ANN UAL REPORT TO S HAREHOL D ER S
Northern Trust Corporation
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N ORT HER N TRUS T COR POR AT IO N
50 SOUTH L A SALLE S TR EET | C H IC AGO, IL L IN OIS 60 603
N OR THE RNTRUS T. C OM
2014
C O N S O L I D A T E D F I N A N C I A L H I G H L I G H T S
2014
2013
PERCENT CHANGE
FOR THE YEAR ENDED DECEMBER 31 ($ IN MILLIONS)
Revenues (Fully Taxable Equivalent Basis)
$ 4,360.6
$ 4,121.8
Net Income
Dividends Declared on Common Stock
Dividends Declared on Preferred Stock
PER COMMON SHARE
Net Income — Basic
Net Income — Diluted
Cash Dividends Declared per Common Share
Book Value — End of Period
Market Price — End of Period
AT YEAR-END ($ IN MILLIONS)
Earning Assets
Total Assets
Deposits
Stockholders’ Equity
AVERAGE BAL ANCES ($ IN MILLIONS)
Earning Assets
Total Assets
Deposits
Stockholders’ Equity
CLIENT ASSETS AT YEAR-END ($ IN BILLIONS)
Assets Under Custody
Global Custody Assets
Assets Under Management
811.8
311.7
9.5
731.3
299.2
—
$ 3.34
$ 3.01
3.32
1.30
34.54
67.40
2.99
1.23
33.34
61.89
$ 100,889.8
$ 93,367.2
109,946.5
90,757.0
8,448.9
102,947.3
84,098.1
7,912.0
$ 95,947.5
$ 85,628.5
104,083.5
84,656.6
8,166.5
94,857.7
75,596.3
7,667.7
$ 5,968.8
$ 5,575.7
3,458.1
934.1
3,248.9
884.5
6 %
11
4
—
11 %
11
6
4
9
8 %
7
8
7
12 %
10
12
7
7 %
6
6
FINANCIAL RATIOS AND METRICS
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (Fully Taxable Equivalent Basis)
10.02 %
0.78
39.2
1.08
9.54 %
0.77
41.1
1.13
CAPITAL RATIOS
Common Equity Tier 1 Capital to Risk-Weighted Assets —
End of Period
Tier 1 Capital to Risk-Weighted Assets — End of Period
Total Capital to Risk-Weighted Assets — End of Period
Tier 1 Leverage Ratio
DECEMBER 31, 2014
DECEMBER 31, 2013 (c)
Advanced
Approach (a)
Standardized
Approach (b)
12.4 %
13.2
15.0
N/A
12.5 %
12.9 %
13.3
15.5
7.8
13.4
15.8
7.9
(a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the December 31, 2014, ratios are calculated in compliance with the Basel III Advanced Approach final rules released by
the Board of Governors of the Federal Reserve System on July 2, 2013. (b) Standardized Approach capital components in 2014 are determined by Basel III phased-in requirements and risk-weighted assets are determined
by Basel I requirements. The December 31, 2014, ratios calculated under the Standardized Approach comply with the final rules released by the Board of Governors of the Federal Reserve System on July 2, 2013.
(c) The December 31, 2013, ratios are calculated in accordance with Basel I requirements.
The 2014 Northern Trust Corporation Annual Report is printed on 20% recycled paper
made from fiber sourced from well-managed forests and is independently certified to the
Forest Stewardship Council® (FSC®) standards.
© Northern Trust Corporation
A L E A D I N G P R O V I D E R
Northern Trust Corporation is a leading provider of wealth management, asset servicing,
asset management and banking to corporations, institutions, affluent families and
individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States
in 19 states and Washington, D.C., and 20 international locations in Canada, Europe,
the Middle East and the Asia-Pacific region.
As of December 31, 2014, Northern Trust had assets under custody of $6 trillion,
and assets under management of $934 billion. For 125 years, Northern Trust has
earned distinction as an industry leader for exceptional service, financial expertise,
integrity and innovation.
Northern Trust Bank
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T O O U R S H A R E H O L D E R S
dedicated to their guiding principles of service,
expertise and integrity.
Today, I am proud to report Northern Trust’s asset
servicing, wealth management, asset management
and banking businesses continue to grow. Our global
enterprise is financially strong, and our people deliver
on the enduring principles that have distinguished
our firm for more than a century. Growth and positive
change were the hallmarks of 2014. We expanded
our footprint, grew our client base and aligned our
organization to broaden our leadership and leverage
the significant opportunities we see in the marketplace.
On August 12, 2014, we inaugurated a yearlong
celebration of the bank’s 125th anniversary with our
clients, employees and the communities we serve. Many
of our clients took the time to express their gratitude
for the deep, long-standing relationships they enjoy
with Northern Trust; some of their sentiments are
shown on pages 3 and 7 of this report. Because of
our success in serving clients, we have been able to
expand our commitment to community engagement.
In early 2015, we were proud to announce that we
will commit an additional $1.25 million to charities
around the world, reflecting our culture of caring for
the communities in which our clients and partners
live and work.
FINANCIAL PERFORMANCE
Net income in 2014 was $811.8 million, an improvement
of 11 percent over 2013. Revenues grew 6 percent to
$4.3 billion, primarily reflecting higher trust, investment
and other servicing fees. Expenses rose to $3.1 billion,
an increase of 5 percent in support of our growth.
FREDERICK H. WADDELL
chairman and chief executive officer
On August 12, 1889, Byron Laflin Smith and 32
other investors founded The Northern Trust
Company in a small second-floor office in
Chicago, Illinois. He and the five other employees
who opened the bank’s doors that day never could
Our balance sheet – always a source of comfort
have envisioned the breadth and scope of their
for our clients and shareholders – remained strong.
enterprise as it exists today. They did, however,
We also saw continued growth in deposits, which
expect Northern Trust would endure as an institution
rose 8 percent, driven primarily by new business. Loans,
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L E T T E R S T O O U R C H A I R M A N
“(Byron L. Smith) understood the principles of service, expertise
and integrity that laid a foundation for past, present and
future generations. Outstanding leadership for 125 years
that we may glean from.”
Michael J. Moncrief
“Northern Trust, uniquely in the industry, does what it
says it will do and looks to do it fairly. Your principles –
service, expertise, integrity – dovetail neatly into your clients’ objectives.”
Tim Linehan, Senior Partner, Silchester International Investors
“We take great pride in being part of the Northern Trust family.”
John W. and Mary Clark
“We greatly value the principles Northern Trust represents and
that we have seen your management and employees live by
and use in their business dealings every day.”
Barend Fruithof, Head of Corporate & Institutional Clients, Credit Suisse
“I can’t think of a time when I would ever have to question (Northern Trust’s integrity)
during the 50 years I’ve been with Northern Trust…
they’re willing to stand behind what they’re supposed to do.”
J. Ira Harris
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letter to sharehol ders
our highest-yielding asset, grew 8 percent, reflecting
acquired in 2011. Bridgewater, the world’s largest hedge
solid demand from our Wealth Management clients.
fund, transitioned to our platform during the year,
Our capital base grew by 7 percent due to the issuance
validating our hedge fund servicing capabilities for
of 16,000 shares of perpetual preferred stock and
highly sophisticated clients. New client relationships
continued growth in retained earnings. We were able
led us to open offices in Kuala Lumpur, Malaysia,
to return $792.4 million in capital to shareholders in
and in Seoul, South Korea. We relocated our
the form of dividends and share repurchases.
Luxembourg-based fund administration operation
BUSINESS HIGHLIGHTS
to a larger space to handle its continued growth. To
accommodate our expanding Irish-domiciled fund
Against a backdrop of generally higher equity markets,
business, we began implementing plans to increase
mixed volatility and continued low interest rates, we
our physical space in Limerick, Ireland. We are now
saw solid new business from existing and new clients.
the third-largest fund administrator in Ireland. New
Our Corporate & Institutional Services business
processing and back-office operations began in Manila,
had a record year. Assets under custody (AUC) grew
Philippines, to support global clients, and in 2015
7 percent to $5.5 trillion, reflecting strong new business,
we plan to open a new office in Tempe, Arizona, that
higher equity markets and continued expansion of our
will perform a wide variety of front-, middle- and
global franchise. Institutional assets under management
back-office functions.
(AUM) also saw good growth, rising 7 percent to
In our Wealth Management business, we continued
$709.6 billion. This was particularly evident with the
to grow steadily, with AUC totaling $515.7 billion, up
success of our defined contribution and Outsourced
4 percent, and AUM growing 1 percent to $224.5 billion.
Chief Investment Officer (OCIO) capabilities. Our OCIO
Throughout 2014, we focused our investments in two
business saw a 23 percent increase in growth – now
areas: expanding capabilities to support evolving client
representing more than $60 billion in AUM – making
needs and technology innovation. Our Delaware trust
us a top provider of these capabilities to foundations,
company added additional trust and advisory expertise
endowments and pension plans.
to assist our clients with their generational wealth
For our institutional clients, we supported their
needs and moved into a new, larger space to handle
ability to meet ever-increasing regulatory requirements,
our growth. Our technology investments will enhance
such as the European Union’s Alternative Investment
our client experience and equip our employees with
Fund Managers Directive and reporting requirements
the most efficient, effective tools necessary to meet
under the United States’ Dodd-Frank Wall Street
clients’ needs.
Reform and Consumer Protection Act. And to satisfy
Building on our longstanding focus on business
clients’ needs regarding Europe’s TARGET2-Securities
owners facing succession planning, liquidity and estate
settlements initiative, we developed a unique strategy
planning issues, we increased our capacity to serve this
with an enhanced range of asset safety holding
important wealth segment. We also added expertise in
structures, liquidity assurance and liquidity products.
family education and governance, as clients continue
We continued to invest in and expand our client
to ask for help preparing the next generation for the
base using the hedge fund servicing platform we
wealth they will inherit. The ways our clients interact
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C O N S I S T E N T L E A D E R S H I P
ONE OF THE “WORLD’S MOST ADMIRED COMPANIES”
8TH CONSECUTIVE YEAR
Fortune Magazine
ONE OF THE “WORLD’S MOST ETHICAL COMPANIES”
Ethisphere Institute
BEST PRIVATE BANK IN THE UNITED STATES
6TH CONSECUTIVE YEAR
Financial Times Group
BEST SINGLE FAMILY OFFICE SERVICE PROVIDER
Private Asset Management
ONE OF THE BEST PLACES TO WORK IN MONEY MANAGEMENT
2ND CONSECUTIVE YEAR
Pensions & Investments
U.S. MANAGER OF THE YEAR – MUNICIPAL FIXED INCOME
AND FIXED INCOME INDEXER
Institutional Investor
HEDGE FUND ADMINISTRATOR OF THE YEAR – EUROPE & AMERICAS
Custody Risk
GLOBAL CUSTODIAN OF THE YEAR
Central Banking Journal
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with us are vitally important; the investments we’ve
operational, market, interest rate and strategic risks.
made in our online, digital and mobile capabilities
While regulatory expectations drove much of this
enhanced and deepened our clients’ experience and ties
effort, we clearly benefit from certain modeling
with Northern Trust. We were gratified to be named by
applications that help us make better-informed
the Financial Times Group as Best Private Bank in the
decisions. For example, we now use our operational
United States for the sixth year and, for the second year,
risk-modeling capabilities to negotiate and buy our
as Best Private Bank for Socially Responsible Investing.
insurance coverages, helping us reduce expenses and
In our Asset Management business, we ended the
better align coverage with our risk appetite.
year with a record $934.1 billion in AUM from personal
and institutional clients. Our exchange traded funds
OUTLOOK
family, FlexShares, grew significantly and now represents
The beginning of 2015 shows promise for an improving
$8.4 billion in AUM, up 25 percent from 2013. Our
U.S. economy against a backdrop of global economic
Engineered Equity business exceeded $33 billion in AUM,
and political uncertainty. Job growth in the United States
building on our position as the industry’s fourth-largest
appears to be gaining solid traction, although wage
provider of index-based asset management solutions
growth remains stubbornly low. Inflation continues to
for sophisticated investment needs.
run below the Federal Reserve’s long-run target, and
We saw the expertise of our people again recognized
the drop in oil prices should provide additional buying
when Institutional Investor named Northern Trust the
power to consumers. Commercial and industrial
U.S. Manager of the Year in its Municipal Fixed Income
loans in the United States grew 12 percent in 2014 as
and Fixed Income Indexer categories for 2014. And
businesses expanded to meet new demand. There
for the second year in a row, Pensions & Investments
appears to be consensus that U.S. interest rates will
magazine named Northern Trust to its list of Best
begin to rise in 2015, although the timing of that move
Places to Work in Money Management.
remains unclear. Northern Trust is well-positioned to
RISK MANAGEMENT
benefit from a rise in short-term interest rates.
Against an improving picture in the United States,
The management of risk has been a key focus for every
economic headwinds continue in Europe and may
Northern Trust partner throughout our 125-year history.
dampen the outlook for an even-faster U.S. recovery.
Yet today’s global environment presents risks our
Unrest in Eastern Europe and the Middle East may
founder never imagined. Topping the list are emerging
deter new investments in those regions. Should U.S.
and ever-more-public threats to cybersecurity. Over
interest rates begin to rise, emerging markets could
the past four years, our financial investment in
experience increased market and currency volatility.
cybersecurity has increased substantially, and in 2014
The regulatory environment also continues to be
we furthered those efforts to help ensure our company
challenging, although the Federal Reserve has suggested
and client data remain secure.
that a tiered approach to regulating banks of different
Northern Trust also invested heavily in developing
sizes may make more sense than the current broad-based
models to manage and measure better our credit,
approach. This would be a positive development.
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L E T T E R S T O O U R C H A I R M A N
“Northern Trust differentiates itself… through its culture and the
degree to which it operates as a truly connected organization.”
Gordon McKellar, COO, Australia Future Fund
“As a wealth management client, I highly value
Northern Trust’s unique client-centric ethos, coupled with
outstanding investment expertise and advice.”
Casey Sylla
“We as customers feel the strong principles that Northern Trust
lives with every day – being service, expertise and integrity.”
Marwan El Ajou, Vice Chairman, Abdul Ghani El-Ajou & Sons Holding Trading Co.
“We feel fortunate to have such a wonderful team of
professionals guiding us; and we feel very good about extending that
relationship to and for our children and grandchildren.
That’s what TRUST is all about.”
Michael and Mary Kay Poulos
“While remaining true to its principles, Northern Trust understands the
necessity of continuous transformation in order to anticipate market demands,
exceed client expectations and deliver unique value.”
Ginni Rometty, Chairman and CEO, IBM
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ORGANIZATIONAL CHANGES
GROWTH, STRENGTH AND CLIENT COMMITMENT
Last year, we made a number of changes to our
We were proud to celebrate the rich history and success
organizational structure to position us for faster
of Northern Trust in 2014 – a year of continued growth
growth and expand the experience of our talented
and progress in our businesses. Great thanks go to our
leaders. Bill Morrison remains President, heading our
people who continue working tirelessly every day to meet
client-facing businesses – Corporate & Institutional
and exceed our clients’ – and our own – expectations.
Services, Wealth Management and Asset Management.
Northern Trust partners provide differentiated service,
Effective September 1, 2014, Jana Schreuder became
deep expertise and unfailing integrity in everything
Chief Operating Officer responsible for enabling
they do. I am very proud of our people and the work
our businesses to grow faster, more efficiently and
they produce on behalf of our shareholders.
more profitably. Steve Fradkin, who formerly led
A company does not stay in business for 125 years
Corporate & Institutional Services, took over as head
if its clients don’t value it. We are fortunate to work
of Wealth Management. Mike O’Grady, our former
with the world’s most sophisticated individuals,
Chief Financial Officer, replaced him. Biff Bowman
families and institutional investors, who look each day
became our Chief Financial Officer, and we welcomed
to Northern Trust for solutions to their financial needs.
Gill Pembleton to Northern Trust’s Management
Our clients, who expect us always to act in their best
Group, replacing Biff as head of Human Resources.
interests, are our greatest assets. We thank them for the
Susan Levy, formerly Managing Partner of Jenner &
honor of serving them another year.
Block, joined as General Counsel, replacing Kelly Welsh,
Finally, I want to thank our shareholders for your
who became General Counsel of the U.S. Department
continued support of Northern Trust and our businesses.
of Commerce. We thank Kelly for his many years of
For 125 years, we have worked on your behalf to build
leadership and contributions to the success of
and lead a company that capitalizes on opportunities to
Northern Trust and wish him well in his new role.
grow. A company that exhibits the financial strength to
Finally, Bob Browne, Chief Investment Officer, and
weather both good and bad times. And a business that
Pete Cherecwich, head of Global Fund Services,
operates with only the highest standards of integrity.
were added to the Management Group, reflecting
That’s what Byron L. Smith expected when he founded
their significant roles and tremendous leadership
Northern Trust in 1889. That’s what we still do today.
contributions to date.
I’m sure he would be proud.
FREDERICK H. WADDELL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
FEBRUARY 26, 2015
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M A N A G E M E N T G R O U P
Joyce M. St.Clair
president
enterprise operations
Jeffrey D. Cohodes
executive vice president
chief risk officer
S. Biff Bowman
executive vice president
chief financial officer
Robert P. Browne
executive vice president
chief investment officer
Stephen N. Potter
president
asset management
s tand ing lef t to right
Frederick H. Waddell
chairman and
chief executive officer
S. Gillian Pembleton
executive vice president
human resources
Peter B. Cherecwich
executive vice president
global fund services
corporate & institutional
services
Steven L. Fradkin
president
wealth management
Michael G. O’Grady
president
corporate &
institutional services
seated left to right
Susan C. Levy
executive vice president
general counsel
Jana R. Schreuder
chief operating officer
William L. Morrison
president
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B O A R D O F D I R E C T O R S
Frederick H. Waddell
Chairman and Chief Executive Officer
Northern Trust Corporation
Linda Walker Bynoe
President and Chief Executive Officer
Telemat Ltd.
Project management and consulting firm
Nicholas D. Chabraja
Retired Chairman and Chief Executive Officer
General Dynamics Corporation
Global defense, aerospace and other
technology products manufacturer
Susan Crown
Vice President
Henry Crown and Company
Global company with diversified investments in banking,
transportation, manufacturing, real estate
and other industries;
Chief Executive Officer
Owl Creek Partners, LLC
Venture capital investment vehicle;
Chairman and Founder
Susan Crown Exchange Inc.
Social investment organization that connects talent and
innovations with market forces to drive social change
Dean M. Harrison
President and Chief Executive Officer
Northwestern Memorial HealthCare
Primary teaching affiliate of Northwestern University
Feinberg School of Medicine and parent corporation of
Northwestern Memorial Hospital
Dipak C. Jain
Director
Sasin Graduate Institute of Business Administration
International graduate business school
Robert W. Lane
Retired Chairman and Chief Executive Officer
Deere & Company
Global provider of agricultural, construction and
forestry equipment, and financial services
Jose Luis Prado
Retired President
Quaker Oats North America, a division of PepsiCo, Inc.
Global food and beverage company
John W. Rowe
Chairman Emeritus
Exelon Corporation
Producer and wholesale marketer of energy
Martin P. Slark
Chief Executive Officer
Molex Incorporated
Manufacturer of electronic, electrical and fiber optic
interconnection products and systems
David H.B. Smith Jr.
Executive Vice President – Policy & Legal Affairs
and General Counsel
Mutual Fund Directors Forum
Nonprofit membership organization for
investment company directors
Charles A. Tribbett III
Managing Director
Russell Reynolds Associates
Global executive recruiting firm
advisory directors
Sir John R.H. Bond
Former Chairman
Xstrata plc
Global diversified mining group
Edward J. Mooney
Retired Délégué Général – North America
Suez Lyonnaise des Eaux
Global provider of energy, water, waste and
communications services;
Retired Chairman and Chief Executive Officer
Nalco Chemical Company
Manufacturer of specialized service chemicals
Lord Charles D. Powell of Bayswater KCMG
Former private secretary and advisor on foreign affairs
and defense to Prime Ministers Margaret Thatcher
and John Major
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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. 0-5965
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
50 South La Salle Street
Chicago, Illinois
(Address of principal executive offices)
36-2723087
(I.R.S. Employer
Identification No.)
60603
(Zip Code)
Registrant’s telephone number, including area code: (312) 630-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $1.66 2⁄ 3 Par Value
Depositary Shares, each representing 1/1000th interest in a share of Series C
Non-Cumulative Perpetual Preferred Stock
Name of Each Exchange On Which Registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ‘ No È
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 È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer È
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ‘ No È
The aggregate market value of the registrant’s common stock as of June 30, 2014 (the last business day of the registrant’s most recently
completed second quarter), based upon the last sale price of the common stock at June 30, 2014 as reported by The NASDAQ Stock
Market LLC, held by non-affiliates was approximately $15.1 billion. Determination of stock ownership by non-affiliates was made solely
for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.
Accelerated filer
Smaller reporting company ‘
‘
At January 31, 2015, 233,486,704 shares of common stock, $1.66 2/3 par value, were outstanding.
Portions of the registrant’s Proxy Statement for its 2015 Annual Meeting of Stockholders are incorporated by reference into
Part III hereof.
N O R T H E R N T R U S T C O R P O R A T I O N
F O R M 1 0 - K
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P A R T I
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Supplemental Item Executive Officers of the Registrant
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
P A R T I I
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
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Supplemental Item Selected Statistical and Supplemental Financial Data
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Item 9B
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
P A R T I I I
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P A R T I V
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S i g n a t u r e s
E x h i b i t I n d e x
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P A R T I
I T E M 1 – B U S I N E S S
Northern Trust Corporation
Northern Trust Corporation (Corporation) is a financial holding company that is a leading provider of asset servicing, fund
administration, asset management, fiduciary and banking solutions for corporations, institutions, families and individuals
worldwide. The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust
Company (Bank). The Corporation was originally formed as a holding company for the Bank in 1971. The Corporation has a
network of offices in 19 U.S. states, Washington, D.C., and 20 international locations in Canada, Europe, the Middle East, and
the Asia-Pacific region. At December 31, 2014, the Corporation had consolidated total assets of $109.9 billion and stockholders’
equity of $8.4 billion.
The Bank is an Illinois banking corporation headquartered in Chicago and the Corporation’s principal subsidiary. Founded
in 1889, the Bank conducts its business through its U.S. operations and its various U.S. and non-U.S. branches and subsidiaries.
At December 31, 2014, the Bank had consolidated assets of $109.6 billion and common bank equity capital of $7.6 billion.
The Corporation expects that the Bank will continue in the foreseeable future to be the major source of the Corporation’s
consolidated assets, revenues, and net income. Except where the context otherwise requires, references to “Northern Trust,”
“we,” “us,” “our” or similar terms mean Northern Trust Corporation and its subsidiaries on a consolidated basis.
Business Overview
Northern Trust 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. The revenue and expenses of Asset Management and
certain other support functions are allocated fully to C&IS and Wealth Management. Northern Trust also makes use of a third
reporting segment, Treasury and Other, under which it reports certain income and expense items not allocated to C&IS and
Wealth Management.
C O R P O R A T E & I N S T I T U T I O N A L S E R V I C E S
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations,
endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe.
Asset servicing and related services encompass a full range of capabilities including, but not limited to: global master trust and
custody; employee benefit services; fund administration; investment operations outsourcing; investment risk and analytical
services; securities lending; foreign exchange; banking; cash management; treasury management; brokerage services; and
transition management services. Client relationships are managed through the Bank and the Bank’s and the Corporation’s
other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region. At
December 31, 2014, total C&IS assets under custody were $5.5 trillion and assets under management were $709.6 billion.
W E A L T H M A N A G E M E N T
Wealth Management provides trust,
investment management, custody, and philanthropic services; financial consulting;
guardianship and estate administration; family business consulting; family financial education; brokerage services; and private
and business banking. Wealth Management focuses on high-net-worth individuals and families, business owners, executives,
professionals, retirees, and established privately-held businesses in its target markets. Wealth Management also includes the
Global Family Office, which provides customized services to meet the complex financial needs of individuals and family offices
in the United States and throughout the world with assets typically exceeding $200 million.
Wealth Management is one of the largest providers of advisory services in the United States, with $515.7 billion in assets
under custody and $224.5 billion in assets under management at December 31, 2014. Wealth Management services are
delivered by multidisciplinary teams through a network of offices in 18 U.S. states and Washington, D.C., as well as offices in
London, Guernsey, and Abu Dhabi.
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A S S E T M A N A G E M E N T
Asset Management, through the Corporation’s various subsidiaries, supports the C&IS and Wealth Management reporting
segments by providing a broad range of asset management and related services and other products to clients around the world.
Investment solutions are delivered through separately managed accounts, bank common and collective funds, registered
investment companies, exchange traded funds, non-U.S. collective investment funds, and unregistered private investment
funds. Asset Management’s capabilities include active, passive and engineered equity; active and passive fixed income; cash
management; alternative asset classes (such as private equity and hedge funds of funds); and multi-manager advisory services
and products. Asset Management’s activities also include overlay services and other risk management services. Asset
Management operates internationally through subsidiaries and distribution arrangements and its revenue and expense are fully
allocated to C&IS and Wealth Management.
Competition
Northern Trust faces intense competition in all aspects and areas of its business. Competition is provided by both
unregulated and regulated financial services organizations, whose products and services span the local, national, and global
markets in which Northern Trust conducts operations. Our competitors include a broad range of financial institutions and
servicing companies, including other custodial banks, deposit-taking institutions, asset management firms, benefits consultants,
trust companies, investment banking firms, insurance companies, and investment counseling firms.
Northern Trust’s principal business strategy is to provide quality financial services to targeted market segments in which it
believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to deliver
a level of service that distinguishes it from its competitors. In addition, Northern Trust emphasizes the development and
growth of recurring sources of fee-based income. Northern Trust seeks to develop and expand its recurring fee-based revenue
by identifying select markets with attractive growth characteristics and providing a high level of individualized service to clients
in those markets. Northern Trust also seeks to preserve its asset quality through established credit review procedures and to
maintain a conservative balance sheet. Finally, Northern Trust seeks to operate with a strong management team that includes
senior officers having broad experience and long tenures.
Economic Conditions And Government Policies
The earnings of Northern Trust are affected by numerous external influences. Chief among these are general economic
conditions, both domestic and international, and actions that governments and their central banks take in managing their
economies. These general conditions affect all of Northern Trust’s businesses, as well as the quality, value, and profitability of
their loan and investment portfolios.
The Board of Governors of the Federal Reserve System (Federal Reserve Board) implements monetary policy through its
open market operations in United States Government securities, its setting of the discount rate at which member banks may
borrow from Federal Reserve Banks, and its changes in the reserve requirements for deposits. The policies adopted by the
Federal Reserve Board directly affect interest rates and hence what banks earn on their loans and investments and what they pay
on their savings and time deposits and other purchased funds.
Supervision And Regulation
Northern Trust is subject to extensive regulation under state and federal laws in the United States, as well as the applicable laws
of each of the various jurisdictions outside the United States in which Northern Trust does business. The discussion below
outlines significant elements of selected laws and regulations applicable to Northern Trust. Changes in these laws or
regulations, or their application, cannot be predicted, but may have a material effect on Northern Trust’s businesses and results
of operations.
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F I N A N C I A L H O L D I N G C O M P A N Y R E G U L A T I O N
Under U.S. law, the Corporation is a bank holding company that has elected to be a financial holding company under the Bank
Holding Company Act of 1956, as amended (BHCA). Consequently, the Corporation and its business activities throughout the
world are subject to the supervision, examination, and regulation of the Federal Reserve Board. The BHCA and other federal
laws subject bank and financial holding companies to particular restrictions on the types of activities in which they may engage
and to a range of supervisory requirements, including enforcement actions for violations of laws and regulations. Supervision
and regulation of bank holding companies, financial holding companies, and their subsidiaries are intended primarily for
the protection of depositors and other clients of banking subsidiaries, the Deposit Insurance Fund of the Federal Deposit
Insurance Corporation (FDIC), and the banking system as a whole, not for the protection of stockholders or other non-
depository creditors.
Under the BHCA, bank holding companies and their banking subsidiaries are generally limited to the business of banking
and activities closely related or incidental to banking. As a financial holding company, the Corporation is permitted to engage
in other activities that the Federal Reserve Board determines to be financial in nature, incidental to an activity that is financial
in nature, or complementary to a financial activity and that do not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally, or to acquire shares of companies engaged in such activities. Activities
defined to be financial in nature include: providing financial or investment advice; securities underwriting and dealing;
insurance underwriting; and making merchant banking investments in commercial and financial companies, subject to
significant limitations. They also include activities previously determined by the Federal Reserve Board to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto. The Corporation may not, however, directly or
indirectly acquire the ownership or control of more than 5% of any class of voting shares, or substantially all of the assets, of a
bank holding company or a bank, without the prior approval of the Federal Reserve Board.
In order to maintain the Corporation’s status as a financial holding company, each of the Corporation’s insured depository
institution subsidiaries must remain “well-capitalized” and “well-managed” under applicable regulations, and must have
received at least a “satisfactory” rating in its most recent examination under the Community Reinvestment Act (CRA). In
addition, as a result of the amendment of the BHCA by the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act), as discussed further below, the Corporation must remain “well-capitalized” and “well-managed” in order to
maintain its status as a financial holding company. Failure to meet one or more of these requirements would mean, depending
on the requirements not met, that the Corporation could not undertake new activities, continue certain activities, or make
acquisitions other than those permitted generally for bank holding companies.
S U B S I D I A R Y R E G U L A T I O N
The Bank is a member of the Federal Reserve System, its deposits are insured by the FDIC up to the maximum authorized limit,
and it is subject to regulation by both these agencies. As an Illinois banking corporation, the Bank is also subject to Illinois state
laws and regulations and to examination and supervision by the Division of Banking of the Illinois Department of Financial and
Professional Regulation. The Bank is registered as a government securities dealer in accordance with the Government Securities
Act of 1986. As a government securities dealer, its activities are subject to the rules and regulations of the Department of the
Treasury. The Bank is also registered as a transfer agent with the Federal Reserve Board and is therefore subject to the rules and
regulations of the Federal Reserve Board in this area.
The Bank is registered provisionally with the U.S. Commodity Futures Trading Commission (CFTC) under the
Commodity Exchange Act as a swap dealer. As a provisionally registered swap dealer, the Bank is subject to significant
regulatory obligations regarding swap activity and the supervision, examination and enforcement power of the CFTC and other
regulators. Certain of the Corporation’s other affiliates are registered with the CFTC as a commodity trading advisor or
commodity pool operator under the Commodity Exchange Act and are subject to that act and the associated rules and
regulations of the CFTC.
The Corporation’s nonbanking affiliates are all subject to examination by the Federal Reserve Board. Its broker-dealer
subsidiary is registered with the Securities and Exchange Commission (SEC) and is a member of the Financial Industry
Regulatory Authority, subject to the rules and regulations of both of these bodies. Several subsidiaries of the Corporation are
registered with the SEC under the Investment Advisers Act of 1940 and are subject to that act and the rules and regulations
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promulgated thereunder. Other subsidiaries are regulated by state banking departments in various states. The Bank and other
subsidiaries of the Corporation act as investment advisers to several mutual funds and other asset managers which are subject
to regulation by the SEC under the Investment Company Act of 1940. The Bank is registered with the SEC and Municipal
Securities Rulemaking Board as a municipal securities dealer and another subsidiary of the Corporation is registered as both a
municipal securities dealer and a municipal securities advisor with the same regulators.
F U N C T I O N A L R E G U L A T I O N
Federal banking law has established a system of federal and state supervision and regulation based on functional regulation,
meaning that primary regulatory oversight for a particular activity generally resides with the federal or state regulator
designated as having the principal responsibility for that activity. Banking is supervised by federal and state banking regulators,
insurance by state insurance regulators, derivatives and swaps activities by the CFTC, and securities activities by the SEC and
state securities regulators.
A significant component of the functional regulation relates to the application of federal securities laws and SEC oversight
of some bank securities activities. Generally, banks may conduct securities activities without broker-dealer registration only if
the activities fall within a set of activity-based exemptions designed to allow banks to conduct only those activities traditionally
considered to be primarily banking or trust activities. Securities activities outside these exemptions, as a practical matter, need
to be conducted by a registered broker-dealer affiliate. The Investment Advisers Act of 1940 requires the registration of any
bank or separately identifiable division of the bank that acts as investment adviser for mutual funds.
Another component of the functional regulation relates to the application of federal commodity and derivatives laws and
CFTC oversight of some bank commodity and derivatives activities, including swap-dealing activities.
T H E D O D D - F R A N K A C T
The Dodd-Frank Act has had, and is expected to continue to have, a broad impact on the financial services industry, imposing
significant new regulatory and compliance requirements, including the imposition of increased capital, leverage, and liquidity
requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and
soundness within, the financial services sector. Additionally, the Dodd-Frank Act established a new framework of authority to
conduct systemic risk oversight within the financial system to be distributed among new and existing federal regulatory
agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, and the FDIC. The following items
provide a brief description of certain provisions of the Dodd-Frank Act that are most relevant to the Corporation and its
banking subsidiaries, including the Bank.
Enhanced Prudential Standards. The Dodd-Frank Act imposed enhanced prudential requirements on U.S. bank holding
companies with at least $50 billion in total consolidated assets, including the Corporation. The enhanced prudential standards
include more stringent risk-based capital, leverage, liquidity, risk management, and stress testing requirements and single
counterparty credit limits for large bank holding companies, including the Corporation. The Federal Reserve Board also has the
discretion to require these large U.S. bank holding companies to limit their short-term debt, to issue contingent capital
instruments, and to provide enhanced public disclosures. The Federal Reserve Board has issued final rules implementing
enhanced prudential standards for more stringent risk-based capital, leverage, liquidity, risk management, and stress testing
requirements. Under the final rules, which became effective January 1, 2015, the Corporation must submit annual capital plans
to the Federal Reserve Board, be subject to supervisor-conducted periodic stress tests to evaluate capital adequacy in adverse
economic conditions, conduct capital stress tests, implement enhanced risk management procedures, comply with a liquidity
risk management framework (discussed below in “Liquidity Standards”), conduct liquidity stress tests, and hold a buffer of
liquid assets estimated to meet funding needs during a financial stress event. The Federal Reserve Board also has proposed rules
that would implement aggregate credit exposure limits and early remediation requirements that are required to be established
under sections 165 and 166 of the Dodd-Frank Act, but these proposed rules have not yet been finalized.
Resolution Planning. As required by the Dodd-Frank Act, the Federal Reserve Board and FDIC have jointly issued a final
rule requiring the Corporation to submit periodically to regulators a resolution plan for its rapid and orderly resolution in the
event of material financial distress or failure. In addition, the FDIC has issued a final rule requiring the Bank to submit to the
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FDIC periodic plans for resolution in the event of the Bank’s failure. The Corporation and the Bank submitted a single
resolution plan that complies with these rules in December 2014. A similar directive has been adopted for European Union
credit institutions.
Orderly Liquidation Authority. Under the Dodd-Frank Act, certain financial companies, such as the Corporation and certain
of its covered subsidiaries, can be subjected to a new orderly liquidation authority. For the orderly liquidation authority to
apply, the U.S. Treasury Secretary, in consultation with the President of the United States, must make a determination, among
other things, that the Corporation is in default or danger of default, the failure of the Corporation and its resolution under the
U.S. Bankruptcy Code would have serious adverse effects on financial stability in the United States, no viable private sector
alternative is available to prevent the default of the Corporation, and orderly liquidation authority proceedings would mitigate
these adverse effects. This determination must be recommended by two-thirds of the FDIC Board of Directors and two-thirds
of the Federal Reserve Board. Absent such actions, the Corporation, as a bank holding company, would remain subject to the
U.S. Bankruptcy Code. The orderly liquidation authority became effective in July 2010, and rulemaking is proceeding in stages.
If the Corporation were subject to orderly liquidation authority, the FDIC would be appointed as its receiver, which would give
the FDIC considerable powers to resolve the Corporation, including: (1) the power to remove officers and directors responsible
for the Corporation’s failure and to appoint new directors and officers; (2) the power to assign assets and liabilities to a third
party or bridge financial company without the need for creditor consent or prior court review; (3) the ability to differentiate
among creditors, including by treating junior creditors better than senior creditors, subject to a minimum recovery right to
receive at least what such senior creditors would have received in bankruptcy liquidation; and (4) broad powers to administer
the claims process to determine distributions from the assets of the receivership to creditors not transferred to a third party or
bridge financial institution.
The Volcker Rule. The Volcker rule became effective on July 21, 2012, and, in December 2013, U.S. regulators issued final
regulations to implement it. In December 2013, the Federal Reserve Board extended the conformance period for compliance
with the Volcker rule until July 21, 2015. The Federal Reserve Board subsequently extended the conformance period for
compliance with certain portions of the prohibition against sponsoring or investing in certain private funds until July 21, 2017.
The Volcker rule bans proprietary trading subject to exceptions for market making, hedging, certain trading activities in U.S.
and foreign sovereign debt, certain trading activities of non-U.S. banking entities trading outside the United States, and trading
activities related to liquidity management. The Volcker rule also maintains the ban on sponsoring or investing in certain
“covered funds,” such as hedge funds or private equity funds. While a banking entity may “organize and offer” certain private
funds if certain conditions are met, it may not acquire or retain an equity partnership or other ownership interest in such
private funds except for certain limited investments. A banking entity that sponsors or invests in certain private funds is also
restricted from providing credit or other support to the fund or permitting the fund to use the name of the bank. The rule
requires large banking entities, including the Corporation, to implement a detailed compliance program and, on an annual
basis, requires the Chief Executive Officer of the banking entity to attest that the compliance program is reasonably designed to
achieve compliance with the rule. Northern Trust is reviewing its activities affected by the final Volcker rule regulations and is
taking steps to bring those activities into conformity with the Volcker rule. Northern Trust also is in the process of establishing
the necessary compliance programs to comply with the final Volcker rule regulations. The impact of the Volcker rule on
Northern Trust will ultimately depend on the interpretation and implementation by the regulatory agencies responsible for
its oversight.
Swaps and Other Derivatives. Title VII of the Dodd-Frank Act (Title VII) imposes a new regulatory structure on the over-
the-counter derivatives market,
including requirements for clearing, exchange trading, capital, margin, reporting, and
recordkeeping. In addition, certain swaps and other derivatives activities are required to be “pushed out” of insured depository
institutions and conducted in separately capitalized non-bank affiliates. Title VII also will require certain persons to register as a
“major swap participant,” a “swap dealer,” a “major-security-based swap participant” or a “security-based swap dealer.” The
CFTC and SEC have finalized joint rules further defining these entities, and the CFTC, SEC and other U.S. regulators are in the
process of adopting regulations to implement Title VII. The CFTC has also finalized many rules applicable to swap dealers and
other swap market participants including business conduct standards for swap dealers, reporting and recordkeeping,
mandatory central clearing for certain swaps, exchange-trading rules applicable to swaps, and regulatory requirements for
cross-border swap activities. The SEC has finalized rules that, among other things, enhance the oversight of clearing and trading
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entities; require regulatory reporting of security-based swap information and the public dissemination of security-based swap
transaction, volume, and pricing information by registered swap data repositories; and define the scope of swap data repository
registration requirements and certain regulatory requirements for cross-border swap activities. It is anticipated that the SEC
will continue with its rulemaking process, which will further clarify, among other things, recordkeeping obligations, the scope
of security-based swap dealer and major-security-based swap participant registration requirements, central clearing
requirements, and exchange-traded requirements for security-based swaps. The CFTC and SEC have yet to complete the
implementation of Title VII, and the complete regulatory framework for swaps and security-based swaps continues to develop.
Incentive Compensation Arrangements. The Dodd-Frank Act requires federal regulators to prescribe regulations or
guidelines regarding incentive-based compensation practices at certain large financial institutions. No final rule has been issued
to date.
H O L D I N G C O M P A N Y S U P P O R T A N D C R O S S - G U A R A N T E E S U N D E R T H E F D I A
Under the Federal Deposit Insurance Act (FDIA), when two or more insured depository institutions are under common
control, each of those depository institutions may be liable for any loss incurred, or expected to be incurred, by the FDIC in
connection with the default of any of the others. Each also may be liable for any assistance the FDIC provides to the other
institutions. “Default” means the appointment of a conservator or receiver for the institution. This cross-guarantee liability for
a loss at a commonly controlled institution would be subordinated in right of payment to deposit liabilities, secured obligations,
any other general or senior liability, and any obligation subordinated to depositors or other general creditors, other than
obligations owed to any affiliate of the depository institution (with certain exceptions).
The Dodd-Frank Act amends the FDIA to obligate the Federal Reserve Board to require bank holding companies, such as
the Corporation, to serve as a source of financial strength for any subsidiary depository institution. The term “source of
financial strength” is defined as the ability of a company to provide financial assistance to its insured depository institution
subsidiaries in the event of financial distress at such subsidiaries. Under this requirement, the Corporation in the future could
be required to provide financial assistance to the Bank should the Bank experience financial distress.
P A Y M E N T O F D I V I D E N D S
The Corporation is a legal entity separate and distinct from its subsidiaries. The Corporation may pay dividends, repurchase
stock, and make other capital distributions only in accordance with a capital plan that has been reviewed by the Federal Reserve
Board and as to which the Federal Reserve Board has not objected. A significant source of funds for the Corporation is
dividends from the Bank. As a result, the Corporation’s ability to pay dividends on its common stock will depend on the ability
of the Bank to pay dividends to the Corporation in amounts sufficient to service its obligations. Dividend payments from the
Bank are subject to Illinois law and to regulatory limitations, generally based on capital levels and current and retained
earnings, imposed by various regulatory agencies with authority over the Bank. The ability of the Bank to pay dividends is
also subject to regulatory restrictions if paying dividends would impair its profitability,
financial condition or cash
flow requirements.
Various federal and state statutory provisions limit the amount of dividends the Bank can pay to the Corporation without
regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state-chartered bank
that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would
exceed the total of its retained net income (as defined by regulatory agencies) for that year combined with its retained net
income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its
“undivided profits,” as defined, without regulatory and stockholder approval.
The Bank is also prohibited under federal law from paying any dividends if the Bank is undercapitalized or if the payment
of the dividends would cause the Bank to become undercapitalized. In addition, the federal regulatory agencies are authorized
to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of
dividends could, depending on the financial condition of the Bank, be deemed to constitute an unsafe or unsound practice. The
Dodd-Frank Act and Basel III (as defined and discussed further below) impose additional restrictions on the ability of banking
institutions to pay dividends.
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C A P I T A L P L A N N I N G A N D S T R E S S T E S T I N G
The Corporation’s capital distributions are subject to Federal Reserve Board oversight. The major component of that oversight
is the Federal Reserve Board’s Comprehensive Capital Analysis and Review (CCAR) exercise, implementing its capital plan
rules. These rules require bank holding companies having $50 billion or more in total consolidated assets (including the
Corporation) to submit annual capital plans to their respective Federal Reserve Bank. The Corporation also is required to
collect and report certain related data on a quarterly basis to allow the Federal Reserve Board to monitor progress against the
annual capital plans. The Corporation and other affected bank holding companies may pay dividends, repurchase stock, and
make other capital distributions only in accordance with a capital plan that has been reviewed by the Federal Reserve Board and
as to which the Federal Reserve Board has not objected. The Federal Reserve Board may object to a capital plan if the plan does
not show that the covered bank holding company will meet, for each quarter throughout the nine-quarter planning horizon
covered by the capital plan, all minimum regulatory capital ratios under applicable capital rules as in effect for that quarter, as
well as all minimum regulatory capital ratios and a Tier 1 common to risk-weighted assets ratio of at least 5% calculated under
general risk-based capital rules as currently in effect, in each case on a pro forma basis under the base case and stressful
scenarios (including a severely adverse scenario provided by the Federal Reserve Board). The capital plan rules also
stipulate that a covered bank holding company may not make a capital distribution, unless after giving effect to the
distribution, it will meet all minimum regulatory capital ratios and maintain a Tier 1 common to risk-weighted assets ratio of at
least 5%.
The purpose of CCAR is to ensure that these bank holding companies have robust, forward-looking capital planning
processes that account for their unique risks and that permit continued operations during times of economic and financial
stress. The CCAR rule, consistent with prior Federal Reserve Board guidance, provides that capital plans contemplating
dividend payout ratios exceeding 30% of projected after-tax net income will receive particularly close scrutiny. The
Corporation’s common stock dividend payout ratio was 39.2% in 2014.
The Corporation submitted its capital plan to the Federal Reserve Board in January 2014 as part of the Federal Reserve
Board’s 2014 CCAR exercise, and the Federal Reserve Board did not object to the Corporation’s plan. In January 2015, the
Corporation submitted its 2015 capital plan to the Federal Reserve Board. The Federal Reserve Board has indicated that it
expects to publish either its objection or non-objection to the 2015 capital plan and proposed capital actions, such as dividend
payments and share repurchases, on March 11, 2015. The Corporation anticipates announcing its proposed 2015 capital plan
distributions shortly thereafter.
In addition to the CCAR stress testing requirements, Federal Reserve Board regulations also include the new Dodd-Frank
Act stress tests (DFAST). The CCAR and DFAST requirements substantially overlap, and the Federal Reserve Board implements
them at the bank holding company level on a coordinated basis. Under the DFAST regulations, the Corporation is required to
undergo regulatory stress tests conducted by the Federal Reserve Board annually, and to conduct internal stress tests pursuant
to regulatory requirements semi-annually. The Bank also is required to conduct its own annual internal stress test (although it
is permitted to combine certain reporting and disclosure of its stress test results with the results of the Corporation). These
requirements involve both company-run and supervisory-run testing of capital under various scenarios, including baseline,
adverse and severely adverse scenarios provided by the appropriate banking regulator. Results from the Corporation’s and the
Bank’s annual company-run stress tests are reported to the appropriate regulators and published. Northern Trust published the
results of its company-run stress tests on March 20, 2014, and the results of its company-run mid-cycle stress tests on
September 17, 2014.
C A P I T A L A D E Q U A C Y R E Q U I R E M E N T S
The regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-
insured depository institutions and their holding companies (including the Bank and the Corporation) are required to
maintain minimum capital relative to the amount and types of assets they hold. The final supervisory determination on an
institution’s capital adequacy is based on the regulator’s assessment of numerous factors.
The Federal Reserve Board has established risk-based and leverage capital guidelines for bank holding companies, including
the Corporation. As of January 1, 2015, the risk-based capital guidelines that apply to the Corporation and the Bank are based
upon the 2011 capital accord of the International Basel Committee on Banking Supervision (Basel Committee), a committee of
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central banks and bank supervisors, as implemented by the Federal Reserve Board (Basel III). The Basel III rules are currently
being phased in, and will come into full effect by January 1, 2022.
The federal banking regulators also have established risk-based and leverage capital guidelines that FDIC-insured
depository institutions, such as the Bank, are required to meet. These regulations are generally similar to those established by
the Federal Reserve Board for bank holding companies. The Bank’s risk-based and leverage capital ratios remained strong at
December 31, 2014 and were well above the minimum regulatory requirements established by U.S. banking regulators.
Under the final Basel III rules, the Corporation is one of a small number of “core” banking organizations. The rules require
core banking organizations to have rigorous processes for assessing overall capital adequacy in relation to their total risk
profiles, and to publicly disclose certain information about their risk profiles and capital adequacy. In order to implement the
capital rules, a core banking organization, such as the Corporation, is required to satisfactorily complete a parallel run, in which
it calculates capital requirements under both the Basel III rules and previously effective regulations. On February 21, 2014, the
Corporation was notified by the Federal Reserve Board that both the Corporation and the Bank would be permitted to exit
parallel run. Accordingly, the Corporation and the Bank were required to use the advanced approaches methodologies to
calculate and disclose publicly their risk-based capital ratios beginning with the second quarter of 2014.
Pursuant to the Federal Reserve Board’s implementation in the final Basel III rules of a provision of the Dodd-Frank Act,
the Corporation is subject to a capital floor that is based on the Basel III standardized approach. The Corporation is therefore
required to calculate its risk-based capital ratios under both the standardized and advanced approaches, and is subject to the
more stringent of the risk-based capital ratios as calculated under the standardized approach and the advanced approach in the
assessment of its capital adequacy under the prompt corrective action framework (described further below).
The risk-based and leverage capital ratios for the Corporation and the Bank, together with the regulatory minimum ratios
and the ratios required for classification as “well-capitalized,” are provided in the following chart.
T A B L E 1 : R I S K - B A S E D A N D L E V E R A G E C A P I T A L R A T I O S A S O F D E C E M B E R 3 1 , 2 0 1 4
COMMON EQUITY
TIER 1 CAPITAL
TIER 1 CAPITAL
TOTAL CAPITAL
LEVERAGE RATIO
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
Northern Trust Corporation
The Northern Trust Company
Minimum required ratio(1)
“Well-capitalized” minimum ratio(2)
12.4%
12.00%
4.0%
N/A
12.5%
11.8%
4.0%
N/A
13.2%
12.0%
5.5%
6.0%
13.3%
11.8%
5.5%
6.0%
15.0%
13.8%
8.0%
10.0%
15.5%
14.0%
8.0%
10.0%
7.8%
6.9%
4.0%
5.0%
(1) Effective January 1, 2015, the applicable minimum common equity Tier 1 capital, Tier 1 capital, and Total capital ratios are 4.5%, 6.0% and 8%, respectively.
(2) Effective January 1, 2015, the applicable minimum common equity Tier 1 capital, Tier 1 capital, and Total capital ratios to be considered “well-capitalized” are 6.5%, 8.0% and
10.0%, respectively.
In addition to the above, beginning in 2018, advanced approaches institutions, such as the Corporation, must comply with a
supplementary leverage ratio, which the Federal Reserve Board finalized in 2014. Under the supplementary leverage ratio rule,
advanced approaches institutions will be subject to a minimum supplementary leverage ratio of 3.0%. Insured depository
institution subsidiaries of advanced approaches institutions, such as the Bank, will be required to maintain at least a 3.0%
supplementary leverage ratio to be considered “well-capitalized” under the rule. The supplementary leverage ratio differs from
the leverage ratio in that the leverage ratio does not take into account certain off-balance-sheet assets and exposures that are
reflected in the supplementary leverage ratio.
Basel III also introduced a capital conservation buffer, requiring banking organizations to hold a buffer of common equity
Tier 1 capital above the minimum risk-based capital requirements in an amount ranging from at least 0.625% in 2016 to at least
2.5% in 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking
organizations with a common equity Tier 1 ratio above the minimum but below the conservation buffer may face constraints
on dividends, equity repurchases and compensation based on the amount of such shortfall. Basel III also introduced a
“countercyclical buffer” of 0% to 2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking
organizations, such as the Corporation, which is intended to create a capital buffer for such banking organizations during
expansionary economic phases in order to protect against declines in asset prices if credit conditions weaken. In general, the
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amount of the countercyclical capital buffer is a weighted average of the countercyclical capital buffer established in the various
jurisdictions in which the banking organization has credit exposures.
The U.S.’s implementation of Basel III has increased the minimum capital thresholds for banking organizations and
tightened the standards for what qualifies as capital. However, the Corporation and the Bank believe their capital strength,
balance sheets and business models leave them well positioned for the continued U.S. implementation of Basel III.
L I Q U I D I T Y S T A N D A R D S
In addition to capital adequacy standards, Basel III introduced two quantitative liquidity standards: a liquidity coverage ratio
(LCR) and a net stable funding ratio (NSFR). The LCR is intended to promote the short-term resilience of the liquidity risk
profile of covered banking organizations, improve the banking industry’s ability to absorb shocks arising from financial and
economic stress, and improve the measurement and management of liquidity risk. In September 2014, the U.S. banking
agencies finalized rules to implement the LCR in the United States for large banking organizations, such as the Corporation and
the Bank. Among other things, the finalized LCR rules require covered banking organizations, which include the Corporation
and the Bank, to maintain an amount of high-quality liquid assets (HQLAs) equal to or greater than 100% of the banking
organization’s total net cash outflows over a thirty-calendar-day standardized supervisory liquidity stress scenario. The LCR will
be phased in, beginning on January 1, 2015, at 80%, with full implementation beginning on January 1, 2017. Beginning with
January 2015, Northern Trust is required to calculate its LCR on a monthly basis. Daily calculation of the LCR will be required
beginning with July 2016. The NSFR requires banking organizations to maintain a stable funding profile in relation to the
composition of their assets and off-balance-sheet activities. More specifically, the NSFR requires that the ratio of available stable
funding relative to the amount of required stable funding be equal to at least 100% on an ongoing basis. The Basel Committee
finalized its NSFR rules in October 2014 as a minimum standard by January 1, 2018. The Federal Reserve Board has not yet
issued a proposal to implement the NSFR.
In March 2014, the Federal Reserve Board issued enhanced prudential standards which specify certain liquidity risk
management practices to be followed by covered large U.S. banks and bank holding companies, including the Corporation and
the Bank, effective January 1, 2015. These practices include an independent review of liquidity risk management and the
establishment of cash flow projections, a contingency funding plan, and liquidity risk limits. The Board of Directors also is
required to establish and maintain a liquidity buffer of unencumbered HQLAs based on the results of internal liquidity stress
testing. This liquidity buffer must be tailored to Northern Trust’s business risks and is in addition to other liquidity
requirements, such as the LCR and NSFR discussed above. The enhanced prudential standards also establish requirements and
responsibilities for the Board of Directors and its Business Risk Committee with respect to liquidity risk management. The
enhanced prudential standards require Northern Trust to engage in liquidity stress testing under multiple stress scenarios and
time horizons tailored to its specific products and risk profile. In January 2015, the Board of Directors approved a new
Liquidity Management Policy establishing the principles and guidelines for the Corporation to govern the processes and
activities for the management of its liquidity position. Among other matters, this Policy includes limits and thresholds related
to the enhanced prudential standards liquidity buffer and the LCR.
P R O M P T C O R R E C T I V E A C T I O N
The FDIC Improvement Act of 1991 requires the appropriate federal banking regulator to take “prompt corrective action” with
respect to a depository institution if that institution does not meet certain capital adequacy standards. While these regulations
apply only to banks, such as the Bank, the Federal Reserve Board is authorized to take appropriate action against a parent bank
holding company, such as the Corporation, based on the under-capitalized status of any banking subsidiary. In certain
instances, the Corporation would be required to guarantee the performance of the capital restoration plan for its under-
capitalized banking subsidiary.
As noted above, in December 2011, the Federal Reserve Board issued proposed rules to implement requirements in
Section 165 and 166 of the Dodd-Frank Act to establish stricter prudential standards for U.S. bank holding companies with
total consolidated assets of $50 billion or more. The proposed rule incorporates the Section 166 “early remediation
requirements.” Similar to prompt corrective action, the early remediation requirements would require firms subject to the
proposal to take increasingly stringent corrective measures as the firm’s financial condition deteriorates. No final rule
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implementing Section 166 has been issued to date and the final rules implementing Section 165 indicate that the Federal
Reserve Board is continuing to consider the comments it received to the proposal.
R E S T R I C T I O N S O N T R A N S A C T I O N S W I T H A F F I L I A T E S A N D I N S I D E R S
The Corporation’s bank subsidiaries are subject to restrictions, which govern transactions between FDIC-insured banks and
any affiliated entity, whether that entity is the bank’s parent holding company, a holding company affiliate of the bank or a
subsidiary of the bank. Regulation W restrictions apply to certain “covered transactions,” including extensions of credit,
issuance of guarantees, investments or asset purchases. In general, these restrictions require that any extensions of credit must
be fully secured with qualifying collateral and are limited, as to any one of the Corporation or such non-bank affiliates, to 10%
of the lending bank’s capital stock and surplus, and, as to the Corporation and all such non-bank affiliates in the aggregate, to
20% of such lending bank’s capital stock and surplus. These restrictions are also applied to transactions between banks and
their financial subsidiaries. Furthermore, these transactions must be on terms and conditions that are, or in good faith would
be, offered to nonaffiliated companies (i.e., at arm’s length).
The Dodd-Frank Act generally enhanced the restrictions on transactions with affiliates under Sections 23A and 23B of the
Federal Reserve Act, including an expansion of the definition of “covered transactions” to include credit exposures related to
derivatives, repurchase agreements and securities lending arrangements, and an increase in the amount of time for which
collateral requirements regarding covered credit transactions must be satisfied. The definition of “affiliate” was expanded to
include any investment fund to which the Corporation or an affiliate serves as an investment adviser. The ability of the Federal
Reserve Board to grant exemptions from these restrictions was also narrowed, including by requiring coordination with other
bank regulators. In addition, the provision in Section 23A that had permitted a bank to engage in covered transactions with a
financial subsidiary of the bank in an amount greater than 10% (but less than 20%) of the bank’s capital and surplus has
been eliminated.
The restrictions on loans to directors, executive officers, principal stockholders and their related interests (collectively
referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all federally insured
institutions. These restrictions include, among others, limits on loans to one borrower and conditions that must be met before
such a loan can be made. There is also an aggregate limitation on all loans (including credit exposures related to derivatives,
repurchase agreements and securities lending arrangements) to insiders and their related interests. These loans cannot exceed
the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders
are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. The Dodd-Frank Act
enhanced these restrictions and also imposed restrictions on the purchase or sale of assets between banking institutions
and insiders.
A N T I - M O N E Y L A U N D E R I N G , A N T I - T E R R O R I S M L E G I S L A T I O N , A N D O F F I C E O F F O R E I G N A S S E T S C O N T R O L
The Corporation and certain of its subsidiaries are subject to the Bank Secrecy Act of 1970, as amended by the USA PATRIOT
Act of 2001, which contains anti-money laundering (AML) and financial transparency provisions and requires implementation
of regulations applicable to financial services companies, including standards for verifying client identification and monitoring
client transactions and detecting and reporting suspicious activities. AML laws outside the U.S. contain similar requirements.
The Corporation and its subsidiaries have implemented policies, procedures and internal controls that are designed to comply
with all applicable AML laws and regulations. Compliance with applicable AML and related requirements is a common area of
review for financial regulators, and the Corporation’s and its subsidiaries’ level of compliance with these requirements could
result in fines, penalties, lawsuits, regulatory sanctions or difficulties in obtaining approvals, restrictions on their business
activities or harm to their reputation.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is responsible for requiring that U.S.
entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of
Congress. OFAC publishes lists of persons, organizations and countries suspected of aiding, harboring or engaging in terrorist
acts, known as Specially Designated Nationals and Blocked Persons. If the Corporation or the Bank finds a name on any
transaction, account or wire transfer that is on an OFAC list, the Corporation or the Bank must freeze or block such account or
transaction, file a suspicious activity report and notify the appropriate authorities.
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Many other countries have imposed similar laws and regulations that apply to the Corporation’s non-U.S. offices. The
Corporation has established policies and procedures to comply with these laws and the related regulations in all
relevant jurisdictions.
D E P O S I T I N S U R A N C E A N D A S S E S S M E N T S
The Bank accepts deposits, and those deposits have the benefit of FDIC insurance up to the applicable limit. The current limit
for FDIC insurance for deposit accounts is $250,000 for each depositor account. Under the FDIA, insurance of deposits may be
terminated by the FDIC upon a finding that the insured depository institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by a bank’s federal regulatory agency. The FDIC’s deposit insurance fund is funded by assessments on
insured depository institutions. As required by the Dodd-Frank Act, the FDIC issued a final rule in February 2011 that changed
the assessment base from insured deposits to average consolidated total assets less average tangible equity, and changed the
assessment rate calculation effective on April 1, 2011. Under the final rule, the FDIC concluded that certain liquid assets could
be excluded from the deposit insurance assessment base of custody banks that satisfy certain institutional eligibility criteria.
This has the effect of reducing the amount of deposit insurance fund insurance premiums due from custody banks.
M O N E Y M A R K E T M U T U A L F U N D S
On July 23, 2014, the SEC approved final rules implementing money market mutual fund reform, which, among other things,
require institutional prime money market funds to maintain a floating net asset value and implement procedures that may
restrict redemption in certain circumstances through the imposition of liquidity fees and gates against investor redemptions.
The implementation of these rules will occur in phases from July 2015 through October 2016. Money market mutual fund
reforms also have been proposed by the European Union as part of its approach to addressing shadow banking. The timing and
content of the final EU regulation is uncertain at this time. On January 29, 2014, the EU published a legislative proposal aimed
at increasing the transparency of certain transactions in the shadow banking sector which includes provisions for enhanced
transparency and reporting of securities financing transactions.
C O M M U N I T Y R E I N V E S T M E N T A C T
The Bank is subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder are intended
to encourage banks to help meet the credit needs of their service areas, including low and moderate income neighborhoods,
consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s
record in meeting the needs of its service area when considering applications to establish branches, merger applications, and
applications to acquire the assets and assume the liabilities of another bank. Federal banking agencies are required to make
public the rating of a bank’s performance under the CRA. In October 2012, the Federal Reserve Board, the federal regulator
responsible for monitoring the Bank’s CRA compliance, approved the designation of the Bank as a “wholesale bank.” As a
result of this designation, the Bank fulfills its CRA obligations by making qualified investments for the purposes of community
development, rather than retail CRA loans. The Bank received an “outstanding” CRA rating from the Federal Reserve Board in
its most recent CRA examination.
P R I V A C Y A N D S E C U R I T Y
Federal law establishes a minimum federal standard of financial privacy by, among other provisions, requiring financial
institutions to adopt and disclose privacy policies with respect to consumer information and setting forth certain limitations on
disclosure to third parties of consumer information. The Corporation has adopted and disseminated its privacy policies
pursuant to law. Regulations adopted under the federal law set standards for protecting the security, confidentiality and
integrity of client information, and require notice to regulators, and in some cases, to clients, in the event of security breaches.
A number of states and the EU have adopted their own statutes concerning financial privacy and security and requiring
notification of security breaches.
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C O N S U M E R L A W S A N D R E G U L A T I O N S
The Corporation’s banking subsidiaries are subject to certain consumer laws and regulations that are designed to protect
consumers in transactions with banks. These laws and regulations mandate certain disclosure requirements and regulate the
manner in which financial institutions must deal with clients and monitor account activity when taking deposits, making loans
to or engaging in other types of transactions with such clients. Failure to comply with these laws and regulations could lead to
substantial penalties, operating restrictions and reputational damage to the financial
institution. The Dodd-Frank Act
established an independent Consumer Financial Protection Bureau (CFPB) within the Federal Reserve System. The CFPB was
tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to
the conduct of providers of certain consumer financial products and services. The creation of the CFPB by the Dodd-Frank Act
is likely to lead to enhanced and strengthened enforcement of consumer financial protection laws.
N O N - U . S . R E G U L A T I O N
Northern Trust’s non-U.S. branches and subsidiaries are subject to the laws and regulatory authorities of the jurisdictions in
which they operate. For example, branches and subsidiaries conducting banking, fund administration and asset servicing
businesses in the United Kingdom are authorized to do so pursuant to the UK Financial Services and Markets Act 2000 or are
otherwise subject to regulation by the Prudential Regulation Authority (PRA) and/or the Financial Conduct Authority (FCA).
The PRA and FCA exercise broad supervisory and disciplinary powers that include the power to revoke temporarily or
permanently authorization to conduct a regulated business upon breach of the relevant regulations, suspend registered
employees, and impose censures and fines on both regulated businesses and their regulated employees.
Northern Trust’s European branches and subsidiaries are subject to the laws and regulatory authorities of the European
Economic Area (EEA). Moreover, Northern Trust’s non-European branches and subsidiaries conducting financial services
activities also may be within the scope of these laws, given the increasing extraterritorial effect of European legislation. The
Alternative Investment Fund Managers Directive (AIFMD) and its implementing legislation, which came into force on July 22,
2013, imposed new regulatory requirements on alternative investment fund managers that are located or market fund interests
in the EEA. AIFMD establishes an EEA-wide framework for regulating, monitoring and supervising risks posed by alternative
investment fund managers and the alternative investment funds they manage and introduces new requirements for firms acting
as a depositary for an alternative investment fund. The European Market Infrastructure Regulation (EMIR), which began to be
phased in March 2013, imposes a large number of requirements on the trading of over-the-counter (OTC) derivatives by or
with an EEA counterparty and OTC derivatives that otherwise have an EEA nexus. In August 2014, the European Union
published a directive, referred to as UCITS V, on the coordination of laws, regulations and administrative provisions relating to
undertakings for collective investment in transferable securities. UCITS V will become effective in March 2016. Although
secondary legislation setting out technical details with respect to UCITS V remains in the process of being drafted, ultimately
UCITS V will introduce rules for the depositary, rules on remuneration policies for certain staff and a sanctions regime for
noncompliance.
A number of other new regulations that may affect Northern Trust’s operations have recently been or are currently being
implemented in Europe, including the Capital Requirements Directive IV, referred to as CRD IV, and the Bank Recovery and
Resolution Directive. The EU and some member states also are considering bank structural reform. On January 29, 2014, the
EU published a proposal that would prohibit proprietary trading by in-scope banking groups and potentially require that
trading activities only be carried out by a trading entity legally, economically and operationally separate from the deposit-taking
entities within the banking group. Northern Trust is working diligently to comply with AIFMD, EMIR, UCITS V, and other EU
rules and regulations, and is also monitoring the development of EU proposals that might create challenges or opportunities
for it.
Additionally, the Bank’s and the Corporation’s subsidiary banks located outside the U.S. are subject to regulatory capital
requirements in the jurisdictions in which they operate. As of December 31, 2014, each of our non-U.S. banking subsidiaries
had capital ratios above their specified minimum requirements.
S T A F F
Northern Trust employed approximately 15,400 full-time equivalent staff members as of December 31, 2014.
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A V A I L A B L E I N F O R M A T I O N
Through the Corporation’s website at www.northerntrust.com, it makes available free of charge its Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all other reports and all amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(Exchange Act), as soon as reasonably practicable after it files such material with, or furnishes such material to, the SEC. The
contents of the Corporation’s website, the website of the SEC or any other website referenced herein are not a part of this
Annual Report on Form 10-K.
S T A T I S T I C A L D I S C L O S U R E B Y B A N K H O L D I N G C O M P A N I E S
The following statistical disclosures, included in the “Supplemental Item – Selected Statistical and Supplemental Financial
Data” section of this Annual Report on Form 10-K, are incorporated herein by reference.
‰
Average Consolidated Balance Sheet with Analysis of Net Interest Income for the years ended December 31, 2014, 2013
and 2012.
Changes in Net Interest Income for the years ended December 31, 2014, and 2013.
Remaining Maturity and Average Yield of Securities Held to Maturity and Available for Sale as of December 31, 2014.
Remaining Maturity of Selected Loans and Leases as of December 31, 2014.
‰
‰
‰
‰ Distribution of Non-U.S. Loans by Type as of December 31, 2014, 2013, 2012, 2011 and 2010.
‰
Allowance for Credit Losses Related to Non-U.S. Operations for the years ended December 31, 2014, 2013, 2012, 2011
and 2010.
Analysis of Allowance for Credit Losses for the years ended December 31, 2014, 2013, 2012, 2011 and 2010.
Average Deposits by Type as of December 31, 2014, 2013 and 2012.
‰
‰
‰ Distribution of Non-U.S. Deposits by Type as of December 31, 2014, 2013 and 2012.
‰
Remaining Maturity of Time Deposits $100,000 or More as of December 31, 2014.
‰
Average Rates Paid on Interest-Related Deposits by Type for the years ended December 31, 2014, 2013 and 2012.
‰
Information about Short-Term Borrowings as of December 31, 2014, 2013 and 2012 and for the years then ended.
‰
Selected Average Assets and Liabilities Attributable to Non-U.S. Operations for the years ended December 31, 2014, 2013
and 2012.
Percent of Non-U.S.-Related Average Assets and Liabilities to Total Consolidated Average Assets for the three years ended
December 31, 2014, 2013 and 2012.
‰
‰ Non-U.S. Outstandings as of December 31, 2014, 2013 and 2012.
The following statistical disclosures, included under Items 6, 7 and 8 of this Annual Report on Form 10-K, are incorporated
herein by reference.
‰
Item 6, “Selected Financial Data” includes the Corporation’s consolidated return on average common equity, return on
average assets, dividend payout ratio and ratio of average equity to average assets.
The “Securities Held to Maturity and Available for Sale” table (Item 7) provides the book values of investments in
obligations of the U.S. government, states and political subdivisions, and other held to maturity and available for sale
securities as of December 31, 2014, 2013 and 2012.
The “Composition of Loan Portfolio” table (Item 7) provides loans and leases by type at the end of the year.
The “Nonperforming Assets” table (Item 7) provides information about the Corporation’s nonaccrual, past due and
restructured loans receivable.
The “Commercial Real Estate Loans” table (Item 7) provides details of loan concentrations.
The “Allocation of the Allowance for Credit Losses” table (Item 7) provides a breakdown of the allowance for credit losses
by loan class and illustrates the proportion of each loan class to total loans.
The “Provision and Allowance for Credit Losses” section (Item 7) provides a discussion of the factors which influenced
management’s judgment in determining the provision for credit losses.
‰
‰
‰
‰
‰
‰
‰ Note 6, “Loans and Leases” (Item 8) provides the Corporation’s forgone interest income on nonaccrual loans, as well as a
description of the nature of non-U.S. loans.
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‰ Note 1, “Summary of Significant Accounting Policies” (Item 8) provides a discussion of Northern Trust’s policy for placing
‰
loans on non-accrual status.
Further discussion of Northern Trust’s management of credit risk with respect to the provision and allowance for credit
losses are provided in the following information that is incorporated herein by reference to the notes to the consolidated
financial statements provided in Item 8, “Financial Statements and Supplementary Data:”
‰ Note 1, “Summary of Significant Accounting Policies”:
‰ H. Loans and Leases
‰
‰
I. Allowance for Credit Losses
L. Other Real Estate Owned
‰ Note 6, “Loans and Leases”
‰ Note 7, “Allowance for Credit Losses”
‰ Note 8, “Concentrations of Credit Risk”
‰ Note 27, “Off-Balance Sheet Financial Instruments”
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I T E M 1 A – R I S K F A C T O R S
In the normal course of our business activities, we are exposed to a variety of risks. The following discussion sets forth the risk
factors that we have identified as being most significant to Northern Trust. Although we discuss these risk factors primarily in
the context of their potential effects on our business, financial condition or results of operations, you should understand that
these effects can have further negative implications such as: reducing the price of our common stock and other securities;
reducing our capital, which can have regulatory and other consequences; affecting the confidence that clients and
counterparties have in us, with a resulting negative effect on our ability to conduct and grow our businesses; and reducing the
attractiveness of our securities to rating agencies and potential purchasers, which may affect adversely our ability to raise capital
and secure other funding or the prices at which we are able to do so. Further, additional risks beyond those discussed below,
elsewhere in this Annual Report on Form 10-K or in other of our reports filed with, or furnished to, the SEC also could
adversely affect us. We cannot assure you that the risk factors herein or elsewhere in our other reports address all potential risks
that we may face.
These risk factors also serve to describe factors which may cause our results to differ materially from those described in
forward-looking statements included herein or in other documents or statements that make reference to this Annual Report on
Form 10-K. Forward-looking statements and other factors that may affect future results are discussed under “Forward-Looking
Statements” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of
this Annual Report on Form 10-K.
Market Risks
A downturn in economic conditions, such as the global financial crisis of 2007–08 and resultant economic turmoil, may
negatively affect our earnings.
Our principal operational focus is on fee-based business, which is distinct from commercial banking institutions that earn most
of their revenues from loans and other traditional interest-generating products and services. Fees for many of our products and
services are based on the volume of transactions processed, the market value of assets under management or custody, securities
lending volume and spreads, and fees for other services rendered, all of which may be negatively impacted by a downturn in
economic conditions. For example, downturns in equity markets and decreases in the value of debt-related investments as a
result of market disruption, illiquidity or other factors have historically reduced the valuations of the assets we manage or
service for others, which generally reduced our earnings. Weak economic conditions also affect wealth creation, investment
preferences, trading activities and savings patterns, which impact demand for our trust and investment products and services.
Reduced transaction volumes would also generally negatively impact our earnings. Economic weakness may also affect the
ability of borrowers to repay loans, causing credit quality to deteriorate and resulting in increased cost of credit, a higher level of
charge-offs and higher provision for credit losses, all of which would reduce our earnings.
Changes in interest rates can negatively affect our earnings.
The direction and level of interest rates are important factors in our earnings. Rates that remain persistently low may reduce
our net interest margin, which is the difference between what we earn on our assets and the interest rates we pay for deposits
and other sources of funding. A low interest rate environment can also reduce fees earned on certain of our products. For
example, since 2009, we have waived certain fees associated with money market mutual funds due to the low level of short-term
interest rates. Lower net interest margins and fee waivers negatively impact our earnings. Please see “Market Risk” in the “Risk
Management” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report on Form 10-K, for a more detailed discussion of interest rate and market risks we face.
Changes in the monetary and other policies of the various regulatory authorities or central banks of the United States, non-U.S.
governments and international agencies may reduce our earnings and negatively affect our growth prospects.
The monetary and other policies of U.S. and international governments, agencies and regulatory bodies have a significant
impact on interest rates and overall financial market performance. For example, the Federal Reserve Board regulates the supply
of money and credit in the United States, and its policies determine in large part the level of interest rates and our cost of funds
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for lending and investing, which are important factors in our earnings. The actions of the Federal Reserve Board or other
regulatory authorities also may reduce the value of financial instruments we hold. Further, their policies can affect our
borrowers by increasing interest rates or making sources of funding less available, which may increase the risk that borrowers
fail to repay their loans from us. Changes in monetary and other governmental policies are beyond our control and can be
difficult to predict, and we cannot determine the ultimate effect that any such changes would have upon our business, financial
condition or results of operations.
Uncertainty about the financial stability of several countries in the EU, the risk that those countries may default on their
sovereign debt and related stresses on financial markets could have a significant adverse effect on our earnings.
There remain ongoing concerns about the ability of certain European countries to finance their deficits and service their debt
burdens. Risks and ongoing concerns about the financial stability of these countries could have a detrimental impact on the
continued global economic recovery, sovereign and nonsovereign debt in these countries and the financial condition of
European financial institutions. European market and economic disruptions have affected, and may continue to affect,
consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and
home prices. Continuing economic challenges in Europe, including negative interest rates in some jurisdictions, and related
disruptions may negatively impact our earnings.
Declines in the value of securities held in our investment portfolio can negatively affect our earnings.
Our investment securities portfolio represents a greater proportion, and our loan and lease portfolios represents a smaller
proportion, of our total consolidated assets in comparison to many other financial institutions. The value of securities available
for sale and held to maturity within our investment portfolio, which is generally determined based upon market values available
from third-party sources, may fluctuate as a result of market volatility and economic or financial market conditions. For
example, the global financial crisis of 2007–08 and resultant period of economic turmoil and financial market disruption
negatively affected the liquidity and pricing of securities, generally, and asset-backed and auction rate securities, in particular.
To the extent that any portion of the unrealized losses in our portfolio of investment securities results from declines in
securities values that management determines to be other than temporary, the book value of those securities will be adjusted to
their estimated recovery value and we will recognize a charge to earnings in the quarter during which we make
that determination.
Volatility levels and fluctuations in foreign currency exchange rates may affect our earnings.
We provide foreign exchange services to our clients, primarily in connection with our global custody business. Foreign currency
volatility influences our foreign exchange trading income as does the level of client activity. Foreign currency volatility and
changes in client activity may result in reduced foreign exchange trading income.
We also are exposed to non-trading foreign currency risk as a result of our holdings of non-U.S. dollar denominated assets
and liabilities, investment in non-U.S. subsidiaries, and future non-U.S. dollar denominated revenue and expense. Fluctuations
in exchange rates may raise the potential for losses resulting from foreign currency trading positions, where aggregate
obligations to purchase and sell a currency other than the U.S. dollar do not offset each other or offset each other in different
time periods.
We have policies and procedures in place to assess and mitigate potential impacts of foreign exchange risks, including
hedging-related strategies. Any Failure or circumvention of our procedures to mitigate risk may negatively impact earnings.
Please see “Market Risk” in the “Risk Management” section included in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of this Annual Report on Form 10-K, for a more detailed discussion of market
risks we face.
Changes in a number of particular market conditions can negatively affect our earnings.
In past periods, reductions in the volatility of currency-trading markets, the level of cross-border investing activity, and the
demand for borrowing securities or willingness to lend such securities have negatively affected our earnings from activities such
as foreign exchange trading and securities lending. If these conditions occur in the future, our earnings from these activities
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may be negatively affected. In a few of our businesses, such as securities lending, our fee is calculated as a percentage of our
client’s earnings, such that market and other factors that reduce our clients’ earnings from investments or trading activities also
reduce our revenues. For example, the global financial crisis of 2007-08 and resultant period of economic turmoil and financial
market disruption produced losses in some securities lending programs, reduced borrower demand and led some clients to
withdraw from these programs. A return of these conditions in the future could result in additional withdrawals and decreased
activity, which could negatively impact our earnings.
Operational Risks
Many types of operational risks can negatively affect our earnings.
We regularly assess and monitor operational risk in our businesses. Despite our efforts to assess and monitor operational risk,
our risk management program may not be effective in all cases. Factors that can impact operations and expose us to risks
varying in size, scale and scope include:
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human errors or omissions, including failures to comply with applicable laws or corporate policies and procedures;
theft, fraud or misappropriation of assets, whether arising from the intentional actions of internal personnel or external
third parties;
defects or interruptions in computer or communications systems;
breakdowns in processes, over-reliance on manual processes, which are inherently more prone to error than automated
processes, breakdowns in internal controls or failures of the technology and facilities that support our operations;
unsuccessful or difficult implementation of computer systems upgrades;
defects in product design or delivery;
difficulty in accurately pricing assets, which can be aggravated by increased asset coverage, market volatility and illiquidity,
and lack of reliable pricing from vendors;
negative developments in relationships with key counterparties, vendors, employees or associates in our day-to-day
operations; and
external events that are wholly or partially beyond our control, such as natural disasters, epidemics, computer viruses,
geopolitical events, political unrest or acts of terrorism.
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While we have in place many controls and business continuity plans designed to address many of these factors, these plans may
not operate successfully to mitigate effectively these risks. If they do not, such factors may have a negative impact on our
business, financial condition or results of operations. In addition, an important aspect of managing our operational risk is
creating a risk culture in which all employees fully understand that there is risk in every aspect of our business and the
importance of managing risk as it relates to their job functions. We continue to enhance our risk management program to
support our risk culture, ensuring that it is sustainable and appropriate to our role as a major financial institution. Nonetheless,
if we fail to create the appropriate environment that sensitizes all of our employees to managing risk, our business could be
adversely impacted.
The systems and models we employ to analyze, monitor and mitigate risks, as well as for other business purposes, are inherently
limited, may be not be effective in all cases and, in any case, cannot eliminate all risks that we face.
We use various systems and models in analyzing and monitoring several risk categories, as well as for other business purposes.
However, these systems and models are inherently limited because they involve techniques and judgments that cannot anticipate
every economic and financial outcome in the markets in which we operate, nor can they anticipate the specifics and timing of such
outcomes. Further, these systems and models may fail to accurately quantify the magnitude of the risks we face. Our measurement
methodologies rely on many assumptions and historical analyses and correlations. These assumptions may be incorrect, and the
historical correlations on which we rely may not continue to be relevant. Consequently, the measurements that we make may not
adequately capture or express the true risk profiles of our businesses or provide accurate data for other business purposes, each of
which could ultimately have a negative impact on our business, financial condition and results of operations. Errors in the
underlying model or model assumptions, or inadequate model assumptions, could result in unanticipated and adverse
consequences.
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Errors, breakdowns in controls or other mistakes in the provision of services to clients or in carrying out transactions for our
own account can subject us to liability, result in losses or negatively affect our earnings in other ways.
In our asset servicing, investment management, fiduciary administration and other business activities, we effect or process
transactions for clients and for us that involve very large amounts of money. Failure to properly manage or mitigate operational
risks can have adverse consequences, and increased volatility in the financial markets may increase the magnitude of
resulting losses. Given the high volume of transactions we process, errors that affect earnings may be repeated or compounded
before they are discovered and corrected.
Our dependence on technology exposes us to risks that also can result in losses.
Our businesses depend on information technology infrastructure, both internal and external, to, among other things, record
and process a large volume of increasingly complex transactions and other data, in many currencies, on a daily basis, across
numerous and diverse markets and jurisdictions. Due to our dependence on technology and the important role it plays in our
business operations, we must constantly improve and update our information technology infrastructure. Updating these
systems can require significant resources and often involves implementation, integration and security risks that could cause
financial, reputational and operational harm. Failure to ensure adequate review and consideration of critical business changes
prior to and during the introduction and deployment of key technological systems or failure to adequately align evolving client
commitments and expectations with operational capabilities may have a negative impact on our results of operations. The
failure to upgrade systems as necessary to support growth and changing business needs also could have a material adverse effect
on our operations.
Breaches of our security measures may result in losses.
Any failure, interruption or breach in the security of our systems could severely disrupt our operations. Our systems involve the
use of clients’ and our proprietary information, and security breaches – including cyber-attacks – could expose us to a risk of
loss of this information. Our security measures may be breached due to the actions of outside parties, employee error,
malfeasance or otherwise, and, as a result, an unauthorized party may obtain access to our or our clients’ proprietary
information. Information security risks for large financial institutions like us are significant in part because of the proliferation
of new technologies to conduct financial transactions and the increased sophistication and activities of organized crime,
hackers, terrorists and other external parties, including foreign state actors. Our computer, communications, data processing,
networks, backup, business continuity or other operating, information or technology systems, including those that we
outsource to other providers, may fail to operate properly or become disabled, overloaded or damaged as a result of a number
of factors, including events that are wholly or partially beyond our control, which could adversely affect our ability to
appropriately conduct our business activities.
The third parties with which we do business also are susceptible to the foregoing risks (including regarding the third parties
with which they are similarly interconnected or on which they otherwise rely), and our or their business operations and
activities may therefore be adversely affected, perhaps materially, by failures, terminations, errors or malfeasance by, or attacks
or constraints on, one or more financial, technology, infrastructure or government institutions or intermediaries with whom
we or they are interconnected or conduct business.
In recent years, several financial services firms suffered successful cyber-attacks launched both domestically and from
abroad, resulting in the disruption of services to clients, loss or misappropriation of sensitive or private data, and reputational
harm. Although we have not suffered a material breach of our systems, it is possible that we could suffer such a breach in the
future. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change
frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to
implement adequate preventative measures. We expect to continue to face increasing cyber threats, including computer viruses,
malicious code, distributed denial of service attacks, phishing attacks, information security breaches or employee or contractor
error or malfeasance that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our,
our clients’ or other parties’ confidential, personal, proprietary or other information or otherwise disrupt, compromise or
damage our or our clients’ or other parties’ business assets, operations and activities. If an actual or perceived breach of our
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security occurs, the market perception of the effectiveness of our security measures could be harmed, our reputation could
suffer and we could lose clients.
Our reputation and business may be harmed and we may be subject to legal claims if there is loss or disclosure of our or our
clients’ information.
The secure maintenance and transmission of client information is a critical element of our operations. Our information
technology and other systems that maintain and transmit client information, or those of service providers or business partners,
may be impacted by advertent or inadvertent actions or inactions by our employees, or those of a third-party service provider
or business partner or by a security breach. As a result, our clients’ information may be lost, disclosed, accessed or taken
without the clients’ consent. Any such loss, disclosure or access to clients’ information can result in legal claims or legal
proceedings, including regulatory investigations and actions, may have a serious impact on our reputation and may adversely
affect our business, financial condition and results of operations.
Inability of our internal controls to keep pace with our expansion may result in losses.
In recent years, we have expanded our geographic footprint, product pipeline and client types. A failure to put controls in place
to mitigate new risks associated with this expansion may disrupt our operations, resulting in losses.
A failure or circumvention of our controls and procedures could have a material adverse effect on our business, financial
condition and results of operations.
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies
and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can
provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our
controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse
effect on our business, financial condition and results of operations. If we identify material weaknesses in our internal control
over financial reporting or are otherwise required to restate our financial statements, we could be required to implement other
expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our
financial reports. In addition, there are risks that individuals, either employees or contractors, consciously circumvent
established control mechanisms by, for example, exceeding trading or investment management limitations, or committing
fraud.
Failure of any of our third-party vendors to perform can result in losses.
Third-party vendors provide key components of our business operations such as data processing, recording and monitoring
transactions, online banking interfaces and services, and network access. While we have established risk management processes
and continuity plans, any disruptions in service from a key vendor for any reason or poor performance of services could
negatively affect our ability to deliver products and services to our clients and conduct our business. Replacing these third-party
vendors or performing the tasks they perform for ourselves could also create significant delay and expense.
We are subject to certain risks inherent in operating globally which may adversely affect our business.
including social or political
In conducting our business, we are subject to risks of loss from various unfavorable political, economic, legal or other
developments,
instability, changes in governmental policies or policies of central banks,
expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, unfavorable tax rates
and tax court rulings and changes in laws and regulations. Less mature and often less regulated business and investment
environments heighten these risks in various emerging markets, in which we have been expanding our business activities. Our
non-U.S. operations accounted for 31% of our revenue in 2014. Our non-U.S. businesses are subject to extensive regulation by
various non-U.S. regulators, including governments, securities exchanges, central banks and other regulatory bodies in the
jurisdictions in which those businesses operate. In many countries, the laws and regulations applicable to the financial services
industry are uncertain and evolving and may be applied with extra scrutiny to foreign companies. Further, it may be difficult
for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in
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various jurisdictions. Our inability to remain in compliance with local laws in a particular market and manage our relationships
with regulators could have an adverse effect not only on our businesses in that market but also on our reputation generally. The
failure to properly mitigate such risks or the failure of our operating infrastructure to support such international activities could
result in operational failures and regulatory fines or sanctions, which could adversely affect our business and results of
operations.
We actively strive to optimize our geographic footprint. This optimization may occur by establishing operations in lower-
cost locations or by outsourcing to vendors in various jurisdictions. These efforts expose us to the risk that we may not
maintain service quality, control or effective management within these operations. In addition, we are exposed to the relevant
macroeconomic, political and similar risks generally involved in doing business in those jurisdictions. The increased elements
of risk that arise from conducting certain operating processes in some jurisdictions could lead to an increase in reputational
risk. During periods of transition, greater operational risk and client concern exist with respect to maintaining a high level of
service delivery.
In addition, we are subject in our global operations to rules and regulations relating to corrupt and illegal payments and
money laundering, as well as laws relating to doing business with certain individuals, groups and countries, such as the U.S.
Foreign Corrupt Practices Act, the USA PATRIOT Act, and the UK Bribery Act. While we have invested and continue to invest
significant resources in training and in compliance monitoring, the geographical diversity of our operations, employees, clients
and customers, as well as the vendors and other third parties that we deal with, presents the risk that we may be found in
violation of such rules, regulations or laws and any such violation could subject us to significant penalties or adversely affect our
reputation.
Failure to adequately control our costs could negatively affect our earnings.
Our success in controlling the costs and expenses of our business operations also impacts operating results. Through various
parts of our business strategy, including innovation, we aim to produce efficiencies in operations that help reduce and control
costs and expenses, including the costs of losses associated with operating risks attributable to servicing and managing financial
assets. Failure to control these and other costs could negatively affect our earnings.
Acts of terrorism, natural disasters, pandemics and global conflicts may have a negative impact on our business and operations.
Acts of terrorism, natural disasters, pandemics, global conflicts or other similar catastrophic events could have a negative
impact on our business and operations. While we have in place business continuity plans, such events could still damage our
facilities, disrupt or delay the normal operations of our business (including communications and technology), result in harm or
cause travel limitations on our employees, and have a similar impact on our clients, suppliers and counterparties. These events
could also negatively impact the purchase of our products and services to the extent that those acts or conflicts result in reduced
capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States or abroad, or in
financial market settlement functions. In addition, war, terror attacks, political unrest, global conflicts, the national and global
efforts to combat terrorism and other potential military activities and outbreaks of hostilities may negatively impact economic
growth, which could have an adverse effect on our business and operations, and may have other adverse effects on us in ways
that we are unable to predict.
Credit Risks
Failure to evaluate accurately the prospects for repayment when we extend credit or maintain an adequate allowance for credit
losses can result in losses or the need to make additional provisions for credit losses, both of which reduce our earnings.
We evaluate extensions of credit before we make them and then provide for credit risks based on our assessment of the credit
losses inherent in our loan portfolio, including undrawn credit commitments. This process requires us to make difficult and
complex judgments. Challenges associated with our credit risk assessments include identifying the proper factors to be used in
assessment and accurately estimating the impacts of those factors. Allowances that prove to be inadequate may require us to
realize increased provisions for credit losses or write down the value of certain assets on our balance sheet, which in turn would
directly and negatively affect earnings.
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Weakened economic conditions can result in losses or the need for additional provisions for credit losses, both of which reduce
our earnings.
Credit risk levels and our earnings can also be affected by weakness in the economy in general and in the particular locales in
which we extend credit, a deterioration in credit quality or a reduced demand for credit. Adverse changes in the financial
performance or condition of our borrowers resulting from weakened economic conditions could impact the borrowers’
abilities to repay outstanding loans, which could in turn negatively impact our financial condition and results of earnings.
The failure or instability of any of our significant counterparties could expose us to loss.
The financial markets are characterized by extensive interconnections among financial institutions, including banks, broker/
dealers, collective investment funds and insurance companies. As a result of these interconnections, we and many of our clients
have counterparty exposure to other financial institutions. This counterparty exposure presents risks to us and to our clients
because the failure or perceived weakness of any of our counterparties has the potential to expose us to risk of loss. Instability in
the financial markets has resulted historically in some financial institutions becoming less creditworthy. During such periods of
instability, we are exposed to increased counterparty risks, both as principal and in our capacity as agent for our clients.
Changes in market perception of the financial strength of particular financial institutions can occur rapidly, are often based
upon a variety of factors and can be difficult to predict. In addition, the criteria for and manner of governmental support of
financial institutions and other economically important sectors remain uncertain. In recent years the consolidation of financial
service firms and the failures of other financial institutions have increased the concentration of our counterparty risk. We are
not able to mitigate all of our and our clients’ counterparty credit risk. If a significant individual counterparty defaults on an
obligation to us, we could incur financial losses that materially adversely affect our business, our financial condition and our
results of operations.
Liquidity Risks
If the Bank is unable to supply the Corporation with funds over time, the Corporation could be unable to meet its various
obligations.
The Corporation is a legal entity separate and distinct from the Bank and the Corporation’s other subsidiaries. The Corporation
relies on dividends paid to it by the Bank to meet its obligations and to pay dividends to stockholders of the Corporation. There
are various legal limitations on the extent to which the Bank and the Corporation’s other subsidiaries can supply funds to the
Corporation by dividend or otherwise. Dividend payments by the Bank to the Corporation in the future will require continued
generation of earnings by the Bank and could require regulatory approval under certain circumstances. For more information
on dividend restrictions, see “Supervision and Regulation—Payment of Dividends” in Item 1, “Business.”
We may need to raise additional capital in the future, which may not be available to us or may only be available on
unfavorable terms.
We may need to raise additional capital to provide sufficient resources to meet our business needs and commitments, to
accommodate the transaction and cash management needs of our clients, to maintain our credit ratings in response to
regulatory changes, including capital rules, or for other purposes. However, our ability to access the capital markets, if needed,
will depend on a number of factors, including the state of the financial markets. Rising interest rates, disruptions in financial
markets, negative perceptions of our business or our financial strength, or other factors may impact our ability to raise
additional capital, if needed, on terms acceptable to us. Any diminished ability to raise additional capital, if needed, could
subject us to liability, restrict our ability to grow, require us to take actions that would negatively affect our earnings or
otherwise adversely affect our business and our ability to implement our business plan, capital plan and strategic goals.
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Any downgrades in our credit ratings, or an actual or perceived reduction in our financial strength, could adversely affect our
borrowing costs, capital costs and liquidity.
Rating agencies publish credit ratings and outlooks on our creditworthiness and that of our obligations or securities, including
long-term debt, short-term borrowings, preferred stock and other securities. Our credit ratings are subject to ongoing review by
the ratings agencies and thus may change from time to time based on a number of factors, including our own financial strength,
performance, prospects and operations as well as factors not under our control, such as ratings agency-specific criteria or
frameworks for our industry or certain security types, which are subject to revision from time to time, and conditions affecting
the financial services industry generally.
Downgrades in our credit ratings may adversely affect our borrowing costs, our capital costs and our ability to raise capital
and, in turn, our liquidity. A failure to maintain an acceptable credit rating may also preclude us from being competitive in
certain products. Additionally, our counterparties, as well as our clients, rely on our financial strength and stability and evaluate
the risks of doing business with us. If we experience diminished financial strength or stability, actual or perceived, a decline in
our stock price or a reduced credit rating, our counterparties may be less willing to enter into transactions, secured or
unsecured, with us, our clients may reduce or place limits on the level of services we provide them or seek other service
providers, or our prospective clients may select other service providers, all of which may have other adverse effects on our
business.
The risk that we may be perceived as less creditworthy relative to other market participants is higher in a market
environment, in which the consolidation, and in some instances failure, of financial institutions, including major global
financial institutions, could result in a smaller number of larger counterparties and competitors. If our counterparties perceive
us to be a less viable counterparty, our ability to enter into financial transactions on terms acceptable to us or our clients, on
our or our clients’ behalf, will be materially compromised. If our clients reduce their deposits with us or select other service
providers for all or a portion of the services we provide to them, our revenues will decrease accordingly.
Our success with large, complex clients requires substantial liquidity.
A significant portion of our business involves providing certain services to large, complex clients, which, by their nature,
require substantial liquidity. Our failure to successfully manage the liquidity and balance sheet issues attendant to this portion
of our business may have a negative impact on our ability to meet client needs and grow.
Regulatory and Legal Risks
Failure to comply with regulations can result in penalties and regulatory constraints that restrict our ability to grow or even
conduct our business, or that reduce earnings.
Virtually every aspect of our business around the world is regulated, generally by governmental agencies that have broad
supervisory powers and the ability to impose sanctions. In the United States, the Corporation, the Bank and many of the
Corporation’s other subsidiaries are heavily regulated by bank regulatory agencies at the federal and state levels. These
regulations cover a variety of matters ranging from required capital levels to prohibited activities. They are specifically directed
at protecting depositors, the federal deposit insurance fund and the banking system as a whole, not our security holders. The
Corporation and its subsidiaries are also heavily regulated by bank, securities and other regulators globally. Regulatory
violations or the failure to meet formal or informal commitments made to regulators could generate penalties, require
corrective actions that increase costs of conducting business, result in limitations on our ability to conduct business, restrict
our ability to expand or adversely impact our reputation. Failure to obtain necessary approvals from regulatory agencies on a
timely basis could adversely affect proposed business opportunities and results of operations. Similarly, failure to comply
with new requirements or with future changes in laws or regulations may negatively impact our results of operations and
financial condition.
The ongoing implementation of the Dodd-Frank Act may have a material effect on our operations.
The Dodd-Frank Act, which was signed into law on July 21, 2010, made a number of significant regulatory and compliance
changes. There remains uncertainty surrounding the manner in which certain of the provisions of the Dodd-Frank Act will be
implemented by the various regulatory agencies as some provisions still require final rules to be promulgated. Further changes
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resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our
business practices, or otherwise adversely affect our business. These changes may also require us to invest significant
management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory
requirements.
Changes in regulatory capital requirements could result in reduced earnings.
The Dodd-Frank Act and the implementation of Basel III have led to significantly higher capital requirements, higher capital
charges and more restrictive leverage and liquidity ratios, and could impact the capital allocations to various business activities.
The ultimate impact of the evolving capital and liquidity standards on us will depend on a number of factors, including the
interpretation and implementation of capital and leverage requirements by the U.S. banking regulators. Increased capital
requirements could ultimately impact the profitability of certain of our business activities, require changes to certain business
practices or otherwise adversely affect our business and earnings. See “Supervision and Regulation” under Item 1, “Business”
for a further discussion of the various capital and liquidity requirements to which we are, and in the future may be, subject.
The implementation of money market mutual fund reform could lower the desirability of money market mutual funds for
investors and reduce the profitability of money market mutual funds for sponsors.
On July 23, 2014, the SEC approved final rules implementing money market mutual fund reform, which, among other things,
require institutional prime money market funds to maintain a floating net asset value and implement procedures that may
restrict redemption in certain circumstances through the imposition of liquidity fees and gates against investor redemptions.
The implementation of these rules could lower the desirability of money market mutual funds for investors, reduce the
profitability of our money market mutual fund products or otherwise adversely affect our business, earnings, or financial
condition. The implementation of these rules will occur in phases from July 2015 through October 2016.
Further intervention of the U.S. and other governments in the financial services industry may heighten the challenges we face
and make compliance with the evolving laws and regulations applicable to banks and other financial services companies more
difficult and costly.
In recent years various regulatory bodies have demonstrated heightened enforcement scrutiny through many regulatory
initiatives,
including anti-money-laundering rules, anti-bribery laws, home mortgage lending and loan-modification
requirements. These and other regulatory requirements have increased compliance costs and regulatory risks and may lead to
financial and reputational damage in the event of a violation. While we have programs in place, including policies, training and
various forms of monitoring, designed to ensure compliance with legislative and regulatory requirements, these programs and
policies may not always protect us from conduct by individual employees. Governments may take further actions to
significantly change the way financial
institutions are regulated, either through new legislation, new regulations, new
applications of existing regulations or a combination of all of these methods. These actions may involve increased intervention
by such governments and regulators in the normal operation of our businesses and the businesses of our competitors in the
financial services industry, and would likely involve additional legislative and regulatory requirements imposed on banks and
other financial services companies. Such actions could increase compliance costs and regulatory risks, lead to financial and
reputational damage in the event of a violation, affect our ability to compete successfully, and also may impact the nature and
level of competition in the industry in unpredictable ways. The full scope and impact of possible enhanced regulatory and
enforcement scrutiny and evolving legislation and regulation is uncertain and difficult to predict.
Our business may be adversely impacted by litigation and regulatory enforcement.
Our businesses involve the risk that clients or others may sue us, claiming that we have failed to perform under a contract or
otherwise failed to carry out a duty perceived to be owed to them. Our trust, custody and investment management businesses
are particularly subject to this risk. This risk may be heightened during periods when credit, equity or other financial markets
are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses. In addition, as a
publicly-held company, we are subject to the risk of claims under the federal securities laws, and volatility in our stock price and
those of other financial institutions increases this risk. Actions brought against us may result in injunctions, settlements,
23 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
damages, fines or penalties, which could have a material adverse effect on our financial condition or results of operations or
require changes to our business. Even if we defend ourselves successfully, the cost of litigation is often substantial, and public
reports regarding claims made against us may cause damage to our reputation among existing and prospective clients or
negatively impact the confidence of counterparties, rating agencies and stockholders, consequently negatively affecting
our earnings.
In the ordinary course of our business, we also are subject to various regulatory, governmental and enforcement inquiries,
investigations and subpoenas. These may be directed generally to participants in the businesses in which we are involved or may
be specifically directed at us. In enforcement matters, claims for disgorgement, the imposition of civil and criminal penalties
and the imposition of other remedial sanctions are possible.
We may fail to set aside adequate reserves or otherwise underestimate our liability, with a negative effect on our earnings.
We estimate our potential liability for pending and threatened claims, and record reserves when appropriate pursuant to
GAAP, by evaluating the facts of particular claims under current
judicial decisions and legislative and regulatory
interpretations. This process is inherently subject to risk, including the risks that a judge or jury could decide a case contrary to
our evaluation of the law or the facts or that a court could change or modify existing law on a particular issue important to the
case. Our earnings will be adversely affected to the extent that our reserves are not adequate.
If we fail to comply with legal standards, we could incur liability to our clients or lose clients, which could negatively affect
our earnings.
Managing or servicing assets with reasonable prudence in accordance with the terms of governing documents and applicable
laws is important to client satisfaction, which in turn is important to the earnings and growth of our investment businesses.
Failure to comply with these standards, adequately manage these risks or manage the differing interests often involved in the
exercise of fiduciary responsibilities could also result in liability.
Strategic Risks
If we do not successfully execute strategic plans, we will not grow as we have planned and our earnings growth will be
negatively impacted.
Our growth depends upon successful, consistent execution of our business strategies. A failure to execute these strategies will
negatively impact growth. A failure to grow organically or to successfully integrate an acquisition could have an adverse effect
on our business. The challenges arising from generating organic growth or the integration of an acquired business may include
preserving valuable relationships with employees, clients, suppliers and other business partners, delivering enhanced products
and services, as well as combining accounting, data processing and internal control systems.
Competition for our employees is intense, and we may not be able to attract and retain key personnel.
Our success depends, in large part, on our ability to attract new employees, retain and motivate our existing employees, and
continue to compensate our employees competitively. Competition for the best employees in most activities in which we
engage can be intense, and there can be no assurance that we will be successful in our efforts to recruit and retain key personnel.
Factors that affect our ability to attract and retain talented and diverse employees include our compensation and benefits
programs, our profitability and our reputation for rewarding and promoting qualified employees. Our ability to attract and
retain key executives and other employees may be hindered as a result of existing and potential regulations applicable to
incentive compensation and other aspects of our compensation programs. These regulations may not apply to some of our
competitors and to other institutions with which we compete for talent. The unexpected loss of services of key personnel, both
in businesses and corporate functions, could have a material adverse impact on our business because of their skills, knowledge
of our markets, operations and clients, years of industry experience and, in some cases, the difficulty of promptly finding
qualified replacement personnel. Similarly, the loss of key employees, either individually or as a group, could adversely affect
our clients’ perception of our abilities.
24 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
We are subject to intense competition in all aspects of our businesses, which could negatively affect our ability to maintain
satisfactory prices and grow our earnings.
We provide a broad range of financial products and services in highly competitive markets. We compete against large, in some
cases well-capitalized, and geographically diverse, companies that are capable of offering a wide array of financial products and
services at competitive prices. In certain businesses, such as foreign exchange trading, electronic networks present a competitive
challenge. Additionally, technological advances and the growth of internet-based commerce have made it possible for other
types of institutions to offer a variety of products and services competitive with certain areas of our business. Many of these
nontraditional service providers have fewer regulatory constraints and some have lower cost structures. These competitive
pressures may negatively affect earnings and our ability to grow. Furthermore, pricing pressures, as a result of the willingness of
competitors to offer comparable or improved products or services at a lower price, may result in a reduction in the price we can
charge for our products and services, which could negatively affect our ability to maintain or increase our profitability.
Damage to our reputation could have a direct and negative effect on our ability to compete, grow and generate revenue.
Damage to our reputation for delivery of a high level of service undermines the confidence of clients and prospects in our
ability to serve them and therefore could negatively affect our earnings. Damage to our reputation also could affect the
confidence of rating agencies, regulators, stockholders and other parties in a wide range of transactions that are important to
our business. Failure to maintain our reputation would ultimately have an adverse effect on our ability to manage our balance
sheet or grow our business. The global financial crisis of 2007-08 and current political and public sentiment regarding financial
institutions have resulted in a significant amount of adverse media coverage of financial institutions. Actions by the financial
services industry generally or by other members of or individuals in the financial services industry could also negatively impact
our reputation.
We need to constantly invest in innovation, and the inability or failure to do so may negatively affect our businesses
and earnings.
Our success in the competitive environment in which we operate requires consistent investment of capital and human
resources in innovation. This investment is directed at generating new products and services, and adapting existing products
and services to the evolving standards and demands of the marketplace. Among other things, investing in innovation helps us
maintain a mix of products and services that keeps pace with our competitors and achieve acceptable margins. This investment
also focuses on enhancing the delivery of our products and services in order to compete successfully for new clients or gain
additional business from existing clients, and includes investment in technological innovation as well. Effectively identifying
gaps or weaknesses in our product offerings also is important. Falling behind our competition in any of these areas could
adversely affect our business opportunities, growth and earnings. There are substantial risks and uncertainties associated with
innovation efforts. We must invest significant time and resources in developing and marketing new products and services, and
expected timetables for the introduction and development of new products or services may not be achieved and price and
profitability targets may not be met. Further, our revenues and costs may fluctuate because new products and services generally
require start-up costs while revenues take time to develop or may not develop at all.
Failure to understand or fully appreciate the risks associated with development or delivery of new product and service offerings
will negatively affect our businesses and earnings.
Our success in capitalizing on innovation depends, in part, on successful implementation of new product and service initiatives.
Not only must we keep pace with competitors in the development of these new offerings, but we must accurately price them (as
well as existing products) on a risk-adjusted basis and effectively deliver them to clients. Our identification of risks arising from
new products and services, both in their design and implementation, and effective responses to those identified risks, including
pricing, is key to our capitalizing on innovation and investment in new product and service offerings.
25 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
Our success with large, complex clients requires an understanding of the market and legal, regulatory and accounting
standards in various jurisdictions.
A significant portion of our business involves providing certain services to large, complex clients which require an
understanding of the market and legal, regulatory and accounting standards in various jurisdictions. Any failure to understand
and deal with those appropriately could affect our growth prospects or negatively affect our reputation. We identify and
manage risk through our business strategies and plans and our risk management practices and controls. If we fail to successfully
identify and manage significant risks, we could incur financial loss, suffer damage to our reputation that could restrict our
ability to grow or conduct business profitably, or become subject to regulatory penalties or constraints that could limit some of
our activities or make them significantly more expensive. In addition, our businesses and the markets in which we operate are
continuously evolving. We may fail to fully understand the implications of changes in our businesses or the financial markets or
fail to adequately or timely enhance our risk framework to address those changes. If our risk framework is ineffective, either
because it fails to keep pace with changes in the financial markets, regulatory requirements, our businesses, our counterparties,
clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of
compliance with applicable regulatory or contractual mandates or expectations. These risks are magnified as client
requirements become more complex and as our increasingly global business requires end-to-end management of operational
and other processes across multiple time zones and many inter-related products and services.
Failure to produce adequate and competitive returns can negatively affect our earnings and growth prospects.
We derive a significant portion of our revenues from our investment management, fiduciary and asset-servicing businesses. If
we do not generate competitive risk-adjusted returns that satisfy clients in a variety of asset classes, we will have greater
difficulty maintaining existing business and attracting new business, which would negatively affect our earnings.
We may take actions to maintain client satisfaction that result in losses or reduced earnings.
We may take action or incur expenses in order to maintain client satisfaction or preserve the usefulness of investments or
investment vehicles we manage in light of changes in security ratings, liquidity or valuation issues or other developments, even
though we are not required to do so by law or the terms of governing instruments. The risk that we will decide to take actions
to maintain client satisfaction that result in losses or reduced earnings is greater in periods when credit or equity markets are
deteriorating in value or are particularly volatile and liquidity in markets is disrupted.
Other Risks
Changes in tax laws and interpretations and tax challenges may negatively affect our earnings.
Both U.S. and non-U.S. tax authorities from time to time issue new, or modify existing, tax laws and regulations. These
authorities may also issue new, or modify existing, interpretations of those laws and regulations. These new laws, regulations or
interpretations, and our actions taken in response to, or reliance upon, such changes in the tax laws may impact our tax
position in a manner that results in lower earnings.
In the course of our business, we are sometimes subject to challenges from U.S. and non-U.S. tax authorities regarding the
amount of taxes due. These challenges may result in adjustments to the timing or amount of taxable income or deductions or
the allocation of income among tax jurisdictions, all of which may require a greater provision for taxes or otherwise negatively
affect earnings.
26 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
Changes in accounting standards may be difficult to predict and could have a material impact on our consolidated
financial statements.
New accounting standards, or changes to existing accounting standards, resulting both from initiatives of the Financial
Accounting Standards Board or its convergence efforts with the International Accounting Standards Board, as well as changes
in the interpretation of existing accounting standards by the Financial Accounting Standards Board, the SEC or bank regulatory
agencies, or otherwise reflected in GAAP, potentially could have a material impact on our financial condition and results of
operations. These changes are difficult to predict and in some cases we could be required to apply a new or revised standard
retroactively, resulting in the revised treatment of certain transactions or activities, or even the restatement of consolidated
financial statements for prior periods.
I T E M 1 B – U N R E S O L V E D S T A F F C O M M E N T S
None.
I T E M 2 – P R O P E R T I E S
The executive offices of the Corporation and the Bank are located at 50 South La Salle Street in Chicago. This Bank-owned
building is occupied by various divisions of Northern Trust’s businesses. Adjacent to this building are two office buildings in
which the Bank leases space principally for corporate support functions. Financial services are provided by the Bank and other
subsidiaries of the Corporation through a network of offices in 19 U.S. states, Washington D.C., and 20 international locations.
The majority of those offices are leased. The Bank’s primary U.S. operations are located in four facilities: a leased facility at 801
South Canal Street in Chicago; a subleased facility at 231 South La Salle Street in Chicago; and two Bank-owned supplementary
operations/data center buildings located in the western suburbs of Chicago. A majority of the Bank’s London-based staff is
located at a leased facility at Canary Wharf in London. Additional support and operations activity originates from two leased
facilities in Bangalore. The Bank and the Corporation’s other subsidiaries operate from various other facilities in North
America, Europe, the Asia Pacific region, and the Middle East, most of which are leased.
The Corporation believes that its owned and leased facilities are suitable and adequate for its business needs. For additional
information relating to properties and lease commitments, refer to “Note 9 – Buildings and Equipment” and “Note 10 – Lease
Commitments” included under Item 8 of this Annual Report on Form 10-K and which information is incorporated herein
by reference.
I T E M 3 – L E G A L P R O C E E D I N G S
The information presented under the caption “Legal Proceedings” in “Note 24 – Contingent Liabilities” included under Item 8
of this Annual Report on Form 10-K is incorporated herein by reference.
I T E M 4 – M I N E S A F E T Y D I S C L O S U R E S
Not applicable.
27 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
S U P P L E M E N T A L I T E M – E X E C U T I V E O F F I C E R S O F T H E R E G I S T R A N T
The following sets forth certain information with regard to each executive officer of the Corporation.
Frederick H. Waddell – Mr. Waddell, age 61, joined Northern Trust in 1975 and has served as Chairman of the Board of
Directors since 2009 and Chief Executive Officer since 2008. Mr. Waddell served as President from 2006 to 2011, Chief
Operating Officer from 2006 to 2008, and Executive Vice President and President of Corporate & Institutional Services from
2003 to 2006. Prior to that, Mr. Waddell held leadership positions in commercial banking, strategic planning and Wealth
Management. Mr. Waddell serves as a director of AbbVie Inc.
S. Biff Bowman – Mr. Bowman, age 51, joined Northern Trust in 1985 and has served as Executive Vice President and
Chief Financial Officer since September 2014. Prior to that, Mr. Bowman served as Executive Vice President, Human Resources
from 2012 to 2014. From 2010 to 2012, Mr. Bowman was the Head of Americas Region for Corporate & Institutional Services.
From 2008 to 2010, he served as the Chief Executive Officer of Europe, Middle East and Africa.
Robert P. Browne – Mr. Browne, age 49, joined Northern Trust in 2009 as Executive Vice President and Chief Investment
Officer. Before joining Northern Trust, Mr. Browne served as Chief Investment Officer for Fixed Income and Proprietary
Investments for ING Investment Management Holdings N.V. from 2004 to 2009.
Peter B. Cherecwich – Mr. Cherecwich, age 50, joined Northern Trust in 2007 and has served as Executive Vice President
and Head of Global Fund Services since 2010. Mr. Cherecwich also served as Chief Operating Officer of Corporate &
Institutional Services from 2008 to September 2014. Prior to that, he served as Head of Institutional Strategy & Product
Development from 2007 to 2008. Before joining Northern Trust, Mr. Cherecwich served in several executive and operational
roles at State Street Corporation.
Jeffrey D. Cohodes – Mr. Cohodes, age 54, joined Northern Trust in 1993 and has served as Executive Vice President and
Chief Risk Officer since 2011. Mr. Cohodes served as an Executive Vice President in the Wealth Management business from
2010 to 2011. From 2009 to 2010, he served as the Chief Operating Officer for Asset Management.
Steven L. Fradkin – Mr. Fradkin, age 53, joined Northern Trust in 1985 and has served as Executive Vice President and
President of Wealth Management since September 2014. Prior to that, Mr. Fradkin served as President of Corporate &
Institutional Services from 2009 to 2014. He served as Chief Financial Officer from 2004 to 2009.
Jane B. Karpinski – Ms. Karpinski, age 52, joined Northern Trust in 2006 and has served as Senior Vice President and
Corporate Controller since 2013. Ms. Karpinski served as International Chief Financial Officer from 2012 to 2013. Prior to that,
she served as Chief Financial Officer for the Europe, Middle East and Africa region from 2007 to 2012.
Susan C. Levy – Ms. Levy, age 57, joined Northern Trust in May 2014 as Executive Vice President and General Counsel.
Before joining Northern Trust, Ms. Levy served as Managing Partner of the law firm Jenner & Block from 2008 to 2014, where
she was a partner since 1990.
William L. Morrison – Mr. Morrison, age 64, joined Northern Trust in 1996 and has served as President since 2011. Prior
to that, Mr. Morrison served as Executive Vice President and Chief Financial Officer from 2009 to 2011. From 2003 to 2009, he
served as President of Wealth Management.
Michael G. O’Grady – Mr. O’Grady, age 49, joined Northern Trust in 2011 and has served as Executive Vice President and
President of Corporate & Institutional Services since September 2014. Prior to that, Mr. O’Grady served as Chief Financial
Officer from 2011 to 2014. Before joining Northern Trust, Mr. O’Grady served as a Managing Director in Bank of America
Merrill Lynch’s Investment Banking Group.
28 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
S. Gillian Pembleton – Ms. Pembleton, age 56, joined Northern Trust in 1991 and has served as Executive Vice President,
Human Resources since September 2014. Prior to that, Ms. Pembleton was responsible for Human Resources and
Administration for the Europe, Middle East and Africa region from 2006 to 2014. From 2001 to 2006, she was the Global Head
of Staffing and Development.
Stephen N. Potter – Mr. Potter, age 58, joined Northern Trust in 1982 and has served as Executive Vice President and
President of Asset Management since 2008. Prior to that, Mr. Potter served as the Chief Executive Officer of Europe, Middle
East and Africa from 2001 to 2008.
Joyce M. St. Clair – Ms. St. Clair, age 55, joined Northern Trust in 1992 and has served as Executive Vice President and
President of Enterprise Operations since September 2014. Prior to that, Ms. St. Clair served as President of Operations &
Technology from 2011 to 2014. From 2007 to 2011, Ms. St. Clair served as Chief Risk Officer.
Jana R. Schreuder – Ms. Schreuder, age 56, joined Northern Trust in 1980 and has served as Executive Vice President and
Chief Operating Officer since September 2014. Prior to that, Ms. Schreuder served as President of Wealth Management from
2011 to 2014. She served as Chief Risk Officer from 2005 to 2006 and as President of Operations & Technology from 2006
to 2011.
All officers are appointed annually by the Corporation’s Board of Directors (Board). Officers continue to hold office until
their successors are duly elected or until their death, resignation or removal by the Board.
29 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
P A R T I I
I T E M 5 – M A R K E T F O R R E G I S T R A N T ’ S C O M M O N E Q U I T Y , R E L A T E D S T O C K H O L D E R M A T T E R S A N D
I S S U E R P U R C H A S E S O F E Q U I T Y S E C U R I T I E S
Our common stock is listed on the NASDAQ Stock Market LLC under the symbol “NTRS.” There were 2,213 shareholders of
record as of January 31, 2015. The information required by this item concerning the market prices of, and dividends on, our
common stock during the past two years is provided under “Quarterly Financial Data (Unaudited)” included under
“Supplemental Item – Selected Statistical and Supplemental Financial Data,” and is incorporated herein by reference.
Information regarding dividend restrictions of the Corporation’s banking subsidiaries is incorporated herein by reference
to “Note 30 – Restrictions on Subsidiary Dividends and Loans or Advances” to the “Notes to Consolidated Financial
Statements” included under Item 8 of this Annual Report on Form 10-K.
The following table shows certain information relating to the Corporation’s purchases of common stock for the three
months ended December 31, 2014, pursuant to the Corporation’s share buyback program:
T A B L E 2 : P U R C H A S E S O F C O M M O N S T O C K I N T H E F O U R T H Q U A R T E R O F 2 0 1 4
PERIOD
October 1-31, 2014
November 1-30, 2014
December 1-31, 2014
Total (Fourth Quarter)
TOTAL NUMBER
OF SHARES
PURCHASED (1)
397,561
1,831,406
256,666
2,485,633
AVERAGE PRICE
PAID PER
SHARE
$63.67
67.02
67.80
$66.57
TOTAL NUMBER
OF SHARES
PURCHASED AS
PART OF A
PUBLICLY
ANNOUNCED
PLAN (2)
397,561
1,831,406
256,666
MAXIMUM
NUMBER OF
SHARES THAT
MAY YET BE
PURCHASED
UNDER THE
PLAN
9,225,673
7,394,267
7,137,601
2,485,633
7,137,601
(1) Includes shares purchased from employees in connection with equity plan transactions such as the surrender of shares to pay an option exercise price or tax withholding.
(2) Includes shares repurchased under the authorization approved by the Corporation’s board of directors on April 15, 2014. Under this program, which has no expiration date, the
Corporation may repurchase up to 12.0 million shares of the Corporation’s common stock.
30 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
C O M P A R I S O N O F F I V E - Y E A R C U M U L A T I V E T O T A L R E T U R N
The graph below compares the cumulative total stockholder return on the Corporation’s common stock to the cumulative total
return of the S&P 500 Index and the KBW Bank Index for the five fiscal years which ended December 31, 2014. The cumulative
total stockholder return assumes the investment of $100 in the Corporation’s common stock and in each index on
December 31, 2009 and assumes reinvestment of dividends. The KBW Bank Index is a modified-capitalization-weighted index
made up of 24 of the largest banking companies in the United States. The Corporation is included in the S&P 500 Index and the
KBW Bank Index.
T o t a l R e t u r n A s s u m e s $ 1 0 0 I n v e s t e d o n
D e c e m b e r 3 1 , 2 0 0 9 w i t h R e i n v e s t m e n t o f D i v i d e n d s
Five-Year Cumulative Total Return
$220
$160
$100
$40
2009
2010
2011
2012
2013
2014
Northern Trust
S&P 500
KBW Bank Index
Northern Trust
S&P 500
KBW Bank Index
2009
100
100
100
2010
108
115
123
DECEMBER 31,
2011
79
117
95
2012
103
136
126
2013
130
180
174
2014
144
205
190
31 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
I T E M 6 – S E L E C T E D F I N A N C I A L D A T A
FOR THE YEAR ENDED DECEMBER 31,
CONDENSED INCOME STATEMENT (In Millions)
Noninterest Income
Net Interest Income
Total Revenue
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes
Provision for Income Taxes
Net Income
Preferred Stock Dividends
Net Income Applicable to Common Stock
PER COMMON SHARE
Net Income – Basic
– Diluted
Cash Dividends Declared Per Common Share
Book Value – End of Period (EOP)
Market Price – EOP
SELECTED BALANCE SHEET DATA (In Millions)
At Year End:
Earning Assets
Total Assets
Deposits
Senior Notes
Long-Term Debt
Stockholders’ Equity
Average Balances:
Earning Assets
Total Assets
Deposits
Senior Notes
Long-Term Debt
Stockholders’ Equity
CLIENT ASSETS (In Billions)
Assets Under Custody
Assets Under Management
SELECTED RATIOS AND METRICS
Financial Ratios and Metrics:
2014
2013
2012
2011
2010
$ 3,325.7
1,005.5
$ 4,331.2
6.0
3,135.0
$ 1,190.2
378.4
$
$
$
811.8
9.5
802.3
3.34
3.32
1.30
34.54
67.40
$100,889.8
109,946.5
90,757.0
1,497.0
1,615.1
8,448.9
$ 95,947.5
104,083.5
84,656.6
1,661.2
1,654.9
8,166.5
$ 3,156.2
933.1
$ 4,089.3
20.0
2,993.8
$ 1,075.5
344.2
$
$
$
731.3
–
731.3
3.01
2.99
1.23
33.34
61.89
$ 93,367.2
102,947.3
84,098.1
1,996.6
1,709.2
7,912.0
$ 85,628.3
94,857.7
75,596.3
2,247.0
1,211.7
7,667.7
$ 2,905.8
990.3
$ 3,896.1
25.0
2,878.8
$
$
$
$
992.3
305.0
687.3
–
687.3
2.82
2.81
1.18
31.51
50.16
$87,472.7
97,463.8
81,407.8
2,405.8
1,421.6
7,527.0
$84,168.5
92,975.5
75,219.8
2,295.2
1,634.1
7,358.2
$ 2,760.8
1,009.1
$ 3,769.9
55.0
2,831.2
$
$
$
$
883.7
280.1
603.6
–
603.6
2.47
2.47
1.12
29.53
39.66
$ 90,793.6
100,223.7
82,677.5
2,126.7
2,133.3
7,117.3
$ 82,748.8
91,947.9
72,446.4
1,983.3
2,446.3
7,024.2
$ 2,729.0
918.7
$ 3,647.7
160.0
2,497.9
$
$
$
$
989.8
320.3
669.5
–
669.5
2.74
2.74
1.12
28.19
55.41
$75,849.9
83,843.9
64,195.7
1,896.1
2,729.3
6,830.3
$67,865.4
76,008.2
55,583.1
1,509.0
2,821.6
6,634.4
$ 5,968.8
934.1
$ 5,575.7
884.5
$ 4,804.9
758.9
$ 4,262.8
662.9
$ 4,081.3
643.6
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (*)
Average Stockholders’ Equity to Average Assets
10.02%
0.78
39.2
1.08
7.8
9.54%
0.77
41.1
1.13
8.1
9.34%
0.74
42.0
1.22
7.9
8.59%
0.66
45.4
1.27
7.6
10.09%
0.88
40.8
1.41
8.7
Capital Ratios:
Common Equity Tier 1
Tier 1
Total
Leverage
DECEMBER 31,
2014
DECEMBER 31,
2013(c)
DECEMBER 31,
2012(c)
DECEMBER 31,
2011(c)
DECEMBER 31,
2010(c)
ADVANCED
APPROACH(a)
STANDARDIZED
APPROACH(b)
12.4%
13.2
15.0
N/A
12.5%
13.3
15.5
7.8
12.9%
13.4
15.8
7.9
12.4%
12.8
14.3
8.2
12.1%
12.5
14.2
7.3
13.0%
13.6
15.6
8.8
(*) 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 86.
(a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the December 31, 2014, ratios are calculated in compliance with the Basel III Advanced
Approach final rules released by the Federal Reserve Board on July 2, 2013.
(b) Standardized Approach capital components in 2014 are determined by Basel III phased in requirements and risk weighted assets are determined by Basel I requirements. The
December 31, 2014, ratios calculated under the Standardized Approach comply with the final rules released by the Federal Reserve Board on July 2, 2013.
(c) The December 31, 2013, 2012, 2011 and 2010 ratios are calculated in accordance with Basel I requirements.
32 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
I T E M 7 – M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S
O F O P E R A T I O N S
B U S I N E S S O V E R V I E W
Northern Trust Corporation (Corporation) is a financial holding company that is a leading provider of asset servicing, fund
administration, asset management, fiduciary and banking solutions for corporations, institutions, families and individuals
worldwide. Northern Trust 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.
The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust
Company (Bank). The Corporation was originally formed as a holding company for the Bank in 1971. The Corporation has a
network of offices in 19 U.S. states, Washington, D.C., and 20 international locations in North America, Europe, the Middle
East, and the Asia-Pacific region. Except where the context otherwise requires, the term “Northern Trust” refers to Northern
Trust Corporation and its subsidiaries on a consolidated basis.
F I N A N C I A L O V E R V I E W
Net income in 2014 totaled $811.8 million, up 11% from $731.3 million in 2013. Earnings per diluted common share totaled
$3.32 in 2014 compared to $2.99 in 2013. Return on average common equity improved to 10.0% in 2014, from 9.5% in 2013.
Net income in 2014 included pre-tax charges and write-offs totaling $47.5 million and a $9.5 million income tax benefit related
to Northern Trust’s decision to reinvest the pre-tax earnings of a foreign subsidiary indefinitely outside the U.S. Net income in
2013 included a $32.6 million pre-tax gain on the sale of an office building property, offset by a $19.2 million pre-tax charge in
connection with an agreement to resolve certain litigation and a $12.4 million pre-tax write-off of certain fee receivables.
Excluding the current-year items, net income, net income per diluted common share and return on average common equity
were $833.6 million, $3.41 and 10.3%, respectively. Excluding the prior-year items, net income per diluted common share and
return on average common equity were unchanged while net income was $730.7 million.
The 2014 results reflect a continued focus on serving the complex and evolving needs of our clients, while enhancing
profitability and returns for our stockholders. Revenue increased 6% to $4.33 billion in 2014 from $4.09 billion in the prior
year, driven by a 9% increase in trust, investment and other servicing fees and an 8% increase in net interest income, partially
offset by a 14% decline in foreign exchange trading income. Noninterest expense increased 5% to $3.14 billion in 2014
compared to $2.99 billion in 2013, reflecting continued growth in our business, ongoing investment to support technology
initiatives, and actions taken during 2014 to realign our organization.
Trust, investment and other servicing fees, which represent the largest component of total revenue, increased 9% to $2.83
billion, from $2.61 billion in 2013, primarily due to new business and the favorable impacts of equity markets and movements
in foreign exchange rates, partially offset by higher levels of waived fees in money market mutual funds. Money market mutual
fund fee waivers, attributable to persistent low short-term interest rates, totaled $129.8 million in 2014 compared to $108.2
million in 2013.
Foreign exchange trading income of $210.1 million decreased 14% from $244.4 million in 2013, resulting from lower
currency market volatility and client volumes.
Higher equity markets and new business in 2014 drove client assets under custody and under management up 7% and 6%,
respectively, as compared to the December 31, 2013, levels. Client assets under custody as of December 31, 2014, increased to
$6.0 trillion from $5.6 trillion, and included $3.5 trillion of global custody assets, up 6% from 2013. Client assets under
management as of December 31, 2014, increased to $934.1 billion from $884.5 billion in 2013.
Reported net interest income of $1.01 billion increased 8%, reflecting higher levels of earnings assets, partially offset by a
lower net interest margin.
33 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
The provision for credit losses totaled $6.0 million in 2014, compared to $20.0 million in 2013. The current-year provision
reflected continued improvement in the credit quality of commercial and institutional and commercial real estate loans, as well
as loan growth in 2014. Loans and leases as of December 31, 2014, totaled $31.6 billion, up 8% from $29.4 billion in 2013. Net
charge-offs and nonperforming assets decreased in 2014 to $18.0 million and $232.3 million, respectively, from $39.7 million
and $274.7 million in 2013.
Total noninterest expense equaled $3.14 billion, up 5% from 2013. Excluding the current-year charges and write-offs of
$47.5 million and the prior-year legal settlement charge of $19.2 million, noninterest expense increased 4% in 2014,
attributable to increased compensation, equipment and software, outside services and employee benefits expense.
Northern Trust continued to maintain a strong capital position during 2014, with all capital ratios exceeding those required
for classification as “well-capitalized” under federal bank regulatory capital requirements. Total stockholders’ equity equaled
$8.5 billion at year-end, up 7% from $7.9 billion in 2013. On August 5, 2014, Northern Trust issued 16,000 shares of preferred
stock for proceeds of $388.5 million, net of underwriting discounts, commissions and other issuance costs. In October 2014,
Northern Trust declared dividends totaling $9.5 million to preferred stockholders, payable January 1, 2015, covering the five-
month period since issuance on August 5, 2014. During the year ended December 31, 2014, we increased the quarterly common
stock dividend to $0.33 per common share and repurchased 7.5 million shares of common stock, returning $792.4 million of
capital to common stockholders, compared to $609.2 million in 2013.
C O N S O L I D A T E D R E S U L T S O F O P E R A T I O N S
R E V E N U E
Northern Trust generates the majority of its revenue from noninterest income that primarily consists of trust, investment and
other servicing fees. Net interest income comprises the remainder of revenue and consists of interest income generated by
earning assets, net of interest expense on deposits and borrowed funds.
Revenue in 2014 was $4.33 billion, an increase of 6% from $4.09 billion in 2013. Noninterest income, representing 77% of
total revenue in both 2014 and 2013, totaled $3.33 billion and $3.16 billion in 2014 and 2013, respectively, up 5% in 2014.
The current-year increase in noninterest income primarily reflected higher trust, investment and other servicing fees,
partially offset by lower foreign exchange trading income. Trust, investment and other servicing fees totaled $2.83 billion in
2014, up $223.0 million, or 9%, from $2.61 billion in 2013, primarily reflecting new business and the favorable impacts of
equity markets and movements in foreign exchange rates, partially offset by higher levels of waived fees in money market
mutual funds. Foreign exchange trading income in 2014 totaled $210.1 million, down $34.3 million, or 14%, compared with
$244.4 million in 2013, reflecting lower currency market volatility and client volumes as compared to 2013.
Net interest income on a fully taxable equivalent (FTE) basis in 2014 was $1.03 billion, an increase of $69.3 million, or 7%,
from $965.6 million in 2013, attributable to higher levels of earnings assets, partially offset by a decline in the net interest
margin. The net interest margin declined to 1.08% in 2014 from 1.13% in 2013, primarily resulting from lower yields on
earning assets, partially offset by a lower cost of interest-related funds. Average earning assets increased $10.3 billion, or 12%, in
2014, reflecting higher levels of Federal Reserve deposits, securities and loans and leases.
Additional information regarding Northern Trust’s revenue by type is provided below.
2014 TOTAL REVENUE OF $4.33 BILLION
65% Trust, Investment and Other
Servicing Fees
23% Net Interest Income
5%
7% Other Noninterest Income
Foreign Exchange Trading Income
34 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Noninterest Income
The components of noninterest income, and a discussion of significant changes during 2014 and 2013, are provided below.
T A B L E 3 : N O N I N T E R E S T I N C O M E
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2014
2013
2012
2014 / 2013
2013 / 2012
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Treasury Management Fees
Security Commissions and Trading Income
Other Operating Income
Investment Security Losses, net
$2,832.8
210.1
66.0
67.6
153.5
(4.3)
$2,609.8
244.4
69.0
68.0
166.5
(1.5)
$2,405.5
206.1
67.4
73.6
154.9
(1.7)
Total Noninterest Income
$3,325.7
$3,156.2
$2,905.8
9%
(14)
(4)
(1)
(8)
181
5%
8%
19
2
(8)
8
(9)
9%
Trust, Investment and Other Servicing Fees
Trust, investment and other servicing fees were $2.83 billion in 2014 compared with $2.61 billion in 2013. Trust, investment
and other servicing fees are based primarily on the market value of assets held in custody, managed and 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. Based on an analysis of historical trends and
current asset and product mix, management estimates that a 10% rise or fall in overall equity markets would cause a
corresponding increase or decrease in Northern Trust’s trust, investment and other servicing fees of approximately 3% and in
total revenue of approximately 2%. For a more detailed discussion of 2014 trust, investment and other servicing fees, refer to
the “Reporting Segments and Related Information” section.
The following table presents selected equity market indices and the percentage changes year over year.
T A B L E 4 : M A R K E T I N D I C E S
DAILY AVERAGES
S&P 500 ®
MSCI EAFE ® (in U.S. dollars)
2014
1,931
1,888
2013
1,643
1,747
CHANGE
18%
8
2014
2,059
1,775
YEAR-END
2013
1,848
1,916
CHANGE
11%
(7)
35 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Assets under custody and assets under management form the primary basis of our trust, investment and other servicing fees. At
December 31, 2014, assets under custody were $6.0 trillion, up 7% from $5.6 trillion a year ago, and included $3.5 trillion of
global custody assets, compared to $3.2 trillion at December 31, 2013. Assets under management totaled $934.1 billion, up 6%
from $884.5 billion at the end of 2013.
T A B L E 5 : A S S E T S U N D E R C U S T O D Y
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE
($ In Billions)
Corporate & Institutional
Wealth Management
2014
2013
2012
2011
2010
2014 / 2013
2013 / 2012
$5,453.1
515.7
$5,079.7
496.0
$4,358.6
446.3
$3,877.6
385.2
$3,711.1
370.2
Total Assets Under Custody
$5,968.8
$5,575.7
$4,804.9
$4,262.8
$4,081.3
7%
4
7%
17%
11
16%
10%
9
10%
C&IS ASSETS UNDER CUSTODY
(In Billions)
WEALTH MANAGEMENT ASSETS UNDER CUSTODY
(In Billions)
$5,453.1
$5,079.7
$3,711.1
$3,877.6
$4,358.6
$496.0
$515.7
$446.3
$370.2
$385.2
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
T A B L E 6 : A S S E T S U N D E R M A N A G E M E N T
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE
($ In Billions)
Corporate & Institutional
Wealth Management
Total Assets Under Management
$934.1
$884.5
$758.9
$662.9
$643.6
2014
2013
2012
2011
2010
2014 / 2013
2013 / 2012
$709.6
224.5
$662.7
221.8
$561.2
197.7
$489.2
173.7
$489.2
154.4
7%
1
6%
18%
12
17%
8%
9
8%
C&IS ASSETS UNDER MANAGEMENT
(In Billions)
$709.6
$662.7
$489.2
$489.2
$561.2
WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
(In Billions)
$221.8
$224.5
$197.7
$173.7
$154.4
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
36 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Assets under custody and under management were invested as follows:
T A B L E 7 : A S S E T S U N D E R C U S T O D Y B Y
I N V E S T M E N T T Y P E
Equities
Fixed Income Securities
Cash and Other Assets
T A B L E 8 : A S S E T S U N D E R M A N A G E M E N T B Y
I N V E S T M E N T T Y P E
Equities
Fixed Income Securities
Cash and Other Assets
Foreign Exchange Trading Income
DECEMBER 31,
2014
2013
C&IS
WM
CONSOLIDATED
C&IS
WM
CONSOLIDATED
44%
38
18
55%
22
23
45%
36
19
46%
36
18
55%
22
23
47%
34
19
DECEMBER 31,
2014
2013
C&IS
WM
CONSOLIDATED
C&IS
WM
CONSOLIDATED
54%
14
32
47%
28
25
52%
17
31
56%
13
31
48%
27
25
54%
17
29
Northern Trust provides foreign exchange services in the normal course of business as an integral part of its global custody
services. Active management of currency positions, within conservative limits, also contributes to foreign exchange trading
income. This income totaled $210.1 million in 2014 compared with $244.4 million last year. The decrease of $34.3 million, or
14%, is attributable to lower currency market volatility and client volumes in 2014.
Treasury Management Fees
Treasury management fees, generated from cash and treasury management products and services provided to clients, totaled
$66.0 million, down 4% from $69.0 million in 2013.
Security Commissions and Trading Income
Security commissions and trading income is generated primarily from securities brokerage services provided by Northern Trust
Securities, Inc., and totaled $67.6 million in 2014, relatively unchanged from $68.0 million in 2013.
Other Operating Income
The components of other operating income include:
T A B L E 9 : O T H E R O P E R A T I N G I N C O M E
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
2014
$ 62.7
49.6
41.2
$153.5
2013
$ 61.9
50.9
53.7
$166.5
2012
2014 / 2013
2013 / 2012
$ 64.5
55.0
35.4
$154.9
1%
(3)
(23)
(8)%
(4)%
(7)
52
8%
The decline in banking service fees in 2014 primarily reflected lower income from standby letters of credit. The “other”
component of other operating income in 2013 included the $32.6 million gain on the sale of an office building property,
partially offset by a $12.4 million write-off of certain fee receivables. Excluding these prior-year items, the “other” component
of other operating income increased $7.7 million, or 23%, primarily attributable to increased income from currency-related
hedging, lease-related and third party servicing activities in 2014.
37 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Investment Security Gains (Losses), Net
Net investment security losses totaled $4.3 million and $1.5 million in 2014 and 2013, respectively. Results for 2014 include
$4.2 million of pre-tax charges for the credit-related other-than-temporary impairment (OTTI) of certain Community
Reinvestment Act (CRA) eligible securities held within Northern Trust’s balance sheet investment securities portfolio. There
were no OTTI losses in 2013.
N O N I N T E R E S T I N C O M E – 2 0 1 3 C O M P A R E D W I T H 2 0 1 2
Trust, investment and other servicing fees were $2.61 billion in 2013, up 8% from $2.41 billion in 2012, primarily attributable
to new business and the favorable impact of equity markets, partially offset by higher waived fees in money market mutual
funds. Foreign exchange trading income increased 19% in 2013 to $244.4 million from $206.1 million in 2012, reflecting higher
client volumes from 2012 levels.
Other operating income totaled $166.5 million in 2013, an increase of 8% from $154.9 million in 2012. Other operating
income in 2013 included the $32.6 million gain on the sale of an office building property, partially offset by the $12.4 million
fee receivable write-off. Excluding these 2013 items, other operating income decreased 6% from 2012, reflecting lower banking
and loan service fees.
Net investment security losses totaled $1.5 million and $1.7 million in 2013 and 2012, respectively. Charges of $3.3 million
were recorded in 2012 for the credit-related OTTI of residential mortgage backed securities and auction rate securities held
within Northern Trust’s balance sheet investment securities portfolio. There were no OTTI losses in 2013.
Net Interest Income
Net interest income stated on an FTE basis is a non-generally-accepted-accounting-principle (GAAP) financial measure that
facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net interest
margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are
comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on
a GAAP basis to net interest income on an FTE basis is provided on page 86.
An analysis of net interest income on an FTE basis, major balance sheet components impacting net interest income, and related
ratios are provided below.
T A B L E 1 0 : A N A L Y S I S O F N E T I N T E R E S T
I N C O M E ( F T E )
($ In Millions)
Interest Income – GAAP
FTE Adjustment
Interest Income – FTE
Interest Expense
Net Interest Income – FTE Adjusted
Net Interest Income – GAAP
AVERAGE BALANCE
Earning Assets
Interest-Related Funds
Net Noninterest-Related Funds
AVERAGE RATE
Earning Assets
Interest-Related Funds
Interest Rate Spread
Total Source of Funds
Net Interest Margin – FTE
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2014
2013
2012
2014 / 2013
2013 / 2012
$ 1,186.9
29.4
$ 1,155.5
32.5
$ 1,287.7
40.8
1,216.3
181.4
1,034.9
1,005.5
1,188.0
222.4
965.6
933.1
1,328.5
297.4
1,031.1
990.3
$95,947.5
73,167.2
22,780.3
$85,628.3
67,364.2
18,264.1
$84,168.5
62,293.0
21,875.5
3%
(9)
2
(18)
7
8
12%
9
25
CHANGE IN PERCENTAGE
1.27%
0.25
1.02
0.19
1.08%
1.39%
0.33
1.06
0.26
1.13%
1.58%
0.48
1.10
0.35
1.22%
(0.12)
(0.08)
(0.04)
(0.07)
(0.05)
(10)%
(20)
(11)
(25)
(6)
(6)
2%
8
(17)
(0.19)
(0.15)
(0.04)
(0.09)
(0.09)
Refer to pages 160 and 161 for additional analysis of net interest income.
38 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
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. Earning assets – including federal
funds sold, securities purchased under agreements to resell, interest-bearing due from and deposits with banks, Federal Reserve
deposits, securities, and loans and leases – are financed by a large base of interest-bearing funds that include client deposits;
short-term borrowings; senior notes and long-term debt. Earning assets also are funded by net noninterest-related funds, which
include demand deposits; the allowance for credit losses; and stockholders’ equity, reduced by nonearning assets such as
noninterest-bearing cash and due from banks; items in process of collection; and buildings and equipment. Net interest income
is subject to variations in the level and mix of earning assets and interest-bearing funds and their relative sensitivity to interest
rates. In addition, the levels of nonperforming assets and client compensating deposit balances used to pay for services impact
net interest income.
Net interest income in 2014 was $1.01 billion, up $72.4 million, or 8%, from $933.1 million in 2013. Net interest income
on an FTE basis for 2014 was $1.03 billion, an increase of $69.3 million, or 7% from $965.6 million in 2013. The increase is
primarily attributable to higher levels of average earning assets, partially offset by a decline in the net interest margin. Average
earning assets increased $10.3 billion, or 12%, to $95.9 billion from $85.6 billion in 2013. The net interest margin in 2014 was
1.08%, down from 1.13% in 2013, primarily the result of lower yields on earning assets, partially offset by a lower cost of
interest-related funds due to lower short-term interest rates.
Growth in average earning assets primarily reflected increased Federal Reserve deposits, securities and loans and leases.
Federal Reserve deposits averaged $14.7 billion in 2014, up $7.1 billion, or 94%, from $7.6 billion in 2013. Securities, inclusive
of Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in
other assets in the consolidated balance sheet, averaged $33.4 billion, an increase of $2.6 billion, or 9%, from $30.8 billion in
2013. Loans and leases averaged $30.2 billion, an increase of $1.5 billion, or 5% higher than the $28.7 billion in 2013.
The increase in average earning assets was primarily funded by higher levels of interest-bearing and demand deposits. Non-
U.S.-office interest-bearing client deposits averaged $48.3 billion in 2014, up $5.9 billion, or 14%, from $42.3 billion in 2013,
while average demand deposits increased $3.0 billion, or 18%, to $19.6 billion in 2014 from $16.6 billion in 2013.
Stockholders’ equity averaged $8.2 billion in 2014 compared with $7.7 billion in 2013. The increase of $499.5 million, or
7%, principally reflected current-year earnings and the issuance of preferred stock during 2014, partially offset by dividend
declarations and the repurchase of common stock pursuant to Northern Trust’s share repurchase program. On August 5, 2014,
Northern Trust issued 16,000 shares of Series C Non-Cumulative Perpetual Preferred Stock (Series C Preferred Stock), without
par value, for proceeds of $388.5 million. Shares of the Series C Preferred Stock rank senior to Northern Trust’s common stock.
In October 2014, Northern Trust declared cash dividends totaling $9.5 million to preferred stockholders, payable January 1,
2015, covering the five-month period since issuance on August 5, 2014. Northern Trust returned $792.4 million in capital to
common stockholders in 2014, including common stock dividend declarations totaling $311.7 million and common stock
repurchases totaling $480.7 million.
Under our capital plan submitted in January 2014, which was reviewed without objection by the Federal Reserve Board in
March 2014, the Corporation may repurchase up to $107.3 million of common stock after December 31, 2014 through
March 31, 2015. In January 2015, the Corporation submitted its most recent capital plan to the Federal Reserve Board. The
Corporation is authorized by its Board to purchase up to 7.1 million additional shares after December 31, 2014.
For additional analysis of average balances and interest rate changes affecting net interest income, refer to the Average
Balance Sheet with Analysis of Net Interest Income included in “Supplemental Item – Selected Statistical and Supplemental
Financial Data.”
N E T I N T E R E S T I N C O M E – 2 0 1 3 C O M P A R E D W I T H 2 0 1 2
Net interest income on an FTE basis decreased 6% to $965.6 million in 2013 from $1.03 billion in 2012, primarily due to a
decline in the net interest margin, partially offset by higher levels of average earning assets. The net interest margin in 2013 was
1.13% compared to 1.22% in 2012, resulting from lower yields on earning assets, partially offset by a lower cost of interest-
related funds.
Average earning assets increased $1.5 billion, or 2%, to $85.6 billion in 2013 from $84.2 billion in 2012. Growth in average
earning assets primarily reflected a 41% increase in Federal Reserve deposits, partially offset by a 3% decrease in
39 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
interest-bearing deposits with banks. The increase in average earning assets in 2013 was primarily funded by higher levels of
non-U.S.-office interest-bearing deposits and short-term borrowings, partially offset by lower levels of demand and other
noninterest-bearing deposits.
Stockholders’ equity averaged $7.7 billion and $7.4 billion in 2013 and 2012, respectively. The increase in 2013 reflected the
retention of earnings, partially offset by dividend declarations and the repurchase of common stock.
Provision for Credit Losses
The provision for credit losses was $6.0 million in 2014 compared with $20.0 million in 2013 and $25.0 million in 2012. The
current-year provision primarily reflected improved credit quality in the commercial and institutional, commercial real estate
and residential real estate loan classes, and allowances established as a result of increased commercial and institutional and
commercial real estate loan volumes. Nonperforming assets at December 31, 2014, decreased 15% from the prior-year end.
Residential real estate and commercial real estate loans accounted for 75% and 17%, respectively, of nonperforming loans and
leases at December 31, 2014. For further discussion of the allowance and provision for credit losses for 2014, 2013, and 2012,
refer to the “Asset Quality” section.
Noninterest Expense
Noninterest expense for 2014 totaled $3.14 billion, up $141.2 million, or 5%, from $2.99 billion in 2013. Results for 2014
include $47.5 million of charges and write-offs while the prior year included a $19.2 million legal settlement charge.
Noninterest expense in 2012 included $18.6 million of charges associated with restructuring, acquisition and integration
related activities.
The components of noninterest expense and a discussion of significant changes during 2014 and 2013 are provided below.
T A B L E 1 1 : N O N I N T E R E S T E X P E N S E
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Other Operating Expense
Total Noninterest Expense
Compensation
2014
2013
2012
2014 / 2013
2013 / 2012
$1,417.9
268.7
574.6
421.4
180.3
272.1
$1,306.6
257.5
564.1
377.6
173.8
314.2
$1,267.4
258.2
529.2
366.7
174.4
282.9
$3,135.0
$2,993.8
$2,878.8
9%
4
2
12
4
(13)
5%
3%
–
7
3
–
11
4%
Compensation expense, the largest component of noninterest expense, totaled $1.42 billion and $1.31 billion in 2014 and 2013,
respectively, an increase of $111.3 million, or 9%. Results for 2014 include severance-related charges totaling $29.4 million.
Excluding these charges, compensation expense increased $81.9 million, or 6%, primarily due to higher staff levels and
performance-based compensation and base pay adjustments. Staff on a full-time equivalent basis totaled approximately 15,400
at December 31, 2014, up 4% from approximately 14,800 at December 31, 2013.
Employee Benefits
Employee benefits expense totaled $268.7 million in 2014, up $11.2 million, or 4%, from $257.5 million in 2013, and included
$2.7 million of severance-related charges. Excluding these charges, employee benefit expense increased $8.5 million, or 3%,
attributable to higher expense associated with employee medical and defined contribution postretirement benefits and payroll
tax expense, partially offset by lower pension expense.
Outside Services
Outside services expense totaled $574.6 million in 2014, up $10.5 million, or 2%, from $564.1 million in 2013. Outside services
expense in 2014 included $1.6 million of severance-related charges. Excluding these charges, outside services expense increased
$8.9 million, or 2%, from the prior year, primarily related to higher sub-custodian and investment management sub-advisor
40 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
fees, partially offset by lower technical services expense. Investment management sub-advisor fees are those paid to external
investment managers for services provided to certain funds Northern Trust manages and those relating to custom client
programs. Technical services expense includes costs for systems and application support, the provision of market and research
data, and outsourced check processing and lockbox services, among other services.
Equipment and Software
Equipment and software expense, comprised of depreciation and amortization, rental, and maintenance costs, increased $43.8
million, or 12%, to $421.4 million in 2014 compared to $377.6 million in 2013. Results for 2014 include $9.5 million of write-
offs of replaced or eliminated software. Excluding these write-offs, equipment and software expense increased $34.3 million, or
9%, reflecting increased software amortization and related software support costs.
Occupancy
Occupancy expense totaled $180.3 million in 2014, up $6.5 million, or 4%, from $173.8 million in 2013. Occupancy expense in
2014 included charges totaling $4.3 million in connection with reductions in office space. Excluding these charges, occupancy
expense increased 1% compared to 2013.
Other Operating Expense
Other operating expense in 2014 totaled $272.1 million, down $42.1 million, or 13%, from $314.2 million in 2013. The
components of other operating expense are as follows:
T A B L E 1 2 : O T H E R O P E R A T I N G E X P E N S E
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Legal Settlement Charge
Other Expenses
Total Other Operating Expense
2014
$ 88.0
22.0
39.1
19.5
–
103.5
$272.1
2013
$ 91.6
23.5
39.1
21.1
19.2
119.7
$314.2
2012
2014 / 2013
2013 / 2012
$ 87.8
25.4
41.9
20.3
–
107.5
$282.9
(4)%
(6)
(0)
(8)
N/M
(13)
(13)%
4%
(7)
(7)
4
N/M
11
11%
Other operating expense in 2013 included the $19.2 million charge in connection with an agreement to resolve certain
litigation. The decrease in the “other” component of other operating expense primarily relates to lower charges associated with
other account servicing activities in 2014.
N O N I N T E R E S T E X P E N S E – 2 0 1 3 C O M P A R E D W I T H 2 0 1 2
Noninterest expense in 2013 totaled $2.99 billion, up 4% from $2.88 billion in 2012, and included the $19.2 million legal
settlement charge. Noninterest expense in 2012 included $18.6 million of charges associated with restructuring, acquisition and
integration related activities.
Compensation expense increased 3% to $1.31 billion in 2013 from $1.27 billion in 2012, primarily due to base pay
adjustments and higher staff levels. Employee benefits expense totaled $257.5 million in 2013, relatively unchanged from $258.2
million in 2012.
Outside services expense totaled $564.1 million in 2013, up 7% from $529.2 million in 2012. Outside services expense in
2013 included higher consulting, technical services and sub-custodian expense as compared to 2012. Outside services expense
in 2012 included restructuring, acquisition and integration charges of $12.1 million.
Equipment and software expense increased 3% to $377.6 million in 2013 compared to $366.7 million in 2012. Equipment
and software expense in 2013 reflected higher software amortization and related software support costs as compared to 2012.
Equipment and software expense in 2012 included software write-offs of $15.1 million.
Occupancy expense for 2013 was $173.8 million, down slightly from $174.4 million in 2012. Occupancy expense in 2012
included $3.6 million of restructuring charges related to reductions in office space.
41 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Other operating expense totaled $314.2 million in 2013, up 11% from $282.9 million in 2012. The increase in 2013 was
primarily attributable to the $19.2 million legal settlement charge as well as higher charges associated with other account
servicing activities.
Provision for Income Taxes
Provisions for income tax and effective tax rates are impacted by levels of pre-tax income, tax rates, and the impact of certain
non-U.S. subsidiaries whose earnings are reinvested indefinitely outside the U.S., as well as nonrecurring items such as the
resolution of tax matters. The 2014 provision for income taxes was $378.4 million, representing an effective rate of 31.8%. This
compares with a provision for income taxes of $344.2 million and an effective rate of 32.0% in 2013.
The income tax provisions for 2014 and 2013 reflect reductions totaling $43.0 million and $27.6 million, respectively,
related to certain non-U.S. subsidiaries whose earnings are being reinvested indefinitely outside the U.S. The 2012 income tax
provision of $305.0 million represented an effective tax rate of 30.7% and included a $12.4 million tax benefit in connection
with the resolution of certain leveraged-lease-related matters as well as reductions totaling $27.1 million related to non-U.S.
subsidiaries whose earnings are being reinvested indefinitely outside the U.S.
R E P O R T I N G S E G M E N T S A N D R E L A T E D I N F O R M A T I O N
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 Corporation’s and the Bank’s wholesale funding activities and
investment portfolios, 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.
C&IS and Wealth Management results are presented to promote a greater understanding of their financial performance.
The information, presented on an internal management-reporting basis, is derived from internal accounting systems that
support Northern Trust’s strategic objectives and management structure. Management has developed accounting systems to
allocate revenue and expense related to each segment. These systems incorporate processes for allocating assets, liabilities and
equity, and the applicable interest income and expense. Equity is allocated based on the proportion of economic risk-based and
leverage capital associated with the reporting segment. Allocations of capital and certain corporate expense may not be
representative of levels that would be required if the segments were independent entities. The accounting policies used for
management reporting are consistent with those described in Note 1 to the consolidated financial statements provided in
Item 8, “Financial Statements and Supplementary Data.” Transfers of income and expense items are recorded at cost; there is
no consolidated profit or loss on sales or transfers between reporting segments. Northern Trust’s presentations are not
necessarily consistent with similar information for other financial institutions.
T A B L E 1 3 : C O N S O L I D A T E D F I N A N C I A L I N F O R M A T I O N
($ In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
Average Assets
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2014
2013
2012
2014 / 2013
2013 / 2012
$ 2,832.8
210.1
282.8
1,034.9
4,360.6
6.0
3,135.0
1,219.6
407.8
$ 2,609.8
244.4
302.0
965.6
4,121.8
20.0
2,993.8
1,108.0
376.7
$ 2,405.5
206.1
294.2
1,031.1
3,936.9
25.0
2,878.8
1,033.1
345.8
$
811.8
$104,083.5
$
731.3
$94,857.7
$
687.3
$92,975.5
9%
(14)
(6)
7
6
(70)
5
10
8
11%
10%
8%
19
3
(6)
5
(20)
4
7
9
6%
2%
Note: Stated on an FTE basis. The consolidated figures include $29.4 million, $32.5 million, and $40.8 million of FTE adjustments for 2014, 2013, and 2012, respectively.
42 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Corporate & Institutional Services
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations,
endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe.
Asset servicing and related services encompass a full range of capabilities including but not limited to: global master trust and
custody; employee benefit services; fund administration; investment operations outsourcing; investment risk and analytical
services; securities lending; foreign exchange; banking; cash management; treasury management; brokerage services; and
transition management services. Client relationships are managed through the Bank and the Bank’s and the Corporation’s
other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region.
The following table summarizes the results of operations of C&IS for the years ended December 31, 2014, 2013, and 2012
on a management-reporting basis.
T A B L E 1 4 : C & I S R E S U L T S O F O P E R A T I O N S
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
Percentage of Consolidated Net Income
Average Assets
Note: Stated on an FTE basis.
2014
2013
2012
2014 / 2013
2013 /2012
$ 1,584.0
200.4
177.9
310.0
2,272.3
5.8
1,732.8
533.7
149.4
384.3
$ 1,443.8
238.8
177.3
275.9
2,135.8
(3.4)
1,657.9
481.3
145.6
$ 1,334.1
193.5
193.6
280.1
2,001.3
(2.1)
1,599.9
403.5
114.3
10%
(16)
–
12
6
N/M
5
11
3
8%
23
(8)
(1)
7
62
4
19
27
$
335.7
$
289.2
14%
16%
47%
46%
42%
$59,462.9
$53,308.2
$49,904.0
12%
7%
The 14% increase in C&IS net income in 2014 primarily resulted from higher trust, investment and other servicing fees and net
interest income, partially offset by lower foreign exchange trading income and higher noninterest expense. In addition, C&IS
net income in 2014 included the $9.5 million income tax benefit related to Northern Trust’s decision to reinvest the pre-tax
earnings of a foreign subsidiary indefinitely outside the U.S. The 16% increase in net income in 2013 compared to 2012
primarily reflected higher trust, investment and other servicing fees and foreign exchange trading income, partially offset by
higher noninterest expense.
C&IS Trust, Investment and Other Servicing Fees
C&IS trust, investment and other servicing fees are primarily attributable to services related to custody, fund administration,
investment management, and securities lending. Custody and fund administration fees are driven primarily by values of client
assets under custody, transaction volumes, and number of accounts. The asset values used to calculate these fees vary depending
on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are
priced based on quarter-end or month-end values, values at the beginning of each quarter or average values for a month or
quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily
balances. Investment management fees, which are based generally on client assets under management, are based primarily on
market values throughout a period.
Securities lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the
interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have
borrowed. The other services fee category in C&IS includes such products as benefit payment, investment risk and analytical
services and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.
43 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Provided below are the components of C&IS trust, investment and other servicing fees.
T A B L E 1 5 : C & I S T R U S T , I N V E S T M E N T A N D O T H E R S E R V I C I N G F E E S
(In Millions)
Custody and Fund Administration
Investment Management
Securities Lending
Other
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2014
2013
2012
2014 / 2013
2013 / 2012
$1,069.9
305.7
96.5
111.9
$ 948.9
295.6
97.9
101.4
$ 863.9
281.0
96.3
92.9
13%
3
(1)
10
10%
10%
5
2
9
8%
Total Trust, Investment and Other Servicing Fees
$1,584.0
$1,443.8
$1,334.1
2 0 1 4 C & I S T R U S T , I N V E S T M E N T A N D O T H E R S E R V I C I N G F E E S
68% Custody and Fund Administration
19% Investment Management
7% Other Services
6%
Securities Lending
Custody and fund administration fees, the largest component of trust, investment and other servicing fees, increased $121.0
million, or 13%, reflecting new business and the favorable impacts of equity markets and movements in foreign exchange rates.
Fees from investment management increased $10.1 million, or 3%, from the prior year due to higher equity markets and new
business, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS
totaled $63.2 million and $48.6 million in 2014 and 2013, respectively. Securities lending revenue decreased 1%, as lower
spreads were offset by higher loan volumes in the current year. C&IS other trust, investment and servicing fees increased $10.5
million, or 10%, primarily reflecting higher income from the investment risk and analytical services product.
Provided below is a breakdown of the C&IS assets under custody and under management.
T A B L E 1 6 : C & I S A S S E T S U N D E R C U S T O D Y
DECEMBER 31,
CHANGE
(In Billions)
North America
Europe, Middle East, and Africa
Asia-Pacific
Securities Lending
Total Assets Under Custody
2 0 1 4 C & I S A S S E T S U N D E R C U S T O D Y
2014
2013
2012
2014 / 2013
2013 / 2012
$2,920.3
1,939.3
477.3
116.2
$2,705.4
1,823.4
448.6
102.3
$2,414.6
1,459.7
396.4
87.9
$5,453.1
$5,079.7
$4,358.6
8%
6
6
14
7%
12%
25
13
16
17%
53% North America
36% Europe, Middle East, and Africa
9% Asia Pacific
2% Securities Lending
44 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
T A B L E 1 7 : C & I S A S S E T S U N D E R M A N A G E M E N T
DECEMBER 31,
CHANGE
(In Billions)
North America
Europe, Middle East, and Africa
Asia-Pacific
Securities Lending
Total Assets Under Management
2 0 1 4 C & I S A S S E T S U N D E R M A N A G E M E N T
2014
$415.5
115.6
62.3
116.2
$709.6
2013
$382.2
114.0
64.2
102.3
$662.7
2012
2014 / 2013
2013 / 2012
$364.5
60.2
48.6
87.9
$561.2
9%
1
(3)
14
7%
5%
89
32
16
18%
59%
16%
9%
16%
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
C&IS assets under custody were $5.5 trillion at December 31, 2014, 7% higher than $5.1 trillion at December 31, 2013. Assets
under management also increased 7% to $709.6 billion at December 31, 2014, from $662.7 billion at December 31, 2013. Cash
and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed by
Northern Trust and are included in assets under custody and under management. This securities lending collateral totaled
$116.2 billion and $102.3 billion at December 31, 2014 and 2013, respectively.
C&IS Foreign Exchange Trading Income
Foreign exchange trading income totaled $200.4 million in 2014, a $38.4 million, or 16%, decrease from $238.8 million in 2013.
The decrease is attributable to lower currency market volatility and trading volumes in the current year. Foreign exchange
trading income in 2013 of $238.8 million increased $45.3 million, or 23%, from $193.5 million in 2012, due to higher trading
volumes as compared to 2012.
C&IS Other Noninterest Income
Other noninterest income for 2014 totaled $177.9 million in 2014. Other noninterest income in 2013 of $177.3 million
included a $6.6 million reduction in connection with the write-off of certain fee receivables. Excluding the prior-year fee
receivable write-off, C&IS other noninterest income decreased $6.0 million, or 3%, in 2014, due to lower loan and banking
service fees and treasury management fee income, partially offset by current-year gains from lease-related activities. C&IS other
noninterest income in 2013 decreased $16.3 million, or 8%, from $193.6 million in 2012.
C&IS Net Interest Income
Net interest income increased $34.1 million, or 12%, in 2014 to $310.0 million from $275.9 million in 2013, due to higher levels
of average earning assets, partially offset by a decline in the net interest margin. Average earning assets totaled $53.0 billion in
the current year, an increase of $7.1 billion, or 16%, from $45.9 billion in the prior year. Average earning assets were primarily
comprised of interest-bearing deposits with banks as well as loans and leases. Funding sources were primarily comprised of
non-U.S.-office interest-bearing deposits. The C&IS net interest margin in 2014 was 0.58% compared to 0.60% in 2013 and
0.66% in 2012. The net interest margin decreases in 2014 and 2013 are primarily attributable to lower yields on earning assets,
partially offset by lower deposit rates, both the result of the persistent low interest rate environment.
45 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
C&IS Provision for Credit Losses
The provision for credit losses was $5.8 million for 2014, primarily reflecting allowances established as a result of higher
commercial and institutional loan volumes, partially offset by continued improvement in the credit quality of commercial and
institutional loans. The provision for credit losses was negative $3.4 million for 2013 and negative $2.1 million in 2012, each
reflecting improvement in loan portfolio credit quality as compared to the preceding year.
C&IS Noninterest Expense
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 $1.73 billion in
2014, an increase of $74.9 million, or 5%, from $1.66 billion in 2013. Results for 2014 include $24.8 million of charges relating
to severance activities and reductions in office space and write-offs of replaced or eliminated software, while the prior year
included the $19.2 million legal settlement charge. Excluding these charges and write-offs, C&IS noninterest expense increased
$69.3 million, or 4%, resulting from higher indirect expense allocations and compensation expense in 2014. Noninterest
expense in 2013 increased $58.0 million, or 4%, from $1.60 billion in 2012, and included the 2013 legal settlement charge and
higher indirect expense allocations and compensation and outside services expense.
Wealth Management
investment management, custody, and philanthropic services; financial consulting;
Wealth Management provides trust,
guardianship and estate administration; family business consulting; family financial education; brokerage services; and private
and business banking. Wealth Management focuses on high-net-worth individuals and families, business owners, executives,
professionals, retirees, and established privately-held businesses in its target markets. Wealth Management also includes the
Global Family Office, which provides customized services to meet the complex financial needs of individuals and family offices
in the United States and throughout the world with assets typically exceeding $200 million. Wealth Management services are
delivered by multidisciplinary teams through a network of offices in 18 U.S. states and Washington, D.C., as well as offices in
London, Guernsey, and Abu Dhabi.
The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2014,
2013, and 2012 on a management-reporting basis.
T A B L E 1 8 : W E A L T H M A N A G E M E N T R E S U L T S O F O P E R A T I O N S
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2014
2013
2012
2014 / 2013
2013 / 2012
($ In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
$ 1,248.8
9.7
98.3
536.1
1,892.9
0.2
1,268.7
624.0
234.8
389.2
$ 1,166.0
5.6
116.7
557.7
1,846.0
23.4
1,215.0
607.6
229.2
$ 1,071.4
12.6
93.6
629.9
1,807.5
27.1
1,182.3
598.1
226.4
$
378.4
$
371.7
Percentage of Consolidated Net Income
48%
52%
54%
Average Assets
$23,629.3
$22,887.6
$23,917.9
46 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
7%
73
(16)
(4)
3
(99)
4
3
2
3%
3%
9%
(56)
25
(11)
2
(14)
3
2
1
2%
(4)%
management’s discussion and analysis of financial condition and results of operations
Note: Stated on an FTE basis.
Wealth Management net income increased 3% in 2014, primarily as a result of increased trust, investment and other servicing
fees, partially offset by lower other noninterest and net interest income and higher noninterest expense. The 4% increase in
noninterest expense in 2014 is primarily due to increased indirect expense allocations and compensation expense as compared
to 2013. The 2% increase in Wealth Management net income in 2013 from 2012 is primarily attributable to higher revenue,
partially offset by higher noninterest expense.
Wealth Management Trust, Investment and Other Servicing Fees
Provided below is a summary of Wealth Management trust, investment and other servicing fees and assets under custody and
under management.
T A B L E 1 9 : W E A L T H M A N A G E M E N T T R U S T , I N V E S T M E N T A N D O T H E R S E R V I C I N G F E E S
(In Millions)
Central
East
West
Global Family Office
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2014
2013
2012
2014 / 2013
2013 / 2012
$ 509.1
325.3
262.5
151.9
$ 470.0
303.4
241.5
151.1
$ 435.8
279.8
228.1
127.7
8%
7
9
1
7%
8%
8
6
18
9%
Total Trust, Investment and Other Servicing Fees
$1,248.8
$1,166.0
$1,071.4
2 0 1 4 W E A L T H M A N A G E M E N T T R U S T , I N V E S T M E N T A N D O T H E R S E R V I C I N G F E E S
41% Central
26% East
21% West
12% Global Family Office
T A B L E 2 0 : W E A L T H M A N A G E M E N T A S S E T S U N D E R C U S T O D Y
(In Billions)
Global Family Office
Central
East
West
Total Assets Under Custody
DECEMBER 31,
CHANGE
2014
$324.0
85.7
58.5
47.5
$515.7
2013
$314.9
79.4
57.3
44.4
$496.0
2012
2014 / 2013
2013 / 2012
$270.4
71.9
63.9
40.1
$446.3
3%
8
2
7
4%
16%
10
(10)
11
11%
2 0 1 4 W E A L T H M A N A G E M E N T A S S E T S U N D E R C U S T O D Y
63% Global Family Office
17% Central
11% East
9% West
47 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
T A B L E 2 1 : W E A L T H M A N A G E M E N T A S S E T S U N D E R M A N A G E M E N T
(In Billions)
Central
Global Family Office
East
West
Total Assets Under Management
DECEMBER 31,
CHANGE
2014
$ 83.4
57.0
47.4
36.7
$224.5
2013
$ 86.2
53.9
47.2
34.5
$221.8
2012
2014 / 2013
2013 / 2012
$ 75.0
41.8
49.5
31.4
$197.7
(3)%
6
N/M
6
1%
15%
29
(5)
10
12%
2 0 1 4 W E A L T H M A N A G E M E N T A S S E T S U N D E R M A N A G E M E N T
37% Central
26% Global Family Office
21% East
16% West
The Wealth Management regions shown above are comprised of the following: Central includes Illinois, Michigan, Minnesota,
Missouri, Ohio and Wisconsin; East includes Connecticut, Delaware, Florida, Georgia, Massachusetts, New York and
Washington, D.C.; West includes Arizona, California, Colorado, Nevada, Texas and Washington. Global Family Office provides
specialized asset management, investment consulting, global custody, fiduciary, and private banking services to ultra-wealthy
domestic and international clients.
Wealth Management fee income is calculated primarily based on market values. Wealth Management trust, investment and
other servicing fees were $1.25 billion in 2014, up $82.8 million, or 7%, from $1.17 billion in 2013, which in turn was up $94.6
million, or 9%, from $1.07 billion in 2012. The results in 2014 benefitted from higher equity markets and new business,
partially offset by higher waived fees in money market mutual funds. Wealth Management money market mutual fund fee
waivers totaled $66.6 million and $59.6 million in 2014 and 2013, respectively. The 9% increase in trust, investment and other
servicing fees in 2013 compared to 2012 was attributable to new business and higher equity markets, partially offset by higher
waived fees in money market mutual funds as compared to 2012.
At December 31, 2014, assets under custody in Wealth Management were $515.7 billion compared with $496.0 billion at
December 31, 2013. Assets under management were $224.5 billion at December 31, 2014 compared to $221.8 billion at the
previous year end.
Wealth Management Foreign Exchange Trading Income
Foreign exchange trading income totaled $9.7 million in 2014, up $4.1 million from $5.6 million in 2013, primarily due to
increased client activity in 2014. Foreign exchange trading income of $5.6 million in 2013 was $7.0 million lower than $12.6
million in 2012.
Wealth Management Other Noninterest Income
Other noninterest income for 2014 totaled $98.3 million, a decrease of $18.4 million, or 16%, from $116.7 million in 2013.
Noninterest income in 2013 included the $32.6 million pre-tax gain on the sale of an office building property and a $5.8 million
reduction in connection with the write-off of certain fee receivables. Excluding these prior-year items, other noninterest income
increased $8.4 million, or 9%, primarily due to higher income associated with a third-party servicing fee agreement modified in
2014. Other noninterest income in 2013 increased $23.1 million, or 25%, as compared to 2012, due to the 2013 gain on the sale
of an office building property, partially offset by lower banking and credit related service fees.
48 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Wealth Management Net Interest Income
Net interest income was $536.1 million for 2014, down $21.6 million, or 4%, from $557.7 million in 2013, primarily reflecting a
decline in the net interest margin, partially offset by higher levels of average earning assets. The Wealth Management net
interest margin in 2014 decreased to 2.32% from 2.46% in 2013, resulting from lower yields on earning assets, partially offset by
lower deposit rates, each reflecting the persistent low interest rate environment. Average earning assets totaled $23.1 billion in
the current year, a 2% increase from $22.6 billion in the prior year. Net interest income in 2013 declined $72.2 million, or 11%,
from 2012 and the net interest margin in 2013 of 2.46% was down from the 2012 margin of 2.67%. The lower net interest
margin in 2013 as compared to 2012 was attributable to lower yields on earning assets, partially offset by lower deposit rates.
Earning assets and funding sources in both 2014 and 2013 were primarily comprised of loans and domestic interest-bearing
deposits, respectively.
Wealth Management Provision for Credit Losses
The provision for credit losses totaled $0.2 million for 2014, compared with $23.4 million in 2013, and $27.1 million in 2012.
The 2014 provision primarily reflected improvement in the credit quality of commercial real estate and residential real estate
loan classes. The 2013 provision reflected improvement in the credit quality of the commercial and institutional and
commercial real estate loan classes as compared to 2012, but weakness in the credit quality of the residential real estate loan
class. For further discussion of the allowance and provision for credit losses refer to the “Asset Quality” section.
Wealth Management Noninterest Expense
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 $1.27 billion, an increase
of $53.7 million, or 4%, from $1.22 billion in the prior year. Noninterest expense in 2014 included $18.1 million of charges
relating to severance activities and reductions in office space and write-offs of replaced or eliminated software. Excluding these
charges, noninterest expense increased $35.6 million, or 3%, in 2014, primarily due to higher indirect expense allocations and
compensation expense. Noninterest expense for 2013 was 3% higher than 2012, also primarily due to higher indirect expense
allocations and compensation expense.
Treasury and Other
Treasury and Other includes income and expense associated with the wholesale funding activities and the investment portfolios
of the Corporation and the Bank. Treasury and Other also includes certain corporate-based expense, executive level
compensation and nonrecurring items not allocated to the reporting segments.
The following table summarizes the results of operations of Treasury and Other for the years ended December 31, 2014,
2013, and 2012 on a management-reporting basis.
T A B L E 2 2 : T R E A S U R Y A N D O T H E R R E S U L T S O F O P E R A T I O N S
($ In Millions)
Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2014
6.6
188.8
195.4
133.5
61.9
23.6
38.3
$
$
2013
8.0
132.0
140.0
120.9
19.1
1.9
17.2
$
$
2012
2014 / 2013
2013 / 2012
$
$
7.0
121.1
128.1
96.6
31.5
5.1
26.4
(17)%
43
40
10
224
N/M
14%
9
9
25
(39)
(63)
123%
(35)%
Percentage of Consolidated Net Income
5%
2%
4%
Average Assets
Note: Stated on an FTE basis.
$20,991.3
$18,661.9
$19,153.6
12%
(3)%
49 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Treasury and Other noninterest income in 2014 was $6.6 million compared to $8.0 million in 2013, and included $4.2 million
of OTTI charges related to certain CRA-eligible securities. Excluding these charges, Treasury and Other noninterest income
increased 35% from 2013, primarily attributable to gains from currency-related hedging activities in 2014. Noninterest income
in 2013 increased 14% from 2012 and included higher security commissions and trading income as compared to 2012. Other
noninterest income in 2012 included a $5.3 million hedge-related gain, as well as credit-related OTTI losses of $3.3 million.
Treasury and Other net interest income in 2014 was $188.8 million, up $56.8 million, or 43%, from $132.0 million in 2013.
The increase is primarily due to higher internal yields on funds provided to reporting segments in the current year. Net interest
income in 2013 increased $10.9 million, or 9%, from $121.1 million in 2012, primarily due to higher internal yields on funds
provided to business units in 2013.
Treasury and Other noninterest expense in 2014 equaled $133.5 million, up $12.6 million, or 10%, from $120.9 million in
2013, and included $4.6 million of severance-related charges. Excluding these charges, the $8.0 million, or 7%, increase is
primarily attributable to higher general overhead costs, including compensation and regulatory costs, and higher allocated
expense from the corporate support functions.
Asset Management
Asset Management, through the Corporation’s various subsidiaries, supports the C&IS and Wealth Management reporting
segments by providing a broad range of asset management and related services and other products to clients around the world.
Investment solutions are delivered through separately managed accounts, bank common and collective funds, registered
investment companies, exchange traded funds, non-U.S. collective investment funds, and unregistered private investment
funds. Asset Management’s capabilities include active, passive and engineered equity; active and passive fixed income; cash
management; alternative asset classes (such as private equity and hedge funds of funds); and multi-manager advisory services
and products. Asset Management’s activities also include overlay services and other risk management services. Asset
Management operates internationally through subsidiaries and distribution arrangements and its revenue and expense are
allocated fully to C&IS and Wealth Management.
At year-end 2014, Northern Trust managed $934.1 billion in assets for personal and institutional clients, including $709.6
billion for C&IS clients and $224.5 billion for Wealth Management clients. Assets under management increased $49.6 billion,
or 6%, from $884.5 billion at year-end 2013. The following table presents consolidated assets under management as of
December 31, 2014, 2013 and 2012 by investment type.
T A B L E 2 3 : C O N S O L I D A T E D A S S E T S U N D E R M A N A G E M E N T B Y I N V E S T M E N T T Y P E
($ In Millions)
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
Total Assets under Management
DECEMBER 31,
CHANGE
2014
$485.7
162.2
169.9
116.3
$934.1
2013
$477.2
146.7
158.2
102.4
$884.5
2012
2014 / 2013
2013 / 2012
$362.4
146.7
161.8
88.0
$758.9
2%
11
7
14
6%
32%
–
(2)
16
17%
The 6% increase in consolidated assets under management from $884.5 billion as of December 31, 2013, to $934.1 billion as of
December 31, 2014, primarily reflected higher equity and bond markets and net new business from institutional clients,
primarily in fixed income and cash.
50 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
A S S E T M A N A G E M E N T
2 0 1 4 A S S E T S U N D E R M A N A G E M E N T O F $ 9 3 4 . 1 B I L L I O N
BY INVESTMENT TYPE
BY CLIENT SEGMENT
52% Equities
18% Cash and Other Assets
17% Fixed Income Securities
13% Securities Lending Collateral
76% Institutional
24% Personal
BY MANAGEMENT STYLE
A S S E T Q U A L I T Y
Securities Portfolio
49% Index
39% Active
6% Multi-Manager
6% Other
The following table presents the book values of Northern Trust’s held to maturity and available for sale investment securities by
type as of December 31, 2014, 2013 and 2012.
T A B L E 2 4 : S E C U R I T I E S H E L D T O M A T U R I T Y A N D A V A I L A B L E F O R S A L E
DECEMBER 31,
(In Millions)
Securities Held to Maturity
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Total Securities Held to Maturity
Securities Available for Sale
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Asset-Backed
Auction Rate
Other
Total Securities Available for Sale
Average Total Securities
Total Securities at Year-End
2014
2013
2012
$
121.9
18.4
4,030.5
$
225.2
35.9
2,064.7
$
329.3
112.9
1,939.8
$ 4,170.8
$ 2,325.8
$ 2,382.0
$ 4,506.9
4.6
16,389.2
2,327.7
18.1
6,312.0
$ 1,917.9
4.6
17,528.0
2,439.9
98.9
6,403.5
$ 1,784.6
14.1
18,638.8
2,375.9
97.8
5,732.3
$29,558.5
$28,392.8
$28,643.5
$33,445.9
$33,734.0
$30,819.9
$30,720.3
$30,893.8
$31,033.5
Northern Trust maintains a high quality securities portfolio, with 85% of the combined available for sale, held to maturity, and
trading account portfolios at December 31, 2014 composed of U.S. Treasury and government sponsored agency securities and
triple-A rated corporate debt, covered bonds, asset-backed securities, supranational, sovereign & non-U.S. agency bonds,
auction rate securities and obligations of states and political subdivisions. The remaining portfolio was composed of corporate
51 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
debt, 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, 6% were rated double-A, 3% were rated
below double-A, and 6% were not rated by Standard and Poor’s or Moody’s Investors Service (primarily negotiable certificates
of deposits of banks whose long term ratings are at least A).
At December 31, 2014, 39% of corporate debt was rated triple-A, 27% was rated double-A, and 34% was rated below
double-A. Residential mortgage-backed securities had a total amortized cost and fair value of $6.9 million and $6.4 million,
respectively, and were comprised primarily of subprime, prime, and Alt-A securities. Securities classified as “other asset-
backed” at December 31, 2014 had average lives of less than 5 years, and 100% were rated triple-A.
Unrealized losses within the investment securities portfolio at December 31, 2014 were $87.6 million as compared to $180.4
million at December 31, 2013, primarily reflecting widened credit spreads and higher market rates of government-sponsored
agency and corporate debt securities since purchase; 40% of the corporate debt portfolio is backed by guarantees provided by
U.S. and non-U.S. governmental entities. There were $4.2 million and $3.3 million of losses recognized in 2014 and 2012,
respectively, in connection with the write-down of securities determined to be other-than-temporarily impaired. No OTTI
losses were recognized in 2013.
Northern Trust is a participant in the repurchase agreement market. This market provides 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 any 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 the repurchase.
Loans and Leases
The following table presents the amounts outstanding of for loans and leases by segment and class as of December 31, 2014, and
the preceding four years.
T A B L E 2 5 : C O M P O S I T I O N O F L O A N P O R T F O L I O
DECEMBER 31,
(In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total Loans and Leases
Residential Real Estate
2014
2013
2012
2011
2010
$ 8,381.9
3,333.3
916.3
1,530.6
191.5
$ 7,375.8
2,955.8
975.1
954.7
358.6
$ 7,468.5
2,859.8
1,035.0
1,192.3
341.6
$ 6,918.7
2,981.7
978.8
1,057.5
417.6
$ 5,914.5
3,242.4
1,063.7
1,046.2
346.6
$14,353.6
$12,620.0
$12,897.2
$12,354.3
$11,613.4
$ 9,782.6
7,466.9
37.1
$10,271.3
6,445.6
48.6
$10,375.2
6,130.1
102.0
$10,708.9
5,651.4
349.3
$10,854.9
5,423.7
240.0
$17,286.6
$16,765.5
$16,607.3
$16,709.6
$16,518.6
$31,640.2
$29,385.5
$29,504.5
$29,063.9
$28,132.0
The residential real estate loan portfolio is primarily composed of mortgages and home equity credit lines provided as an
accommodation to clients. Residential real estate loans totaled $9.8 billion at December 31, 2014, or 32% of total U.S. loans,
compared with $10.3 billion, or 36% of total U.S. loans at December 31, 2013. All residential real estate loans are underwritten
utilizing Northern Trust’s credit policies, which do not support the origination of loan types generally considered to be of high
risk in nature, such as option ARM loans, subprime loans, loans with initial “teaser” rates, and loans with excessively high loan-
to-value ratios. Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally
52 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
require a loan-to-collateral value of no more than 65% to 80% at inception. Revaluations of supporting collateral for residential
real estate loans are obtained upon refinancing or default or when otherwise considered warranted. Residential real estate
collateral revaluations are performed by independent third parties.
Of the total $9.8 billion in residential real estate loans at December 31, 2014, $3.0 billion were in the greater Chicago area,
$2.2 billion were in Florida, and $1.6 billion were in California, with the remainder distributed throughout the other
geographic regions within the U.S. served by Northern Trust. Legally binding commitments to extend residential real estate
credit, which are primarily equity credit lines, totaled $1.6 billion and $1.7 billion at December 31, 2014, and 2013, respectively.
Commercial Real Estate
In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower’s
principal business activity is the acquisition or the development of real estate for commercial purposes; (2) the principal
collateral is real estate held for commercial purposes, and loan repayment is expected to flow from the operation of the
property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of
the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without
regard to the use of loan proceeds. The commercial real estate portfolio consists of commercial mortgages and construction,
acquisition and development loans extended primarily to highly experienced developers and/or 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.
Commercial mortgage financing is provided for the acquisition or refinancing of income-producing properties. Cash flows
from the properties generally are sufficient to amortize the loan. These loans are primarily located in the Illinois, Florida,
California, Texas, and Arizona markets. Construction, acquisition and development loans provide financing for commercial
real estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or refinance the loan
through a commercial mortgage with Northern Trust or another financial institution upon completion.
The table below provides additional detail regarding commercial real estate loan types:
T A B L E 2 6 : C O M M E R C I A L R E A L E S T A T E L O A N S
(In Millions)
Commercial Mortgages:
Apartment/Multi-family
Office
Retail
Industrial / Warehouse
Other
Total Commercial Mortgages
Construction, Acquisition and Development Loans
Single Family Investment
Other Commercial Real Estate Related
Total Commercial Real Estate Loans
DECEMBER 31,
2014
2013
$ 728.7
735.5
854.1
323.7
125.7
2,767.7
256.8
121.3
187.5
$ 616.2
686.0
768.0
318.6
110.6
2,499.4
254.2
110.0
92.2
$3,333.3
$2,955.8
At December 31, 2014, legally binding commitments to extend credit and standby letters of credit to commercial real estate
borrowers totaled $556.1 million and $110.7 million, respectively. At December 31, 2013, legally binding commitments and
standby letters of credit totaled $448.2 million and $97.1 million, respectively.
Nonperforming Assets and 90 Days Past Due Loans
Nonperforming assets consist of nonperforming loans and other real estate owned (OREO). OREO is comprised of commercial
and residential properties acquired in partial or total satisfaction of loans. Loans that are delinquent 90 days or more and still
53 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
accruing interest can fluctuate widely at any reporting period based on the timing of cash collections, renegotiations and
renewals. The following table presents nonperforming assets and loans that were delinquent 90 days or more and still accruing
at December 31, 2014 and each of the prior four year ends.
T A B L E 2 7 : N O N P E R F O R M I N G A S S E T S
DECEMBER 31,
(In Millions)
Nonperforming Loans and Leases
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Residential Real Estate
Private Client
Total Personal
Total Nonperforming Loans and Leases
Other Real Estate Owned
Total Nonperforming Assets
90 Day Past Due Loans Still Accruing
2014
2013
2012
2011
2010
$ 15.0
37.1
52.1
$162.4
1.2
163.6
215.7
16.6
$232.3
$ 22.7
$ 23.1
49.2
72.3
$189.1
1.4
190.5
262.8
11.9
$274.7
$ 16.4
$ 21.6
56.4
78.0
$174.6
2.2
176.8
254.8
20.3
$275.1
$ 19.0
$ 31.3
79.5
110.8
$177.6
5.3
182.9
293.7
21.2
$314.9
$ 13.1
$ 58.0
116.4
174.4
$153.3
5.3
158.6
333.0
45.5
$378.5
$ 13.0
Nonperforming Loans and Leases to Total Loans and Leases
0.68%
0.89%
0.86%
1.01%
1.18%
Allowance for Credit Losses Assigned to Loans and Leases to Nonperforming
Loans and Leases
1.2x
1.1x
1.2x
1.0x
1.0x
Nonperforming assets of $232.3 million as of December 31, 2014, reflect improved credit quality from the prior year, though
they remain elevated from levels preceding the economic downturn of 2008 and its impact on residential property valuations
and general economic conditions. The December 31, 2014, loan portfolio reflected improvement in the credit quality of the
residential real estate, commercial and institutional and commercial real estate loan classes. 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.
Allowance and Provision for Credit Losses
T A B L E 2 8 : C H A N G E S I N T H E A L L O W A N C E F O R C R E D I T L O S S E S
(In Millions)
Balance at January 1
Charge-Offs
Recoveries
Net Charge-Offs
Provision for Credit Losses
Balance at December 31
2014
$307.9
(36.1)
18.1
(18.0)
6.0
2013
$327.6
(59.3)
19.6
(39.7)
20.0
2012
$328.9
(63.0)
36.7
(26.3)
25.0
$295.9
$307.9
$327.6
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).
54 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
The following table shows the specific portion of the allowance and the allocated inherent portion of the allowance and its
components by loan category at December 31, 2014, and at each of the prior four year-ends.
T A B L E 2 9 : A L L O C A T I O N O F T H E A L L O W A N C E F O R C R E D I T L O S S E S
DECEMBER 31,
2014
2013
2012
2011
2010
PERCENT OF
LOANS TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
ALLOWANCE
AMOUNT
PERCENT OF
LOANS TO
TOTAL
LOANS
$ 21.1
–% $ 24.9
–% $ 32.5
–% $ 47.3
–%
$ 63.7
–%
($ In Millions)
Specific Allowance
Allocated Inherent Allowance
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total Allocated Inherent
Allowance
73.0
69.4
3.6
3.3
–
149.3
107.7
17.8
–
125.5
26
10
3
5
1
45
31
24
–
55
67.5
71.5
4.2
2.1
–
145.3
118.7
19.0
–
137.7
25
10
3
3
2
43
35
22
–
57
79.2
80.6
5.5
3.4
–
168.7
110.9
15.5
–
126.4
25
10
4
4
1
44
35
21
–
56
90.0
77.1
1.8
4.7
–
173.6
92.0
16.0
–
108.0
24
10
3
4
1
42
37
20
1
58
113.6
76.7
1.3
3.8
–
195.4
81.6
16.6
–
98.2
$274.8
100% $283.0
100% $295.1
100% $281.6
100%
$293.6
21
11
4
4
1
41
39
19
1
59
100%
100%
Total Allowance for Credit Losses
$295.9
100% $307.9
100% $327.6
100% $328.9
100%
$357.3
Allowance Assigned to:
Loans and Leases
Undrawn Commitments and
Standby Letters of Credit
Total Allowance for Credit Losses
Allowance Assigned to Loans and
Leases to Total Loans and
Leases
$267.0
28.9
$295.9
$278.1
29.8
$307.9
$297.9
29.7
$327.6
$294.8
34.1
$328.9
$319.6
37.7
$357.3
0.84%
0.95%
1.01%
1.01%
1.14%
Specific Component of the Allowance: 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.
At December 31, 2014, the specific allowance component amounted to $21.1 million compared with $24.9 million at
the end of 2013. The $3.8 million decrease is primarily attributable to a decrease in nonperforming loans attributable to
restructurings and pay-offs as a result of improvement in commercial and institutional, commercial real estate and residential
real estate loans, partially offset by additional allowances provided for new and existing nonperforming loans.
The decrease in the specific component of the allowance from $32.5 million in 2012 to $24.9 million in 2013 was primarily
attributable to charge-offs and pay-offs, partially offset by additional allowances provided for new and existing
nonperforming loans.
Inherent Component of the Allowance: The inherent component of the allowance addresses exposure relating to probable
but unidentified credit-related losses. The amount of the inherent loss allowance is based on factors which incorporate
management’s evaluation of historical charge-off experience and various qualitative factors such as management’s evaluation of
economic and business conditions and changes in the character and size of the loan portfolio.
55 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
The historical charge-off experience for each loan category is based on data from the current and preceding three years.
Qualitative factors reviewed by management include changes in asset quality metrics, the nature and volume of the portfolio,
economic and business conditions, and collateral valuations such as property values, as well as other pertinent information.
Changes in collateral values, delinquency ratios, portfolio volume and concentration, and other asset quality metrics, including
management’s subjective evaluation of economic and business conditions, result in adjustments of qualitative allowance factors
that are applied in the determination of inherent allowance requirements.
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 inherent portion of the allowance decreased $8.2 million to $274.8 million at December 31, 2014, compared with
$283.0 million at December 31, 2013, which decreased $12.1 million from $295.1 million at December 31, 2012. The decrease
in 2014 is primarily attributable to improvement in the credit quality of commercial real estate, residential real estate and
commercial and institutional loans in certain markets, partially offset by additional allowances established for increased loan
volumes in the commercial and institutional and commercial real estate loan classes. The decrease in 2013 reflected
improvement in the credit quality of commercial and institutional and commercial real estate loans in certain markets as
compared to 2012.
Overall Allowance: The evaluation of the factors above resulted in a total allowance for credit losses of $295.9 million at
December 31, 2014, compared with $307.9 million at the end of 2013. The allowance of $267.0 million assigned to loans and
leases, as a percentage of total loans and leases, was 0.84% at December 31, 2014, down from a $278.1 million allowance,
representing 0.95% of total loans and leases, at December 31, 2013. Allowances assigned to undrawn loan commitments and
standby letters of credit totaled $28.9 million and $29.8 million at December 31, 2014, and December 31, 2013, respectively,
and are included in other liabilities in the consolidated balance sheet.
Provision: The provision for credit losses was $6.0 million and net charge-offs totaled $18.0 million in 2014. This compares
with a $20.0 million provision for credit losses and net charge-offs of $39.7 million in 2013, and a $25.0 million provision for
credit losses and net charge-offs of $26.3 million in 2012.
Impaired Loans
A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement or when its terms have been modified as a concession
resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring. As of December 31, 2014, impaired
loans totaled $242.2 million and included $151.3 million of loans deemed troubled debt restructurings as compared to total
impaired loans of $293.4 million at December 31, 2013, which included $162.5 million of loans deemed troubled debt
restructurings. Impaired loans had $6.6 million and $10.4 million of the allowance for credit losses allocated to them at
December 31, 2014, and December 31, 2013, respectively. Impaired loans are measured based upon the loan’s market price, the
present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the fair value of the collateral if
the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, dependent upon the level of
certainty of loss, either a specific allowance is established or a charge-off is recorded for the difference. Smaller balance
(individually less than $250,000) homogeneous loans are collectively evaluated for impairment and excluded from impaired
loan disclosures as allowed under applicable accounting standards.
C R I T I C A L A C C O U N T I N G E S T I M A T E S
The use of estimates and assumptions is required in the preparation of financial statements in conformity with GAAP and
actual results could differ from those estimates. The SEC has issued guidance relating to the disclosure of critical accounting
estimates. Critical accounting estimates are those that require management to make subjective or complex judgments about the
56 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the
underlying assumptions or estimates in these areas could have a material impact on Northern Trust’s future financial condition
and results of operations.
For Northern Trust, accounting estimates that are viewed as critical are those relating to the allowance for credit losses,
pension plan accounting, and OTTI of investment securities. Management has discussed the development and selection of each
critical accounting estimate with the Audit Committee of the Board.
Allowance for Credit Losses
The allowance for credit losses represents management’s estimate of probable losses which have occurred as of the date of the
consolidated financial statements. The loan and lease portfolio and other lending-related credit exposures are regularly
reviewed to evaluate the level of the allowance for credit losses. In determining an appropriate allowance level, Northern Trust
evaluates the allowance necessary for impaired loans and lending-related commitments and also estimates losses inherent in
other lending-related credit exposures.
The allowance for credit losses consists of the following components:
Specific Allowance: 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. For impaired loans where the amount of specific allowance, if any, is determined
based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and utilized by
management. These appraisals are generally less than twelve months old and are subject to adjustments to reflect management’s
judgment as to the realizable value of the collateral.
Inherent Allowance: The amount of inherent allowance is based on factors which incorporate management’s evaluation of
historical charge-off experience and various qualitative factors such as management’s evaluation of economic and business
conditions and changes in the character and size of the loan portfolio. Factors are applied to loan and lease credit exposures
aggregated by shared risk characteristics and are reviewed quarterly by Northern Trust’s Loan Loss Reserve Committee which
includes representatives from Credit Risk Management, the reporting segments and Corporate Financial Management.
The quarterly analysis of the specific and inherent allowance components and the control process maintained by Credit
Risk Management and the lending staff, as described in the “Asset Quality” section, are the principal methods relied upon by
management for the timely identification of, and adjustment for, changes in estimated credit loss levels. In addition to
Northern Trust’s own experience, management also considers regulatory guidance. Control processes and analyses employed to
determine an appropriate level of allowance for credit losses are reviewed on at least an annual basis and modified as considered
appropriate.
Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance for credit losses. Subsequent
recoveries, if any, are credited to the allowance. Determinations as to whether loan balances for which the collectability is in
question are charged-off or a specific reserve is established based on management’s assessment as to the level of certainty
regarding the amount of loss. The provision for credit losses, which is charged to income, is the amount necessary to adjust the
allowance for credit losses to the level deemed to be appropriate through the above process. Actual losses may vary from
current estimates and the amount of the provision for credit losses may be either greater than or less than actual net
charge-offs.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any
single assumption. Management evaluates numerous variables, many of which are interrelated or dependent on other
assumptions and estimates, in determining an appropriate allowance level. Due to the inherent imprecision in accounting
estimates, other estimates or assumptions could reasonably have been used in 2014 and changes in estimates are reasonably
likely to occur from period to period.
Additionally, as an integral part of their examination process, various federal and state regulatory agencies also review the
allowance for credit losses. These agencies may require that certain loan balances be classified differently or charged off when
their credit evaluations differ from those of management, based on their judgments about information available to them at the
57 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
time of their examination. However, management believes that the allowance for credit losses adequately addresses these
uncertainties and has been established at an appropriate level to cover probable losses which have occurred as of the date of the
consolidated financial statements.
Pension Plan Accounting
Northern Trust maintains a noncontributory defined benefit pension plan covering substantially all U.S. employees (the
Qualified Plan) and a U.S. noncontributory supplemental pension plan (the Nonqualified Plan). Certain European-based
employees also retain benefits in local defined benefit pension plans which are closed to new employees and to future benefit
accruals. Measuring cost and reporting liabilities resulting from defined benefit pension plans requires the use of several
assumptions regarding future interest rates, asset returns, compensation increases, mortality rates, and other actuarial-based
projections relating to the plans. Due to the long-term nature of this obligation and the estimates that are required to be made,
the assumptions used in determining the periodic pension expense and the projected pension obligation are closely monitored
and reviewed annually for adjustments that may be required. Pension accounting guidance requires that differences between
estimates and actual experience be recognized as other comprehensive income in the period in which they occur. The
differences are amortized into net periodic pension expense from accumulated other comprehensive income over the future
working lifetime of eligible participants. As a result, differences between the estimates made in the calculation of periodic
pension expense and the projected pension obligation and actual experience affect stockholders’ equity in the period in which
they occur but continue to be recognized as expense systematically and gradually over subsequent periods.
Northern Trust recognizes the significant impact that these pension-related assumptions have on the determination of the
pension obligations and related expense and has established procedures for monitoring and setting these assumptions each
year. These procedures include an annual review of actual demographic and investment experience with the pension plans’
actuaries. In addition to actual experience, adjustments to these assumptions consider observable yields on fixed income
securities, known compensation trends and policies, as well as economic conditions and investment strategies that may impact
the estimated long-term rate of return on plan assets.
In determining the pension expense for the U.S. plans in 2014, Northern Trust utilized a discount rate of 5.00% for both
the Qualified Plan and the Nonqualified Plan. The rate of increase in the compensation level is based on a sliding scale that
averaged 4.25%. The expected long-term rate of return on Qualified Plan assets was 7.75%.
In evaluating possible revisions to pension-related assumptions for the U.S. plans as of Northern Trust’s December 31,
‰
2014, measurement date, the following were considered:
‰ Discount Rate: Northern Trust estimates the discount rate for its U.S. pension plans by applying the projected cash flows
for future benefit payments to several published discount rate yield curves as of the measurement date. These yield curves
are composed of individual zero-coupon interest rates for 60 different time periods over a 30-year time horizon. Zero-
coupon rates utilized by the yield curves are mathematically derived from observable market yields for AA-rated corporate
bonds. The yield curve models referenced by Northern Trust in establishing the discount rate supported a rate between
3.94% and 4.29%, with an average decrease of 90 basis points over the prior year. As such, Northern Trust decreased the
discount rate for the Qualified and Nonqualified plans
to 4.25% for
December 31, 2014.
Compensation Level: Based on a review of actual and anticipated salary experience, the compensation scale assumption is
based on a sliding scale that averages 4.25%.
Rate of Return on Plan Assets: The expected return on plan assets is based on an estimate of the long-term (30 years) rate
of return on plan assets, which is determined using a building block approach that considers the current asset mix and
estimates of return by asset class based on historical experience, giving proper consideration to diversification and
rebalancing. Current market factors such as inflation and interest rates are also evaluated before long-term capital market
assumptions are determined. Peer data and historical returns are reviewed to check for reasonability and appropriateness.
As a result of these analyses, Northern Trust’s rate of return assumption decreased from 7.75% for 2014 to 7.25% for 2015.
‰ Mortality Table: Northern Trust uses the mortality table proposed by the U.S. Treasury for use in accordance with the
provisions of the Pension Protection Act of 2006 (PPA) for both pre- and post-retirement mortality assumptions. For
from 5.00% for December 31, 2013,
‰
58 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
December 31, 2014, Northern Trust changed from the RP-2000 mortality table with improvement scale AA to the RP-2014
mortality table with improvement scale MP-2014 released by the Society of Actuaries in October 2014. The updated
mortality table and improvement scale apply to annuity payments only and reflect greater projected improvements in life
expectancy. Mortality assumptions on lump sum payments remain static and continue to be in line with the IRS prescribed
table for minimum lump sums in 2015.
In order to illustrate the sensitivity of these assumptions on the expected Qualified Plan periodic pension expense in 2015 and
the projected benefit obligation, the following table is presented to show the effect of increasing or decreasing each of these
assumptions by 25 basis points.
T A B L E 3 0 : S E N S I T I V I T Y O F Q U A L I F I E D P E N S I O N P L A N A S S U M P T I O N S
(In Millions)
Increase (Decrease) in 2015 Pension Expense
Discount Rate Change
Compensation Level Change
Rate of Return on Plan Assets Change
Increase (Decrease) in 2014 Projected Benefit Obligation
Discount Rate Change
Compensation Level Change
25 BASIS
POINT INCREASE
25 BASIS
POINT DECREASE
(4.1)
1.4
(3.3)
(45.7)
4.6
4.3
(1.4)
3.3
48.4
(4.5)
Pension Contributions: The deduction limits specified by the Internal Revenue Code for contributions made by sponsors
of defined benefit pension plans are based on a “Target Liability” under the provisions of the PPA. There were no contributions
to the Qualified Plan in 2014 and 2013 due to strong asset performance over the past few years. The minimum required
contribution to the Qualified Plan is expected to be zero in 2015 and for several years thereafter. The maximum deductible
contribution is estimated at $150.0 million for 2015.
Other-Than-Temporary Impairment of Investment Securities
Under GAAP, companies are required to perform periodic reviews of securities with unrealized losses to determine whether the
declines in value are considered other-than-temporary. For available-for-sale and held-to-maturity securities that management
has no intent to sell, and believes it more-likely-than-not that it will not be required to sell, prior to recovery, the consolidated
statement of income reflects only the credit loss component of an impairment, while the remainder of the fair value loss is
recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the
amount of principal not expected to be received over the remaining term of the security as projected. For debt securities that
Northern Trust intends to sell, or would more-likely-than-not be required to sell, before the expected recovery of the amortized
cost basis, the full impairment (that is, the difference between the security’s amortized cost basis and fair value) is recognized in
earnings. The application of significant judgment is required in determining the assumptions used in assessing whether an
OTTI exists and, if so, in the calculation of the credit loss component of the OTTI. Assumptions used in this process are
inherently subject to change in future periods. Different judgments or subsequent changes in estimates could result in
materially different impairment loss recognition.
Northern Trust conducts security impairment reviews quarterly to identify and evaluate those securities within its
investment portfolio that have indications of possible OTTI. A determination as to whether a security’s decline in market value
is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by
security. Factors Northern Trust considers in determining whether impairment is other-than-temporary include, but are not
limited to, the length of time the security has been impaired; the severity of the impairment; the cause of the impairment and
the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse
credit conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that
it will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized
cost basis.
59 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Credit-related losses recognized in 2014 and 2012 in connection with the write-down of securities totaled $4.2 million and
$3.3 million, respectively. There were no credit-related losses recognized in 2013. Additional OTTI may occur in future periods
as a result of market and economic conditions.
F A I R V A L U E M E A S U R E M E N T S
The preparation of financial statements in conformity with GAAP requires certain assets and liabilities to be reported at fair
value. As of December 31, 2014, approximately 29% of Northern Trust’s total assets and approximately 1% of its total liabilities
were carried on the consolidated balance sheet at fair value. As discussed more fully in Note 3 to the consolidated financial
statements provided in Item 8, “Financial Statements and Supplementary Data,” GAAP requires entities to categorize financial
assets and liabilities carried at fair value according to a three-level valuation hierarchy. The hierarchy gives the highest priority
to quoted, active market prices for identical assets and liabilities (Level 1) and the lowest priority to valuation techniques that
require significant management judgment because one or more of the significant inputs are unobservable in the market place
(Level 3). Approximately 14% of Northern Trust’s assets carried at fair value is classified as Level 1; Northern Trust typically
does not hold equity securities or other instruments that are actively traded on an exchange.
Approximately 86% of Northern Trust’s assets and 100% of its liabilities carried at fair value are categorized as Level 2, as
they are valued using models in which all significant inputs are observable in active markets. Investment securities classified as
available for sale make up 91.7% of Level 2 assets with the remaining 8.3% primarily consisting of derivative financial
instruments. Level 2 liabilities are comprised solely of derivative financial instruments.
Northern Trust’s Level 2 assets include available for sale and trading account securities, the fair values of which are
determined predominantly by external pricing vendors. Northern Trust has a well-established process to validate prices
received from pricing vendors as discussed more fully in Note 3 to the consolidated financial statements provided in Item 8,
“Financial Statements and Supplementary Data.”
As of December 31, 2014, all derivative assets and liabilities were classified in Level 2 and approximately 97%, measured on
a notional value basis, related to client-related and trading activities, predominantly consisting of foreign exchange contracts.
Derivative instruments are valued internally using widely accepted income-based models that incorporate inputs readily
observable in actively quoted markets and reflect contractual terms of contracts. Northern Trust evaluated the impact of
counterparty credit risk and its own credit risk on the valuation of derivative instruments. Factors considered included the
likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after
giving effect to master netting agreements, available collateral, and other credit enhancements in determining the appropriate
fair value of derivative instruments. The resulting valuation adjustments are not considered material.
As of December 31, 2014, the fair value of Northern Trust’s Level 3 assets were $18.1 million and represented
approximately 0.1% of assets carried at fair value. Level 3 assets consist of auction rate securities purchased from Northern
Trust clients. To estimate the fair value of auction rate securities, for which trading is limited and market prices are generally
unavailable, Northern Trust developed and maintains a pricing model that discounts estimated cash flows over their estimated
remaining lives. Significant inputs to the model include the contractual terms of the securities, credit risk ratings, discount
rates, forward interest rates, credit/liquidity spreads, and Northern Trust’s own assumptions about the estimated remaining
lives of the securities. As of December 31, 2014, Northern Trust had no Level 3 liabilities.
While Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate and
consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3
assets, could have a material effect on the computation of their estimated fair values.
I M P L E M E N T A T I O N O F A C C O U N T I N G S T A N D A R D S
Information related to recent accounting pronouncements is contained in Note 2 to the consolidated financial statements
provided in Item 8, “Financial Statements and Supplementary Data.”
60 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
C A P I T A L E X P E N D I T U R E S
Proposed significant capital expenditures are reviewed and approved by Northern Trust’s senior management and, where
appropriate, by the Board. This process is designed to assure that the major projects to which Northern Trust commits its
resources produce benefits compatible with its strategic goals.
Capital expenditures in 2014 included ongoing enhancements to Northern Trust’s software and hardware capabilities, the
opening of new offices, and the expansion and renovation of several existing offices. Capital expenditures for 2014 totaled
$409.5 million, of which $327.6 million was for software, $42.2 million was for computer hardware, $31.6 million was for
building and leasehold improvements, and $8.1 million was for furnishings. These capital expenditures principally support and
enhance Northern Trust’s investment management, asset servicing and asset management capabilities, as well as relationship
management and client interaction. Additional capital expenditures planned for systems technology will result in future
expense for the depreciation of hardware and amortization of software. Software amortization and depreciation on computer
hardware and machinery are charged to equipment and software expense. Depreciation on building and leasehold
improvements and on furnishings is charged to occupancy expense and equipment expense, respectively. Capital expenditures
for 2013 totaled $384.9 million, of which $293.0 million was for software, $53.0 million was for computer hardware, $30.5
million was for building and leasehold improvements, and $8.4 million was for furnishings.
O F F - B A L A N C E - S H E E T A R R A N G E M E N T S
Assets Under Custody and Assets Under Management
Northern Trust, in the normal course of business, holds assets under custody, management and servicing in a fiduciary or
agency capacity for its clients. In accordance with GAAP, these assets are not assets of Northern Trust and are not included in
its consolidated balance sheet.
Commitments, Letters of Credit and Securities Lent with Indemnification
Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet
the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the potential
credit exposure should the instrument be drawn fully upon and the client default. To control the credit risk associated with
entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and
monitoring controls as its lending activities. The following table provides details of Northern Trust’s off-balance-sheet financial
instruments as of December 31, 2014, and 2013.
T A B L E 3 1 : S U M M A R Y O F O F F - B A L A N C E - S H E E T F I N A N C I A L I N S T R U M E N T S W I T H C O N T R A C T A M O U N T S
(In Millions)
Undrawn Commitments to Extend Credit
One Year and Less
Over One Year
Total
Standby Letters of Credit
Commercial Letters of Credit
Custody Securities Lent with Indemnification
DECEMBER 31,
2014
2013
$10,660.1
24,467.5
$ 9,336.1
22,838.7
$35,127.6
$32,174.8
$ 4,468.1
20.8
98,113.9
$ 4,451.1
24.8
82,673.9
Undrawn commitments to extend credit generally have fixed expiration dates or other termination clauses. Since a significant
portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not
necessarily represent future loans or liquidity requirements. The following table provides information about the industry sector
and expiration dates of undrawn commitments to extend credit as of December 31, 2014.
61 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
T A B L E 3 2 : U N D R A W N C O M M I T M E N T S T O E X T E N D C R E D I T A T D E C E M B E R 3 1 , 2 0 1 4 B Y I N D U S T R Y S E C T O R
(In Millions)
Commercial
Commercial and Institutional
Finance and Insurance
Holding Companies
Manufacturing
Mining
Public Administration
Retail Trade
Services
Transportation and Warehousing
Utilities
Wholesale Trade
Other Commercial
Commercial and Institutional (Note)
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total
COMMITMENT EXPIRATION
TOTAL
COMMITMENTS
ONE YEAR
AND LESS
OVER ONE
OUTSTANDING
YEAR
LOANS
$ 4,031.5
24.6
8,068.6
653.9
94.1
1,092.8
7,123.3
426.1
1,637.6
806.0
459.4
24,417.9
556.1
–
1,309.5
178.2
26,461.7
1,568.7
7,062.7
34.5
8,665.9
$ 1,887.7
16.1
661.2
138.3
62.5
169.5
2,355.6
35.3
43.6
85.0
199.8
5,654.6
90.7
–
820.5
178.2
6,744.0
256.9
3,624.7
34.5
3,916.1
$ 2,143.8
8.5
7,407.4
515.6
31.6
923.3
4,767.7
390.8
1,594.0
721.0
259.6
18,763.3
465.4
–
489.0
–
19,717.7
1,311.8
3,438.0
–
4,749.8
35,127.6
10,660.1
24,467.5
$
767.7
62.8
2,115.5
118.9
292.1
232.6
3,689.6
308.7
74.0
561.5
158.5
8,381.9
3,333.3
916.3
1,530.6
191.5
14,353.6
9,782.6
7,466.9
37.1
17,286.6
31,640.2
Note: Commercial and institutional industry sector information is presented on the basis of the North American Industry Classification System (NAICS).
Standby letters of credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual
terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private
financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges and
similar transactions. Northern Trust is obligated to meet the entire financial obligation of these agreements and in certain cases
is able to recover the amounts paid through recourse against collateral received or other participants. Standby letters of credit of
$4.5 billion at December 31, 2014, and 2013 include $221.4 million and $208.9 million, respectively, of standby letters of credit
secured by cash deposits or participated to others. The weighted average maturity of standby letters of credit was 27 months
and 25 months at December 31, 2014, and 2013, respectively.
As part of its securities custody activities and at the direction of its clients, Northern Trust lends securities owned by clients
to borrowers who are reviewed and approved by the Northern Trust Counterparty Risk Management Committee. In
connection with these activities, Northern Trust has issued indemnifications to certain clients against certain losses that are a
direct result of a borrower’s failure to return securities when due, should the value of such securities exceed the value of the
collateral required to be posted. Borrowers are required to collateralize fully securities received with cash or marketable
securities. As securities are loaned, collateral is maintained at a minimum of 100% of the fair value of the securities plus accrued
interest. The collateral is revalued on a daily basis. The amount of securities loaned subject to indemnification was $98.1 billion
and $82.7 billion at December 31, 2014, and 2013, respectively. Because of the credit quality of the borrowers and the
requirement to collateralize fully securities borrowed, management believes that the exposure to credit loss from this activity is
not significant and no liability was recorded at December 31, 2014, or 2013 related to these indemnifications.
Additional information about Northern Trust’s off-balance-sheet financial instruments is included in Note 27 to the
consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.”
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management’s discussion and analysis of financial condition and results of operations
Variable Interest Entities
Variable Interest Entities (VIEs) are defined within GAAP as entities that either have a total equity investment that is
insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity
investors lack the characteristics of a controlling financial interest. Investors that finance a VIE through debt or equity interests,
or other counterparties that provide other forms of support, such as guarantees, subordinated fee arrangements, or certain
types of derivative contracts, are variable interest holders in the entity. The variable interest holder, if any, that has both the
power to direct the activities that most significantly impact the entity and a variable interest that could potentially be significant
to the entity is deemed to be the VIE’s primary beneficiary and is required to consolidate the VIE.
Leveraged Leases. In leveraged leasing transactions, Northern Trust acts as lessor of the underlying asset subject to the lease
and typically funds 20-30% of the asset’s cost via an equity ownership in a trust with the remaining 70-80% provided by third
party non-recourse debt holders. In such transactions, the trusts, which are VIEs, are created to provide the lessee use of the
property with substantially all of the rights and obligations of ownership. The lessee’s maintenance and operation of the leased
property has a direct effect on the fair value of the underlying property, and the lessee also has the ability to increase the benefits
it can receive and limit the losses it can suffer by the manner in which it uses the property. As a result, Northern Trust has
determined that it is not the primary beneficiary of these VIEs given it lacks the power to direct the activities that most
significantly impact the economic performance of the VIEs.
Tax Credit Structures. Northern Trust invests in qualified affordable housing projects and community development
entities (collectively, community development projects) that are designed to generate a return primarily through the realization
of tax credits. These community development projects are formed as limited partnerships and LLCs in which Northern Trust
typically invests as a limited partner/investor member through equity contributions. The economic performance of the
community development projects, which are VIEs, is subject to the performance of their underlying investments and their
ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity
investments. Northern Trust has determined that it is not the primary beneficiary of any community development projects as it
lacks the power to direct the activities that most significantly impact the economic performance of the underlying investments
or to affect their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits
generated by equity investments. This power is held by the general partners and managing members who exercise full and
exclusive control of the operations of the VIEs.
Trust Preferred Securities. As discussed in further detail in Note 13 to the consolidated financial statements provided in
Item 8, “Financial Statements and Supplementary Data,” in 1997, Northern Trust issued Floating Rate Capital Securities, Series
A and Series B, through statutory business trusts wholly-owned by the Corporation (NTC Capital I and NTC Capital II,
respectively). The sole assets of the trusts are Subordinated Debentures of the Corporation that have the same interest rates and
maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. NTC
Capital I and NTC Capital II are considered VIEs; however, as the sole asset of each trust is a receivable from the Corporation
and proceeds to the Corporation from the receivable exceed the Corporation’s investment in the VIEs’ equity shares, the
Corporation is not permitted to consolidate the trusts, even though the Corporation owns all of the voting equity shares of the
trusts, has fully guaranteed the trusts’ obligations, and has the right to redeem the preferred securities in certain circumstances.
Investment Funds. Northern Trust acts as asset manager for various funds in which clients of Northern Trust are investors.
As an asset manager of funds, the Corporation earns a competitively priced fee that is based on assets managed and varies with
each fund’s investment objective. Based on its analysis, Northern Trust has determined that it is not the primary beneficiary of
these VIEs under GAAP.
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management’s discussion and analysis of financial condition and results of operations
L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S
Liquidity Risk Management
The objectives of liquidity risk management are to ensure that Northern Trust can meet its cash flow obligations under both
normal and adverse economic conditions while maintaining its ability to capitalize on business opportunities in a timely and
cost effective manner. Liquidity risk is the risk of not being able to raise sufficient funds to meet on- and off-balance sheet cash
flow obligations when they are due and payable because of firm-specific or market-wide events.
Governance and Risk Management Framework
Northern Trust manages its liquidity under a global risk management framework, incorporating regional policies, limits and
management when appropriate. Corporate liquidity policies, risk appetite and limits are reviewed and approved annually by the
Board of Directors. In connection with the implementation of enhanced prudential standards in January 2015, the Board of
Directors approved a new Liquidity Management Policy establishing the principles and guidelines for the Corporation to
govern the processes and activities for the management of its liquidity position. The Business Risk Committee receives reports
at least quarterly on the Corporation’s liquidity risk profile and liquidity risk tolerance. The Asset & Liability Management
Policy Committee (ALCO) is responsible for recommending liquidity policies to the Board, establishing internal liquidity
thresholds, assessing Northern Trust’s overall liquidity status, and reviewing reports, including liquidity stress test results, cash
flows and other analyses on a regular basis. The Treasury department has the day-to-day responsibility for measuring, analyzing
and managing liquidity risk within the thresholds and limits established by ALCO and the Board.
Northern Trust’s Global Liquidity Management framework focuses on five key areas – position management; liquidity
analysis; contingency planning; peer group comparisons; and management reporting – while also providing for the review and
management of the liquidity of the Corporation separate from that of the Bank. It is through this framework that management
monitors its sources and uses of liquidity, evaluates their level of stability under various circumstances, plans for adverse
situations, benchmarks itself against other banks, provides information to management, and complies with various U.S. and
international regulations.
Position management includes daily monitoring of cash positions and anticipating future funding requirements given both
internal and external events. As the Corporation’s principal subsidiary encompassing all of Northern Trust’s banking activities,
the Bank centrally manages liquidity for all U.S. and international banking operations. Liquidity is provided by a variety of
sources, including client deposits (institutional and personal) from our C&IS and Wealth Management businesses, wholesale
funding from the capital markets, maturities of short-term investments, Federal Home Loan Bank advances, and
unencumbered liquid assets that can be sold or pledged to secure additional funds. While management does not view central
bank discount windows as primary sources of liquidity, at December 31, 2014, the Bank had over $25.5 billion of securities and
loans readily available as collateral to support discount window borrowings. The Bank is also very active in the U.S. interbank
funding market, providing an important source of additional liquidity and low-cost funds. Liquidity is used by a variety of
activities, including client withdrawals, purchases of securities, net loan growth, and draws on commitments to extend credit.
Northern Trust maintains a very liquid balance sheet, with cash and due from banks, deposits with the Federal Reserve and
other central banks, short-term money market assets and investment securities in aggregate representing 64% of total assets as
of December 31, 2014. The market value of unencumbered securities at the Bank, which include those placed at the Federal
Reserve discount window, totaled $29.3 billion at December 31, 2014.
Liquidity analysis evaluates a bank’s ability to meet its cash flow obligations given a variety of possible internal and external
events and under different economic conditions. Northern Trust uses liquidity analysis to support its contingent liquidity plans,
size its liquidity buffer, gain insight into its liquidity position and strengthen its liquidity policies and practices. Liquidity
analysis is performed using multiple independent scenarios, across major currencies, at a consolidated corporate level and for
various international banking subsidiaries. These scenarios, which include both company specific and systemic events, analyze
potential impacts on Northern Trust’s domestic and foreign deposit balances, wholesale funding sources, financial market
access, external borrowing capacity and off-balance-sheet obligations. Results are reviewed by senior management and ALCO
on a regular basis.
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management’s discussion and analysis of financial condition and results of operations
Another important area of Northern Trust’s liquidity risk management is the development and maintenance of its
contingent liquidity plans. A contingent funding plan covering the Corporation, Bank and major subsidiaries is approved
annually by the Business Risk Committee and regularly updated and tested. This plan, which can be activated in the event of an
liquidity crisis, details organizational responsibilities and defines specific actions designed to ensure the proper
actual
maintenance of liquidity during periods of stress. In addition, international banking subsidiaries have individual contingent
liquidity plans, which reflect the global plan.
Northern Trust also analyzes its liquidity profile against a peer group of large U.S. bank holding companies, including other
major custody banks. This analysis provides management with benchmarking information, highlights industry trends, and
supports the establishment of new policies and strategies.
Management regularly reviews various reports, analyses and other information depicting changes in Northern Trust’s
liquidity mix and funding concentrations, overall financial market conditions and other internal and external liquidity metrics.
Management uses this information to evaluate the overall status of Northern Trust’s liquidity position and anticipate potential
events that could stress that position in the future. An overall Liquidity Status Level for Northern Trust, established and
regularly reviewed by ALCO, is monitored on an ongoing basis by the Treasury department. Downgrades in liquidity status
resulting from internal, external or industry-wide events, trigger specific pre-determined actions and limits designed to position
Northern Trust to better respond to potential liquidity stresses.
Corporation Liquidity
The liquidity of the Corporation is managed separately from that of the Bank. The primary sources of cash for the Corporation
are issuances of debt or equity, dividend payments from the Bank and interest earned on investment securities and money
market assets. In 2014, the Corporation issued Series C Preferred Stock for net proceeds of $388.5 million, and received $300.0
million of dividends from the Bank. Dividends from the Bank are subject to certain restrictions, as discussed in further detail in
Note 30 to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.” The
Corporation’s uses of cash consist mainly of dividend payments to the Corporation’s stockholders; the payment of principal
and interest to note holders; repurchases of its common stock; and investments in, or loans, to its subsidiaries. The most
significant uses of cash by the Corporation during 2014 were debt repayments of $500.0 million related to the May 2014
maturity of 4.63% fixed rate senior notes, $480.7 million of common stock repurchases and $302.9 million of common
stock dividends.
The Corporation’s liquidity, defined as the amount of cash and highly marketable assets, was $869.4 million and $1.6
billion at December 31, 2014, and 2013, respectively. During, and at year-end, 2014 and 2013, these assets were comprised
almost entirely of cash in a demand deposit account at the Bank or overnight money market placements, both of which were
fully available to the Corporation to support its own cash flow requirements or those of its subsidiary companies, as needed.
Average liquidity during 2014 and 2013 was $1.1 billion and $1.7 billion, respectively. The cash flows of the Corporation are
shown in Note 33 to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.”
65 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
A significant source of liquidity for both the Corporation and the Bank is the ability to draw funding from capital markets
globally. The credit ratings of the Corporation and the Bank as of December 31, 2014, provided below, allow Northern Trust to
access capital markets on favorable terms.
T A B L E 3 3 : N O R T H E R N T R U S T C R E D I T R A T I N G S A S O F D E C E M B E R 3 1 , 2 0 1 4
Northern Trust Corporation:
Commercial Paper
Senior Debt
Subordinated Debt
Preferred Stock
Trust Preferred Capital Securities
Outlook
The Northern Trust Company:
Short-Term Deposit
Long-Term Deposit
Subordinated Debt
Outlook
CREDIT RATING
STANDARD &
POOR’S
MOODY’S
FITCHRATINGS
A-1
A+
A
BBB+
BBB+
Stable
A-1+
AA-
A+
Stable
P-1
A2
A3
Baa2
Baa1
Stable
P-1
A1
A2
Stable
F1+
AA-
A+
BBB
BBB+
Stable
F1+
AA
A+
Stable
A significant downgrade in one or more of these ratings could limit Northern Trust’s access to capital markets and/or increase
the rates paid for short-term borrowings, including deposits, and future long-term debt issuances. The size of these rate
increases would depend on multiple factors including, the extent of the downgrade, Northern Trust’s relative debt rating
compared to other financial institutions, current market conditions, and other factors. In addition, as discussed in Note 25 to
the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data,” Northern Trust
enters into certain master netting arrangements with derivative counterparties that contain credit-risk-related contingent
features in which the counterparty has the option to declare Northern Trust in default and accelerate cash settlement of net
derivative liabilities with the counterparty in the event Northern Trust’s credit rating falls below specified levels. The maximum
amount of these termination payments that Northern Trust could have been required to pay at December 31, 2014, was $26.6
million. Other than these credit-risk-related contingent derivative counterparty payments, Northern Trust had no long-term
debt covenants or other credit-risk-related payments at December 31, 2014, that would be triggered by a significant downgrade
in its debt ratings.
Statement of Cash Flows
For the year ended December 31, 2014, net cash provided by operating activities was $936.0 million, primarily the result
of period earnings, inclusive of the impact of non-cash charges such as amortization of computer software, partially offset by
increased net collateral deposited with derivative counterparties. Net cash provided by operating activities for the year ended
December 31, 2013, was $839.3 million and was primarily the result of period earnings, inclusive of the impact of non-cash
charges, partially offset by increases in net collateral deposited with derivative counterparties and in receivables.
Net cash used in investing activities of $8.2 billion for the year ended December 31, 2014, was primarily attributable to
increased levels of Federal Reserve deposits, net purchases of securities held to maturity and available for sale, and increased
levels of loans and leases, partially offset by decreased levels of interest-bearing deposits with banks. The net increase in
investment securities and the decrease in interest-bearing deposits with banks primarily reflected the redeployment of
investments in bank time deposits to securities. The increase in Federal Reserve deposits primarily reflected increases in
demand and other noninterest-bearing client deposits in 2014.
Net cash used in investing activities of $5.7 billion for the year ended December 31, 2013, was primarily attributable to an
increase in Federal Reserve deposits, primarily reflecting increased levels of non-U.S.-office interest-bearing client deposits and
short-term other borrowings.
66 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
For the year ended December 31, 2014, net cash provided by financing activities totaled $7.1 billion, primarily attributable
to increased levels of total deposits and proceeds from the issuance of Series C Preferred Stock, partially offset by repayments of
senior notes and other long-term debt, the repurchase of common stock pursuant to the Corporation’s share repurchase
program, and cash dividends paid to common stockholders. The increase in total deposits is attributable to higher levels of
demand and other noninterest-bearing client deposits. The decreases in senior notes and other long-term debt reflect the
maturity of $500.0 million of fixed-rate senior notes and $135.0 million of repayments of borrowings from the Federal Home
Loan Bank, respectively.
For the year ended December 31, 2013, net cash provided by financing activities totaled $4.4 billion, primarily reflecting
increased levels of total deposits and short-term other borrowings. The increase in the level of total deposits was primarily due
to an increase in non-U.S.-office interest-bearing client deposits, partially offset by decreased U.S.-office demand and other
noninterest-bearing client deposits from December 31, 2012, levels. The decrease in U.S.-office noninterest-bearing deposits
was largely driven by the expiration on December 31, 2012, of the FDIC’s Temporary Liquidity Guarantee Program which had
provided unlimited deposit insurance. The increase in short-term other borrowings in 2013 reflected additional short-term
borrowings from the Federal Home Loan Bank.
Regulatory Environment
Northern Trust actively follows regulatory developments and regularly evaluates its liquidity risk management framework
against proposed rulemaking and industry best practices in order to comply with applicable regulations and further enhance its
liquidity policies. Please refer to “Liquidity Standards” under “Supervision and Regulation” in Item 1, “Business” of this Annual
Report on Form 10-K for a discussion of applicable liquidity standards.
67 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
Contractual Obligations
The following table shows Northern Trust’s contractual obligations as of December 31, 2014.
T A B L E 3 4 : C O N T R A C T U A L O B L I G A T I O N S A S O F D E C E M B E R 3 1 , 2 0 1 4
(In Millions)
Senior Notes(1)
Subordinated Debt(1)
Floating Rate Capital Debt(1)
Capital Lease Obligations(2)
Operating Leases(2)
Purchase Obligations(3)
Total Contractual Obligations
PAYMENT DUE BY PERIOD
ONE YEAR
AND LESS
$
–
233.7
–
8.3
90.7
136.9
1-3
YEARS
$
–
221.6
–
16.2
166.2
187.1
3-5 YEARS
$
–
335.0
–
17.1
132.3
31.8
OVER 5
YEARS
$1,497.0
793.0
277.2
(1.7)
291.4
10.2
$469.6
$608.6
$542.5
$2,823.3
TOTAL
$1,497.0
1,583.3
277.2
39.9
680.6
366.0
$4,444.0
Note: Obligations as shown do not include deposit liabilities or interest requirements on funding sources.
(1) Refer to Notes 12 and 13 to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data” for further details.
(2) Refer to Note 10 to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data” for further details.
(3) Purchase obligations consist primarily of ongoing operating costs related to outsourcing arrangements for certain cash management services and the support and maintenance of the
Corporation’s technological requirements. Certain obligations are in the form of variable rate contracts and, in some instances, 2014 activity was used as a base to project future
obligations.
Capital Management
One of Northern Trust’s primary objectives is to maintain a strong capital position to merit and maintain the confidence of
clients, the investing public, bank regulators and stockholders. A strong capital position helps Northern Trust pursue profitable
investment opportunities and withstand unforeseen adverse developments.
Northern Trust manages its capital on a total Corporation basis and on a legal entity basis. The Treasury department has
the day-to-day responsibility for measuring and managing capital levels within goals and targets established by the Capital
Management Policy and the Board. The management of capital also involves regional management when appropriate. In
establishing the goals and targets for capital, a variety of factors are taken into consideration, including the overall risk of
Northern Trust’s businesses, regulatory requirements, capital levels relative to its peers, and the impact on its credit ratings.
Capital levels were strengthened in 2014 as average stockholders’ equity increased $499.5 million, or 7%, reaching $8.2
billion. Total stockholders’ equity was $8.4 billion at December 31, 2014, as compared to $7.9 billion at December 31, 2013. In
April 2014, the Board increased the quarterly common stock dividend by 6% to $0.33 per common share. Common dividends
totaling $311.7 million were declared in 2014. The Corporation purchased 7.5 million shares of its own common stock in 2014
at an average price per share of $64.20, and is authorized by the Board to purchase up to 7.1 million additional shares of stock
after December 31, 2014. The Corporation issued Series C Preferred Stock for net proceeds of $388.5 million in August 2014,
and in October 2014, declared $9.5 million of dividends to preferred stockholders, payable January 1, 2015 and covering the
five-month period from August through December 2014.
68 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
In accordance with Basel III requirements in effect at December 31, 2014, capital ratios are calculated using both the
standardized and advanced approaches. For each ratio, the lower of the result calculated under the standardized approach and
the advanced approach serves as the effective ratio for purposes of determining capital adequacy. The following table provides a
reconciliation of the Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios,
under the applicable U.S. regulatory rules as of December 31, 2014, and 2013.
T A B L E 3 5 : C A P I T A L A D E Q U A C Y
($ In Millions)
December 31, 2014
December 31, 2013(5)
Common Equity Tier 1 Capital
Common Stockholders’ Equity
Floating Rate Capital Securities
Net Unrealized (Gains) Losses on Securities Available for Sale
Net Unrealized (Gains) Losses on Cash Flow Hedges
Goodwill and Other Intangible Assets, net of Deferred Tax Liability
Pension and Other Postretirement Benefit Adjustments
Other
Total Common Equity Tier 1
Additional Tier 1 Capital
Preferred Stock
Floating Rate Capital
Other
Total Additional Tier 1 Capital
Total Tier 1 Capital
Tier 2 Capital
Qualifying Allowance for Credit Losses
Qualifying Subordinated Debt
Floating Rate Capital
Other
Total Tier 2 Capital
Total Risk-Based Capital
Risk-Weighted Assets(1)
Total Assets – End of Period (EOP)
Adjusted Average Fourth Quarter Assets(2)
Total Loans and Leases – EOP
Common Stockholders’ Equity to:
Total Loans and Leases – EOP
Total Assets – EOP
Risk-Based Capital Ratios
Tier 1
Total (Tier 1 and Tier 2)
Common Equity Tier 1
Leverage
Advanced
Approach(3)
Standardized
Approach(4)
$ 8,060.4
–
(22.1)
3.8
(497.0)
272.8
(4.6)
$ 8,060.4
–
(22.1)
3.8
(497.0)
272.8
(4.6)
7,813.3
7,813.3
388.5
134.5
(18.3)
504.7
388.5
134.5
(18.7)
504.3
8,318.0
8,317.6
–
1,009.1
134.5
(12.4)
1,131.2
$ 9,449.2
$ 62,896.9
109,946.5
106,814.0
31,640.2
25.48%
7.33
13.2%
15.0
12.4
n/a
274.7
1,009.1
134.5
(12.9)
1,405.4
$ 9,723.0
$ 62,651.2
109,946.5
106,814.0
31,640.2
25.48%
7.33
13.3%
15.5
12.5
7.8
$ 7,912.0
268.8
(6.0)
(2.9)
(578.5)
260.3
(0.5)
7,853.2
–
–
–
–
7,853.2
283.0
1,158.7
–
–
1,441.7
$ 9,294.9
$ 58,773.8
102,947.3
99,074.9
29,385.5
26.92%
7.69
13.4%
15.8
12.9
7.9
(1) Risk-weighted assets exclude, as applicable under each regulatory approach, amounts primarily related to goodwill, certain other intangible assets, and net unrealized gains or losses
on securities and reflect adjustments for excess allowances for credit losses that have been excluded from Tier 1 and Tier 2 capital, if any.
(2) Adjusted average fourth quarter assets exclude amounts primarily related to goodwill, other intangible assets, and net unrealized gains or losses on securities.
(3) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the December 31, 2014, capital balances and ratios are calculated in compliance with the
Basel III Advanced Approach final rules released by the Federal Reserve Board on July 2, 2013.
(4) Standardized Approach capital components in 2014 are determined by Basel III phased in requirements and risk weighted assets are determined by Basel I requirements. The
December 31, 2014, ratios calculated under the Standardized Approach comply with the final rules released by the Federal Reserve Board on July 2, 2013.
(5) The December 31, 2013, capital balances and ratios were calculated in accordance with Basel I requirements.
As of December 31, 2014, and 2013, the Corporation’s capital ratios exceeded the minimum requirements for classification as
“well-capitalized” under applicable U.S. regulatory requirements. Further information regarding the Corporation’s and the
Bank’s capital ratios and the minimum requirements for classification as “well-capitalized” is provided in the “Supervision and
Regulation” section of Item 1, “Business” and Note 32 to the Consolidated Financial Statements provided in Item 8, “Financial
Statements and Supplementary Data.”
69 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
management’s discussion and analysis of financial condition and results of operations
The parallel run of the risk-based capital framework demonstrated that the use of the advanced approaches methodologies,
inclusive of commitments the Corporation provided to the Federal Reserve Board regarding the Corporation’s approach to the
calculation of risk-weighted assets, did not result in Tier 1 or total risk-based capital ratios falling below the levels required for
categorization as “well-capitalized.” As of December 31, 2014, the Corporation’s common equity Tier 1 capital ratio as
calculated under the advanced approaches methodologies would have been 11.9% on a fully phased-in basis, while the
Corporation’s common equity Tier 1 capital ratio under the standardized approach would have been 10.5% on a fully phased-
in basis.
The U.S.’s implementation of Basel III has increased the minimum capital thresholds for banking organizations and
tightened the standards for what qualifies as capital. The Corporation and the Bank believe their capital strength, balance sheets
and business models leave them well positioned for the continued U.S. implementation of Basel III.
R I S K M A N A G E M E N T
Risk Management Overview
Northern Trust employs an integrated enterprise risk management framework to support its strategies. The framework
provides a methodology to identify, assess, monitor, measure, manage and report both internal and external risks to Northern
Trust, and promotes a risk culture that encompasses the general awareness, attitude and behavior of employees to risk and the
management of risk within the organization. The key risk categories that are inherent in Northern Trust’s business activities
include: credit, operational, fiduciary, compliance, market, liquidity, and strategic risk. Please refer to “Liquidity and Capital
Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of
liquidity risk management.
Northern Trust reinforces a culture of effective risk management through training and developing employees and
evaluating and rewarding employee performance.
Risk Governance and Oversight
Risk governance is an integral aspect of corporate governance at Northern Trust, and includes clearly defined accountabilities,
expectations, internal controls and processes for risk-based decision-making and escalation of issues. The diagram below
provides a high-level overview of Northern Trust’s risk governance structure, highlighting the oversight of the Board and key
risk-related committees.
T A B L E 3 6 : R I S K G O V E R N A N C E S T R U C T U R E
Northern Trust Corporation Board of Directors
Audit
Committee
Business Risk
Committee
Business Strategy
Committee
Compensation and Benefit
Committee
Credit Risk
Management
Committee
Global Enterprise Risk Committee (GERC)
Operational Risk
Committee
Fiduciary Risk
Committee
Compliance & Ethics
Oversight Committee
Asset & Liability
Management Policy
Committee
The Board provides oversight of risk management directly and through certain of its committees: the Audit Committee, the
Business Risk Committee, the Business Strategy Committee and the Compensation and Benefits Committee.
The Business Risk Committee assumes primary responsibility and oversight with respect to credit risk, operational risk,
fiduciary risk, compliance risk, market risk and liquidity risk, and the Business Strategy Committee provides oversight with
respect to strategic risk for the Corporation and its subsidiaries. The Audit Committee provides oversight with respect to
financial reporting and legal risk, while the Compensation and Benefits Committee oversees the development and operation of
incentive compensation program. The Compensation and Benefits Committee annually reviews
Northern Trust’s
management’s assessment of the effectiveness of the design and performance of Northern Trust’s incentive compensation
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management’s discussion and analysis of financial condition and results of operations
arrangements and practices in providing risk-taking incentives that are consistent with Northern Trust’s safety and soundness.
This assessment includes an evaluation of whether Northern Trust’s incentive compensation arrangements and practices
discourage inappropriate risk taking behavior by participants.
The Chief Risk Officer (CRO) oversees Northern Trust’s management of risk, promotes risk awareness and fosters a
proactive risk management environment wherein risks inherent in the business strategy are understood and appropriately
monitored and mitigated. The CRO reports directly to the Business Risk Committee and the Corporation’s Chief Executive
Officer. The CRO regularly advises the Business Risk Committee and reports to the Committee at least quarterly on risk
exposures, risk management deficiencies and emerging risks. In accordance with the enterprise risk management framework,
the executive management team of Northern Trust together with the General Auditor and other business leaders meet as the
Global Enterprise Risk Committee (GERC) to provide executive management oversight and guidance with respect to the
management of the categories of risk overseen by the Business Risk Committee and the Business Strategy Committee. Among
other risk management responsibilities, GERC receives reports or recommendations from senior risk committees that are
responsible for the management of risk, and from time to time may delegate responsibility to such committees for risk issues.
Senior risk committees include:
The Credit Risk Management Committee establishes and monitors credit-related policies and practices throughout Northern
Trust and promotes their uniform application. The Credit Risk Management Committee is chaired by the Chief Credit
Officer, and members include the CRO, the Treasurer, the Chief Operational Risk Officer, the Controller, and various
functional risk and business management leaders.
The Operational Risk Committee (ORC) provides independent oversight and is responsible for setting the Corporate
Operational Risk Management Policy and developing the operational risk management framework and programs that
support the coordination of operational risk activities to identify, monitor, measure, manage and report on operational
risk. At ORC, senior management reviews and discusses operational risks including existing and emerging issues. The ORC
also is responsible for coordinating operational risk issues related to compliance and fiduciary risks.
The Fiduciary Risk Committee (FRC) is responsible for establishing and reviewing the fiduciary risk policies and establishing
the fiduciary risk framework, governance and programs that support the coordination of fiduciary risk activities to identify,
monitor, manage and report on fiduciary risk. At FRC, senior management reviews and discusses fiduciary risks including
existing and emerging issues.
The Compliance & Ethics Oversight Committee provides oversight and direction with respect to compliance policies,
implementation of the compliance and ethics program, and the coordination of regulatory compliance initiatives across the
Corporation. This committee may also resolve significant interpretive issues regarding compliance in situations where
specific compliance policies do not provide for or allow resolution of the issue by another individual or committee.
The Asset & Liability Management Policy Committee (ALCO) establishes and monitors Northern Trust’s market and
liquidity risk frameworks and policies as well as actively manages Northern Trust’s market and liquidity risks through
oversight of the implementation of approved asset and liability management strategies. At ALCO, senior management
reviews and discusses Northern Trust’s market risk profile as well as various scenario analyses. ALCO establishes and
monitors guidelines based on measures such as simulation of earnings (SOE), sensitivity of economic value of equity
(SEVE), Value-at-Risk (VaR) and notional position sizes.
In addition to the aforementioned committees, Northern Trust deploys business and regional risk committees that also report
into GERC.
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management’s discussion and analysis of financial condition and results of operations
Risk Identification and Risk Management Process
Northern Trust utilizes a risk classification system called the “risk universe” to identify and classify the risks that it inherently
faces. The risk universe forms the basis of common risk language and provides a consistent framework for the definition and
categorization of risk and the organization of risk management activities. The risk universe supports risk management at all
levels and enables risks to be clearly and consistently identified, categorized, assessed, managed and reported to line
management, corporate risk and committees. The risk universe is reviewed and approved at least annually by GERC and the
Board of Directors.
As part of the integrated enterprise risk framework, Northern Trust has established four key processes as described below.
Risk Appetite: Northern Trust defines the organization’s risk appetite as the amount and types of risk that it is willing to
assume in its exposures and business activities to achieve its strategic and financial objectives. Risk appetite is a tool to
measure Northern Trust’s willingness to take risk and reflects Northern Trust’s tolerance of certain levels of risk exposures
as measured at the enterprise and business level, as applicable. Northern Trust’s Corporate Risk Appetite Statement is
established by senior management and reviewed and approved at least annually by the Board of Directors. The Corporate
Risk Appetite Statement reflects Northern Trust’s expectation that risk is consciously considered as part of day-to-day
activities and strategic decisions. Northern Trust manages its business activities consistent with the risk appetite statement,
in which specific guidelines are detailed for credit, operational, fiduciary, compliance, market, liquidity, and strategic risk.
GERC reviews the measurement and assessment of risk within the Corporation and against Northern Trust’s Corporate
Risk Appetite Statement. When appropriate, GERC addresses emerging risk issues and directs risk mitigation actions.
Assessment of Risks: Northern Trust’s risk assessment process consists of a series of programs that identify, manage and
measure risks. Risk assessments are performed on a regular basis by business risk management and facilitated by the Risk
Management function. The risk assessment process draws on the input of management, staff and risk personnel across the
business, focusing on the inherent drivers of risk, the effectiveness of controls and the resulting residual risks.
Risk Management Embedding: Risk management processes extend beyond risk assessment and measurement, and are
embedded in strategic and business planning and decision-making. Although the Risk Management function sets the
direction for Northern Trust’s risk management activities, Northern Trust’s businesses are the first line of defense for
protecting it against the risks inherent in its businesses and are supported by dedicated business risk management teams.
Risk Reporting, Review and Communication: The risk reporting, review and communication process produces risk reports
that provide updates on the risk profile, performance against risk guidelines and thresholds, and analysis and trend
information, all of which highlight top and emerging risks for management and the Board. Risk reporting includes a robust
escalation process to alert senior management of significant issues.
Risk Control
Risk Control is an internal, independent review function within the Risk Management function. Risk Control is managed by the
Chief Risk Control Officer is comprised of the following four groups, each with its own risk focus and oversight. The Business
Risk Committee oversees Risk Control and each of the groups below.
Model Risk Management
Financial and risk modeling are used by Northern Trust to inform numerous decisions regarding risk management, as well
as capital estimation, financial reporting and disclosure, valuation and pricing and portfolio management. Model risk may
result from decisions based on models that produce incorrect results or models that are improperly used. Model Risk
Management is responsible for independently validating new models and reviewing and re-validating existing models.
Validations are documented and include an assessment of the conceptual soundness of the modeling approach, outcomes
analysis, applicability of use, model assumptions and limitations, development documentation, ongoing monitoring and
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management’s discussion and analysis of financial condition and results of operations
model controls. Oversight of Model Risk Management is provided by the ORC as Northern Trust considers model risk to
be an operational risk.
Basel Independent Verification
The Basel Independent Verification program promotes rigor and accuracy in the Corporation’s ongoing compliance with
Basel requirements. The program independently verifies the Corporation’s advanced systems in order to comply with the
qualification requirements related to the Advanced Internal Ratings Based Approach for credit risk and the Advanced
Measurement Approach for operational risk. The Basel Independent Verification program assesses the effectiveness of the
credit risk, operational risk, market risk, capital adequacy and disclosure frameworks. The Basel Independent Verification
team presents an annual assessment report of its findings to the Board of Directors or its designated committee, who is
required to review and approve the effectiveness of the advanced systems each year.
Credit Review
Credit Review provides an independent, ongoing assessment of credit exposure and related credit risk management
processes across Northern Trust. The scope of Credit Review activities includes all client-related transactions that give rise
to credit exposure and processes that are designed to manage or monitor such exposure. Credit exposure includes credit
risk inherent in the entire portfolio, as well as individual credits or transactions in the form of direct outstandings, potential
exposure and contingent liabilities that are on- or off-balance sheet.
Global Compliance Testing
Global Compliance Testing evaluates the effectiveness of procedures and controls designed to comply with relevant laws
and regulations, as well as corresponding Northern Trust policies governing regulatory compliance activities. Global
Compliance Testing identifies weaknesses that could result in regulatory compliance violations or risks to Northern Trust’s
businesses and monitors action plans designed to mitigate those weaknesses. Oversight of Global Compliance Testing
activities is provided by the Compliance & Ethics Oversight Committee. Also included is a Basel Verification program that
promotes rigor and accuracy in the Corporation’s ongoing compliance with Basel requirements. The program assesses the
effectiveness of the Credit Risk, Operational Risk, Market Risk, Capital Adequacy and Disclosure frameworks.
Audit Services
Audit Services is an independent control function that assesses and validates controls within Northern Trust’s enterprise risk
management framework. Audit Services is managed by the General Auditor with oversight from the Audit Committee. Audit
Services tests the overall adequacy and effectiveness of the system of internal controls, associated with the advanced systems, on
an ongoing basis and reports the results of these audits directly to the Audit Committee. Audit Services includes professionals
with a broad range of audit and industry experience, including risk management expertise. The General Auditor reports directly
to the Audit Committee and the Corporation’s Chief Executive Officer.
Credit Risk
Credit risk is the risk to interest income or principal from the failure of a borrower or counterparty to perform on an
obligation.
Credit Risk Overview
Credit risk is inherent in many of Northern Trust’s activities. A significant component of credit risk relates to the securities
portfolio and loan portfolio. In addition, credit risk is inherent in certain contractual obligations such as legally binding
commitments to extend credit, commercial letters of credit and standby letters of credit. Northern Trust’s loan portfolio differs
significantly from those of other large U.S. financial institutions and is generally more conservative in terms of credit risk. In
particular, Northern Trust is generally:
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not an originator of loan products to be sold into a secondary market or to be bundled into asset securitizations;
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management’s discussion and analysis of financial condition and results of operations
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not an agent bank or syndicator of loans, where risk management is achieved post-close through the sale of participations;
and
not a participant in leveraged financial transactions, such as project finance, private-equity-originated acquisition financing
or hedge fund leveraging.
Credit Risk Framework and Governance
The Credit Risk Management function is the focal point of the credit risk management framework and while independent of
the businesses, it works closely with them to achieve the goal of assuring proactive credit risk management. This function
approves policies, establishes the Credit Risk Framework and monitors adherence to corporate policies, external regulations
and established procedures. Credit Risk Management reports directly to the CRO. Independent oversight and review of the
Credit Risk Framework is provided by Risk Control.
The Credit Risk Management function provides a system of checks and balances for Northern Trust’s diverse credit-related
activities by monitoring these activities and practices and promoting their uniform application throughout Northern Trust.
These activities are designed to diversify credit exposure on an industry and client basis and reduce overall credit risk.
The credit risk framework provides authorities for approval of the extension of credit. Individual credit authority for
commercial and personal loans is limited to specified amounts and maturities. Credits exceeding individual authority because
of amount, rating, term or other conditions, are referred to the relevant Group Credit Approval Committee. Credit decisions
involving exposure in excess of these limits require the approval of the Senior Credit Committee.
The Counterparty Risk Management Committee has sole credit authority for the approval, modification, or renewal of
credit exposure to all wholesale market counterparties.
Credit Risk Measurement
An integral component of credit risk measurement is Northern Trust’s internal risk rating system. Northern Trust’s internal
risk rating system enables identification, measurement, approval and monitoring of credit risk. Northern Trust uses the
Advanced Internal Rating-Based approach to calculate regulatory capital using regulatory formulas and exposure level risk
information from Northern Trust’s internal rating system. Calculations include entity-specific information about the obligor’s
or counterparty’s probability of default and exposure-specific information about loss given default, exposure at default and
maturity. Northern Trust’s internal risk rating system is intended to rank its credit risk without any modeled linkage to external
credit ratings.
The Credit Risk Management function is responsible for the ongoing oversight of each model that supports the internal
risk-rating system. This includes the development, monitoring and maintenance of the models, as well as providing
information to the Credit Risk Management Committee to support model approval and monitoring of ongoing model
performance. Independent model governance and oversight is further supported by the activities of Risk Control.
Loans and Other Extensions of Credit
A significant component of credit risk relates to the loan portfolio, including contractual obligations such as legally binding
commitments to extend credit, commercial letters of credit, and standby letters of credit. These contractual obligations and
arrangements are discussed in Note 27 to the consolidated financial statements provided in Item 8, “Financial Statements and
Supplementary Data” and in the “Off-Balance-Sheet Arrangements” section of “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification,
approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting, management reporting, setting
of loss allowances, and economic capital calculations. Borrower risk ratings are discussed further in Note 6 to the consolidated
financial statements.
The Credit Risk Management function oversees a range of portfolio reviews that focus on significant and/or weaker-rated
credits. This approach allows management to take remedial action in an effort to deal with potential problems. In addition,
independent from the Credit Risk Management function, Credit Review, as part of Risk Control, undertakes both on-site and
off-site file reviews that evaluate effectiveness of management’s implementation of the Credit Risk Management’s requirements.
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management’s discussion and analysis of financial condition and results of operations
Northern Trust maintains a loan portfolio watch list for credits with borrower ratings of “6 to 9.” These credits, which
include all nonperforming credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default,
or are currently in default. Loans outstanding to watch list borrowers associated with these risk profiles that are not currently in
default but have limited financial flexibility totaled $421.2 million at December 31, 2014. Cash flows and capital levels range
from acceptable to potentially insufficient to meet current requirements and borrowers typically have minimal cushion in
adverse down cycle scenarios. An integral part of the Credit Risk Management function is a formal review of past due and
potential problem loans to determine which credits, if any, need to be placed on nonperforming status or charged off.
Counterparty Credit Risk
Counterparty credit risk for Northern Trust primarily arises from over-the-counter (OTC) currency and interest rate
derivatives and from indemnified securities lending transactions, which in turn are derived from a variety of funding, treasury,
trading and custody-related activities. Credit exposure to counterparties is managed by use of a framework for setting limits by
product type and exposure tenor.
To calculate exposure, Northern Trust treats repurchase agreements, reverse repurchase agreements and indemnified
securities lending transactions as repo-style transactions. Foreign exchange exposures and interest rate derivatives are treated as
OTC derivatives. The exposure at default measurement methodology for each eligible type of counterparty credit exposure,
including the use of netting and collateral as risk mitigants,
is determined based on operational requirements, the
characteristics of the contract type and the portfolio size and complexity.
Credit Risk Mitigation
Northern Trust considers cash flow to be the primary source of repayment for client-related credit exposures. However,
Northern Trust employs several different types of credit risk mitigants to manage its overall credit risk in the event cash flow is
not sufficient to repay a credit exposure. Northern Trust has policies in place to ensure that credit risk mitigation is
appropriately recognized, recorded and monitored. Recognition of credit risk mitigants in capital estimations is dependent
upon the form of mitigation. Northern Trust broadly groups its risk mitigation techniques into the following three primary
categories.
Physical and Financial Collateral: Northern Trust’s primary risk mitigation approaches include the requirement of
collateral and/or documented guarantees. Liquidation of collateral that is securing credit risk exposures is considered in
Northern Trust’s estimation of loss given default. Residential and commercial real estate exposures are typically secured by
properly margined mortgages on the property. In cases where loans to commercial or certain Wealth Management clients
are secured by marketable securities, the daily values of the securities are monitored closely to ensure adherence to
collateral coverage policies. The frequency of collateral valuation increases commensurate with the volatility of the
collateral’s value.
Netting: On-balance sheet netting is employed on a limited basis. Netting is primarily related to foreign exchange
transactions with major banks and institutional clients subject to eligible master netting agreements. A sub-set of these
arrangements are conducted under an ISDA Credit Support Annex. Northern Trust has elected to take the credit risk
mitigation capital benefit of netting within its regulatory capital calculation at this time.
Guarantees: Personal and corporate guarantees are often taken to facilitate potential collection efforts and to protect
Northern Trust’s claims relative to other creditors. Northern Trust may also recognize “implied support,” where the
commitment provided is less than that of a legally enforceable guarantee, in its assignment of borrower probability of
default as permitted under U.S. supervisory guidance. Northern Trust has elected not to take the credit risk mitigation
capital benefit of guarantors within its regulatory capital calculation at this time.
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management’s discussion and analysis of financial condition and results of operations
Another important risk management practice is the avoidance of undue concentrations of exposure, such as in any single (or
small number of related) obligor/counterparty, loan type, industry, geography, country or risk mitigant. Processes are in place
to establish limits on certain concentrations and the monitoring of adherence to the limits.
Operational Risk
Operational risk is the risk of loss from inadequate or failed internal processes, people and systems, or from external events.
Operational Risk Overview
Operational risk is inherent in each of Northern Trust’s businesses and corporate functions and reflects the potential for
inadequate information systems, operating problems, product design and delivery difficulties, or catastrophes to result in
unexpected losses. Operational risk includes:
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execution, delivery and process management risk;
risk resulting from business disruption and system failures;
risk of damage to physical assets;
risk resulting from clients, products and business practices;
employment practice and workplace safety risk;
internal fraud risk;
external fraud risk;
compliance risk;
fiduciary risk; and
legal risk.
Operational risk includes compliance, fiduciary and legal risks, which under the Corporation’s risk structure are governed and
managed explicitly.
To monitor and control operational risk, Northern Trust maintains a framework that consists of risk management policies,
programs and practices designed to promote a sound operational environment.
Northern Trust’s operational risk management strategy is to:
align the operational risk framework with evolving business and industry practice and with regulatory requirements;
identify, assess and mitigate risks inherent in business strategies;
promote risk awareness and foster a proactive risk management environment within each business; and
report key topics and developments to senior governance bodies.
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The goal of these activities is to keep the operational risk profile and losses within the Board-approved Corporate Risk Appetite
Statement and guidelines.
The Operational Risk Management function is responsible for defining the operational risk framework and providing
independent oversight of the framework across Northern Trust. It is the responsibility of each business to implement the
corporate-wide operational risk framework as well as business specific risk management programs to identify, monitor,
measure, and manage operational risk and mitigate Northern Trust’s exposure to loss. Risk Control provides independent
oversight and review.
Operational Risk Framework and Governance
The ORC is responsible for overseeing the activities of Northern Trust related to the management of operational risk. This
committee has the expanded role of coordinating operational risk issues related to compliance and fiduciary risks. The purpose
of this committee is to provide executive management’s insight and guidance to the management of existing and emerging
operational risks.
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management’s discussion and analysis of financial condition and results of operations
ORC is responsible for setting the Corporate Operational Risk Management Policy and approving the operational risk
management framework and programs that support the coordination of operational risk activities to identify, monitor,
measure, manage and report on operational risk. In addition, ORC serves as an escalation point for significant issues raised by
its programs.
Operational risk is identified, monitored, measured, managed and mitigated through the operational risk framework. The
framework is deployed consistently and globally across all businesses and its objective is to identify and measure the factors that
impact risk and drive action to reduce future loss events. Several key programs support the operational risk framework,
including:
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Loss Event Data Program – a program that collects loss data for use in monitoring operational risk exposure, various
business analyses and a Basel Advanced Management Approach (AMA) capital quantification. Both internal and external
loss data are used in the operational risk capital quantification. Thresholds drive analysis, action and escalation through
Northern Trust’s businesses and Operational Risk Management.
Risk and Control Self-Assessment – a structured risk management process used by Northern Trust’s the businesses to analyze
the risks that are present in their respective business environments, processes and activities and to assess the adequacy of
associated internal controls.
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‰ Operational Risk Scenario Analysis – a systematic process of obtaining expert opinions from business managers and risk
management experts to derive reasoned assessments of the likelihood of occurrence and the potential loss impact of
plausible high-severity operational losses. This practice facilitates management’s consideration of operational risk to which
the business is exposed and the potential impact and response to such events.
Product and Process Risk Management Program – a program used for evaluating and managing risks associated with the
introduction of new and modified noncredit products and services, significant changes to operating processes, and
proposed business process outsourcing arrangements.
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‰ Outsourcing Risk Management Program – a program that provides processes for appropriate risk assessment, measurement,
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monitoring and management of outsourced technology and business process outsourcing.
Business Process Transition Risk Management Program – a program designed to effectively manage the risk associated with
transitioning and migrating business processes to different geographic or jurisdictional locations within the organization.
Information Security and Technology Risk Management – a program that communicates and implements compliance and
risk management processes and controls to address information security and technology risks to the organization.
Significant New Business Opportunity – a program that assesses the resource requirements, impact on systems and controls,
and other risk factors prior to taking on significant new business.
‰ Operational Concentration Risk Management – a program that provides an assessment of process concentrations within the
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Corporation.
Fraud Prevention Program – a program that provides tools, advice, and guidance to Northern Trust’s businesses to help
mitigate fraud risk.
Business Continuity Management Program – a program designed to minimize business impact and support the resumption
of mission critical functions for clients following an incident.
Insurance - a transfer of some operational risk that may reduce the monetary impact of certain operational loss events. As
discussed in Risk Control, Model Risk Management also is part of the operational risk framework.
Operational Risk Measurement
Northern Trust utilizes a Basel AMA capital quantification process to estimate required capital for the Corporation and
applicable U.S. banking subsidiaries. Northern Trust’s AMA capital quantification process incorporates outputs from the Loss
Event Data, Risk and Control Self-Assessment and Operational Risk Scenario Analysis programs to derive required capital.
While internal loss data is the foundation for the capital quantification, external loss data is also utilized to inform the creation
of scenario analysis data employed in the capital quantification process. Business environment and internal control factor
information is used to estimate loss frequency and as an adjustment to capital estimates. The AMA capital quantification
process uses a Loss Distribution Approach methodology to combine frequency and severity distributions to arrive at an
estimate of the potential aggregate loss at the 99.9th percentile over a one-year time horizon.
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management’s discussion and analysis of financial condition and results of operations
Information Security
Northern Trust’s approach to information security begins at a governance level with its organizational structure and support
from executive management and risk committees comprising members from across the business. In addition, technology risk is
mitigated not only through a strong governance process, but also internal controls and risk management practices designed to
keep risk at levels appropriate to Northern Trust’s overall risk appetite and the inherent risk in the markets in which Northern
Trust operates. The desired control environment is expressed through Northern Trust’s policies, standards and guidelines that
together define its tolerance for risk. Each business is responsible for complying with these policies, standards and guidelines, as
well as external regulations. Where appropriate, these policies, standards and guidelines contain limits and benchmarks to
facilitate the measurement, monitoring and reporting of risk.
Effective management of information and technology risk is crucial in an environment of increasing threat and requires a
structured approach to establish and communicate expectations and required practices. Northern Trust employees are
responsible for promoting information security and following sound technology risk management practices as well as adhering
to applicable policies and standards and other means provided to them to safeguard electronic information and business
systems within their care. Training and awareness programs to educate employees on information security are on-going and
include multiple approaches such as mandatory computer based training. In cases where Northern Trust relies on vendors to
perform services, controls are routinely reviewed for alignment with industry standards and their ability to protect
information. Any findings identified are remediated, following a risk-based approach, both swiftly and thoroughly.
In addition to the various information security controls managed and monitored within the organization, Northern Trust
uses external third party security teams on a regular basis to assess effectiveness. These teams perform penetration tests, security
reviews and susceptibility to social engineering attacks such as spear phishing. Northern Trust also employs an externally
managed threat identification and alert system. This system aggregates security threat information from systems and platforms
across the business, and alerts the organization to threats. Northern Trust maintains a Cyber Incident Response Plan that is
followed in response to identified threats.
Business Resiliency
Northern Trust’s business resiliency approach encompasses business continuity and disaster recovery processes enterprise-wide
(including staff, technology and facilities) to ensure that following a disaster or business interruption Northern Trust resumes
mission-critical business functions and fulfills all regulatory and legal requirements.
Northern Trust’s business resiliency mitigation and preventative measures include sophisticated physical security, resilient
designs and peer capacity for its corporate data centers, a highly redundant worldwide network, robust network security,
resiliency centers that offer alternative workstations, transfer of work and work-from-home programs that provide further
capability by allowing staff to work from home.
All of Northern Trust’s businesses are required to regularly risk-assess their critical functions and develop business
continuity plans covering resource requirements (people, systems and other assets), arrangements for obtaining these resources
and prioritizing the resumption of each function in compliance with corporate standards. All businesses test their plans at least
annually.
ORC annually reviews and presents the corporate business continuity plan to the Business Risk Committee.
Fiduciary Risk
Fiduciary risks are risks arising from the failure, in administering or managing financial and other assets in clients’ fiduciary
accounts: i) to adhere to a fiduciary standard of care if required under the terms of governing documents or applicable laws; or
ii) to properly discharge fiduciary duties. Fiduciary status may hinge on the nature of a particular function being performed and
fiduciary standards may vary by jurisdiction, type of relationship and governing document.
Fiduciary Risk Overview
The Fiduciary Risk Management Program identifies, assesses, measures and monitors fiduciary risk. Fiduciary risk is mitigated
through internal controls and risk management practices that are designed to identify, understand and keep such risk at levels
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management’s discussion and analysis of financial condition and results of operations
consistent with the organization’s overall risk appetite while also managing the inherent risk in each relationship for which
Northern Trust serves in a fiduciary capacity. Each business is responsible for complying with all corporate policies and external
regulations for establishing specific policies, standards and guidelines to manage fiduciary risk within the desired risk appetite
level, and as specifically appropriate for each fiduciary relationship; and for establishing procedures for enhanced review in the
event a product or relationship involves either unique or more complex fiduciary risks. The Corporate Fiduciary Risk Program
framework utilizes existing corporate and business risk management tools to measure and guide the assessment of fiduciary risk
in the businesses.
Fiduciary Risk Framework and Governance
The FRC is responsible for establishing and reviewing the fiduciary risk policies and establishing the fiduciary risk framework,
governance and programs that support the coordination of fiduciary risk activities to identify, monitor, manage and report on
fiduciary risk. At FRC, senior management reviews and discusses fiduciary risks including existing and emerging issues. In
addition, FRC serves as an escalation point for significant issues raised by its subcommittees.
Compliance Risk
Compliance risk is the risk of legal or regulatory sanctions, financial loss, or damage to reputation resulting from failure to
comply with laws, regulations, rules, other regulatory requirements, or codes of conduct and other standards of self-regulatory
organizations applicable to Northern Trust. Compliance risk includes the following two subcategories:
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Regulatory Risk – risk arising from failure to comply with prudential and conduct of business or other regulatory
requirements.
Financial Crime Risk – risk arising from financial crime (e.g., money laundering, sanctions violations, fraud, insider
dealing, theft, etc.) in relation to the products, services, or accounts of the institution, its clients, or others associated with
the same.
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Compliance Risk Framework and Governance
The compliance risk management framework identifies, assesses, controls, measures, monitors and reports on compliance risk.
The framework is designed to minimize compliance risk and maintain an environment in which criminal or regulatory
violations do not occur. The framework includes a comprehensive governance structure and a Compliance and Ethics Program
approved by the Business Risk Committee.
Each business is responsible for the implementation and effectiveness of the Compliance and Ethics Program and specific
compliance policies within their respective businesses. Each business is responsible for its respective partners’ compliance with
corporate policies and external regulations and for establishing specific procedures, standards and guidelines to manage
compliance risk in accordance with Northern Trust’s Compliance and Ethics Program.
The Compliance and Ethics Oversight Committee establishes and monitors adherence to Northern Trust’s Compliance and
Ethics Program. The Chief Compliance and Ethics Officer reports to the Business Risk Committee as appropriate and chairs the
Compliance and Ethics Oversight Committee.
Market Risk
There are two types of market risk. Interest rate risk is the potential for movements in interest rates to cause changes in earnings
and the economic value of equity. Trading risk is the potential for movements in market variables such as foreign exchange and
interest rates to cause changes in the value of trading positions.
Market Risk Framework and Governance
Northern Trust maintains a market risk framework consisting of risk management policies, programs and practices to keep the
market risk profile within the Board-approved Corporate Risk Appetite Statement. All market risk activities are overseen by the
Corporate Market Risk function, which is independent of the businesses undertaking the activities. Independent oversight and
review of the market risk framework is provided by Risk Control.
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management’s discussion and analysis of financial condition and results of operations
Exposure limits for market risk are set by the Board and committee structures have been established to implement and
monitor adherence to corporate policies, external regulations and established procedures. ALCO provides independent
oversight and is responsible for developing the market risk management framework and programs that support the
coordination of market risk activities to identify, monitor, manage and report on market risk. At ALCO, senior management
reviews and discusses Northern Trust’s market risk profile as well as various scenario analyses. ALCO establishes and monitors
guidelines based on measures such as Simulation of Earnings (SOE), Sensitivity of Economic Value of Equity (SEVE), Value at
Risk (VaR) and notional position sizes.
The Market Risk Framework components of Risk Monitoring, Risk Reporting and Analysis, and Risk Measurement are
discussed below.
Interest Rate Risk Overview
Interest rate risk is the risk to earnings or common capital due to changes in interest rates. Changes in interest rates can have a
positive or negative impact on earnings depending on the positioning of assets, liabilities and off-balance-sheet instruments.
The impact to earnings will primarily come through net interest income, but it can also impact certain types of fees. Changes in
interest rates also can impact the values of assets, liabilities and off-balance-sheet positions, which indirectly impact the value of
capital. To mitigate interest rate risk, the structure of the balance sheet is managed so that movements of interest rates on assets
and liabilities (adjusted for hedges) are highly correlated, which allows Northern Trust’s interest-bearing assets and liabilities to
contribute to earnings even in periods of volatile interest rates.
There are four commonly recognized types of interest rate risk:
repricing, which arises from differences in the maturity and repricing terms of assets and liabilities;
yield curve, which arises from changes in the shape of the yield curve;
basis, which arises from the changing relationships between rates earned and paid on different financial instruments with
otherwise similar repricing characteristics; and
embedded optionality, which arises from client or counterparty behavior in response to interest rate changes.
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Interest Rate Risk Measurement, Reporting and Analysis
Northern Trust uses two primary measurement techniques to manage interest rate risk: SOE and SEVE. Simulation of earnings
provides management with a short-term view of the impact of interest rate changes on future earnings. Simulation of economic
value of equity provides management with a long-term view of interest rate changes on the economic value of equity as of the
period-end balance sheet. Both simulation models use the same initial market interest rates and product balances. These two
techniques, which are performed monthly, are complementary and are used in concert to provide a comprehensive interest rate
risk management capability.
Sensitivity of Earnings (SOE)
The modeling of SOE incorporates on-balance sheet positions, as well as derivative financial instruments (principally interest
rate swaps) that are used to manage interest rate risk. Northern Trust uses market implied forward interest rates as the base case
and measures the sensitivity (i.e. change) in earnings if future rates are 100 or 200 basis points higher than base case forward
rates. Each rate movement is assumed to occur gradually over a one-year period. The 100 basis point increase, for example,
consists of twelve consecutive monthly increases of 8.3 basis points. The model simulations also incorporate the following
assumptions:
‰
the balance sheet size and mix generally remains constant over the simulation horizon with maturing assets and liabilities
replaced with instruments with similar terms as those that are maturing, with the exception of certain products such as
securities (the assumed reinvestment of which is determined by management’s strategies); non-maturity deposits, of which
some recent increases are assumed to be temporary in nature; and long-term fixed rate borrowings that upon maturity are
replaced with overnight wholesale instruments;
prepayments on mortgage loans and securities collateralized by mortgages are projected under each rate scenario using a
third-party mortgage analytics system that incorporates market prepayment assumptions;
‰
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management’s discussion and analysis of financial condition and results of operations
‰
‰
‰
cash flows for structured securities are estimated using a third-party vendor in conjunction with the prepayments provided
by the third-party mortgage analytics vendor;
non-maturity deposit rates are projected based on Northern Trust’s actual historical pattern of pricing these products, or
based on judgment when there is no appropriate history or when current pricing strategies differ from history;
commercial demand deposits are treated as short-term rate sensitive as these balances may receive an explicit interest rate
or an earnings credit that can be applied to fees for services provided by Northern Trust; and
‰ New business rates are based on current spreads to market indices.
The following table shows the estimated impact on the next twelve months of pre-tax earnings of 100 and 200 basis point
upward movements in interest rates relative to forward rates. Given the low level of interest rates, the simulation of earnings for
rates 100 and 200 basis points lower would not provide meaningful results.
T A B L E 3 7 : I N T E R E S T R A T E R I S K S I M U L A T I O N O F P R E - T A X E A R N I N G S
(In Millions)
INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
INCREASE/(DECREASE)
ESTIMATED IMPACT ON
NEXT TWELVE MONTHS
OF PRE-TAX EARNINGS:
$30
15
Stress testing of interest rates is performed to include such scenarios as immediate parallel shocks to rates, nonparallel (i.e.
twist) changes to yield curves that results in them becoming steeper or flatter, and changes to the relationship among the yield
curves (i.e. basis risk).
The simulations of earnings do not incorporate any management actions that may be used to mitigate negative
consequences of actual interest rate movements. For that reason and others, they do not reflect the likely actual results but serve
as conservative estimates of interest rate risk. SOE is not directly comparable to actual results disclosed elsewhere or directly
predictive of future values of other measures provided.
During the year ended December 31, 2014, Northern Trust did not exceed its SOE limits.
Sensitivity of Economic Value of Equity (SEVE)
Economic value of equity is defined as the present value of assets minus the present value of liabilities, net of the value of
instruments that are used to manage the interest rate risk of balance sheet items. The potential effect of interest rate changes on
economic equity is derived from the impact of such changes on projected future cash flows and the present value of these cash
flows and is then compared to the established limit. Northern Trust uses current market rates (and the future rates implied by
these market rates) as the base case and measures SEVE if current rates are immediately shocked up by 100 or 200 basis points.
The model simulations also incorporate the following assumptions:
‰
prepayments on mortgage loans and securities collateralized by mortgages are projected under each rate scenario using a
third-party mortgage analytics system that incorporates market prepayment assumptions;
cash flows for structured securities are estimated using a third-party vendor in conjunction with the prepayments provided
by the third-party mortgage analytics vendor;
nonmaturity deposit rates are projected based on Northern Trust’s actual historical pattern of pricing. Projected rates may
also be based on judgment when there is no appropriate history or when current pricing strategies differ from history. The
present value of these deposits are based on estimated remaining lives that are based on Northern Trust’s actual historical
runoff patterns with some balances assumed to be temporary;
the present values of most noninterest-related balances (such as receivables, equipment, and payables) are the same as their
book values; and
the initial shock to current rates assumes the relationship among market yield curves (e.g. Treasury and Libor) remains the
same in each interest rate scenario.
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The following table shows the estimated impact on economic value of equity of 100 and 200 basis point shocks up from current
interest rates. Given the low level of interest rates and assumed interest rate floors as rates approach zero, the simulation of the
economic value of equity for rates 100 or 200 basis points lower would not provide meaningful results.
T A B L E 3 8 : I N T E R E S T R A T E R I S K S I M U L A T I O N O F E C O N O M I C V A L U E O F E Q U I T Y A S O F D E C E M B E R 3 1 , 2 0 1 4
(In Millions)
INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
INCREASE/(DECREASE)
ESTIMATED IMPACT ON
ECONOMIC VALUE OF
EQUITY
$ (67)
(386)
Stress testing of interest rates is performed to include such scenarios as nonparallel (i.e. twist) changes to yield curves that
results in them becoming steeper or flatter and changes to the relationship among the yield curves (i.e. basis risk).
The simulations of economic value of equity do not incorporate any management actions that may be used to mitigate
negative consequences of actual interest rate movements. For that reason and others, they do not reflect the likely actual results
but serve as conservative estimates of interest rate risk. SEVE is not directly comparable to actual results disclosed elsewhere or
directly predictive of future values of other measures provided.
During the year ended December 31, 2014, Northern Trust did not exceed its SEVE limits.
Interest Rate Risk Monitoring
Northern Trust limits aggregate interest rate risk (as measured by the SOE and SEVE simulation techniques) to an acceptable
level within the context of risk/return trade-offs. A variety of actions may be used to implement risk management strategies to
modify interest rate risk including:
‰
‰
‰
‰
‰
‰
purchase of securities;
sale of securities that are classified as available for sale;
issuance of senior notes and subordinated notes;
collateralized borrowings from the Federal Home Loan Bank;
placing and taking Eurodollar time deposits; and
hedges with various types of derivative financial instruments.
Northern Trust strives to use the most effective instruments for implementing its interest rate risk management strategies,
considering the costs, liquidity, collateral and capital requirements of the various alternatives and the risk-return trade-offs.
Foreign Currency Risk Overview
Northern Trust is exposed to non-trading foreign currency risk as a result of its holdings of non-U.S. dollar denominated assets
and liabilities, investment in non-U.S. subsidiaries, and future non-U.S. dollar denominated revenue and expense. To manage
currency exposures on the balance sheet, Northern Trust attempts to match its assets and liabilities by currency. If those
currency offsets do not exist on the balance sheet, Northern Trust will use foreign exchange derivative contracts to mitigate its
currency exposure. Foreign exchange contracts are also used to reduce Northern Trust’s currency exposure to future non-U.S.
dollar denominated revenue and expense.
In addition, Northern Trust provides foreign exchange services to clients. Most of these services are provided in connection
with Northern Trust’s growing global custody business. In the normal course of business Northern Trust also engages in
trading of non-U.S. currencies for its own account. The primary market risk associated with global foreign exchange trading
activities is foreign exchange risk.
Foreign currency trading positions exist when aggregate obligations to purchase and sell a currency other than the U.S.
dollar do not offset each other in amount, or offset each other over different time periods.
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Foreign Currency Risk Measurement
Northern Trust measures daily the risk of loss associated with all non-U.S. currency positions using a VaR model and applying
the historical simulation methodology. This statistical model provides estimates, based on a variety of high confidence levels, of
the potential loss in value that might be incurred if an adverse shift in non-U.S. currency exchange rates were to occur over a
small number of days. The model incorporates foreign currency and interest rate volatilities and correlations in price
movements among the currencies. VaR is computed for each trading desk and for the global portfolio.
VaR measures are computed in a vended software application which reads foreign exchange positions directly from
Northern Trust’s trading systems each day. Data vendors provide foreign exchange rates and interest rates for all currencies.
Corporate Market Risk monitors on a daily basis VaR model inputs and outputs for reasonableness.
Foreign Currency Risk Monitoring, Reporting and Analysis
Northern Trust monitors several variations of the foreign exchange VaR measures to meet specific regulatory and internal
management needs. Variations include different methodologies (historical, variance-covariance and Monte Carlo), equally-
weighted and exponentially-weighted volatilities, horizons of one day and ten days, confidence levels ranging from 95% to
99.95% and look back periods of one year and four years. Those alternative measures provide management a rich array of
alternative risk metrics, offering corroborating measures and useful perspectives on Northern Trust’s market risks.
Automated daily reports are produced and distributed to business managers and risk managers. The Corporate Market Risk
unit also reviews and reports several variations of the VaR measures in historical time series format to provide management
with an historical perspective on risk.
The table below presents the levels of total regulatory VaR and its subcomponents for global foreign currency in the
quarters indicated below, based on the historical simulation methodology, a 99% confidence level, a one day horizon and
equally weighted volatility. The total VaR for foreign currency is typically less than the sum of its two components due to
diversification benefits derived from the two subcomponents.
T A B L E 3 9 : F O R E I G N C U R R E N C Y V A L U E - A T - R I S K
(In Millions)
As of December 31
High
Low
Average
Year-End
TOTAL VaR
(SPOT AND FORWARD)
FOREIGN EXCHANGE
SPOT VaR
FOREIGN EXCHANGE
FORWARD VaR
2014
$0.5
—
0.2
0.2
2013
$0.9
0.1
0.5
0.3
2014
$0.5
—
0.1
0.3
2013
$0.8
—
0.4
0.2
2014
$0.1
—
0.1
0.1
2013
$0.6
0.1
0.3
0.2
During 2014 and 2013, Northern Trust did not incur an actual trading loss in excess of the daily value at risk estimate.
Other Nonmaterial Trading Activities
Market risk associated with other trading activities is negligible. Northern Trust’s broker-dealer, Northern Trust Securities, Inc.,
maintains a small portfolio of trading securities held for customer accommodation purposes which averaged $5.4 million for
the year ended December 31, 2014.
Northern Trust is also party to interest rate derivative contracts consisting mostly of interest rate swaps entered into to meet
clients’ interest rate management needs, but also including a small number of caps, floors, and swaptions (an option to enter
into an interest rate swap). All interest rate derivative transactions are executed by the Treasury department. When Northern
Trust enters into client transactions, its practice is to mitigate the resulting market risk with offsetting interbank derivative
transactions with matching terms and maturities.
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management’s discussion and analysis of financial condition and results of operations
Strategic Risk
Strategic Risk is the long-term risk to earnings or capital from adverse effects of business decisions, improper implementation
of business decisions, unexpected external events or damage to Northern Trust’s reputation from negative public opinion.
Strategic risk includes the following three subcategories:
Business Risk: the risk arising from the general economic conditions and external factors in which Northern Trust operates
that could adversely affect its revenues, profits and or capital;
Strategy Risk: the long-term risk to earnings or capital from adverse effects of business decisions, improper implementation
of business decisions and unexpected external events; and
Reputation Risk: the risk arising from negative perception on the part of clients, counterparties, stockholders, investors,
debt holders, market analysts, regulators, staff, or other relevant parties that adversely affects Northern Trust’s ability to
conduct its business or to access sources of funding.
The GERC and the Business Strategy Committee are responsible for reviewing the general methods, guidelines and policies by
which Northern Trust monitors and controls strategic risk.
F O R W A R D - L O O K I N G S T A T E M E N T S
This report contains statements that are forward-looking, such as statements concerning Northern Trust’s financial goals,
capital adequacy, dividend policy, risk management policies, litigation-related matters and contingent liabilities, accounting
estimates and assumptions, industry trends, strategic initiatives, credit quality including allowance levels, planned capital
expenditures and technology spending, anticipated expense levels, future pension plan contributions, anticipated tax benefits
and expenses, the impact of recent legislation and accounting pronouncements, and all other statements that do not relate to
historical
facts. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,”
“anticipate,” “intend,” “estimate,” “project,” “likely,” “may increase,” “plan,” “goal,” “target,” “strategy,” and similar
expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.”
Forward-looking statements are Northern Trust’s current estimates or expectations of future events or future results and
involve risks and uncertainties that are difficult to predict. Actual results could differ materially from the results indicated by
these statements because the realization of those results is subject to many risks and uncertainties including:
‰
the financial
institutions and other counterparties with which Northern Trust
the health and soundness of
conducts business;
financial market disruptions or economic recession, whether in the U.S., Europe, the Middle East, or other regions;
the downgrade of U.S. Government issued and other securities;
changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of
financial assets in general, or financial assets in particular investment funds or client portfolios including those funds,
portfolios, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to
provide asset value stability or additional liquidity;
the impact of stress in the financial markets, the effectiveness of governmental actions taken in response, and the effect of
such governmental actions on Northern Trust, its competitors and counterparties, financial markets generally and
availability of credit specifically, and the U.S. and international economies;
a significant downgrade of any of Northern Trust’s debt ratings;
changes in foreign exchange trading client volumes and volatility in foreign currency exchange rates, and Northern Trust’s
success in assessing and mitigating the risks arising from such changes and volatility;
a decline in the value of securities held in Northern Trust’s investment portfolio, particularly asset-backed securities, the
liquidity and pricing of which may be negatively impacted by periods of economic turmoil and financial
market disruptions;
uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate
allowances therefor;
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management’s discussion and analysis of financial condition and results of operations
‰
‰
‰
‰
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geopolitical risks and the risks of extraordinary events such as natural disasters, terrorist events and war, and the responses
of the United States and other countries to those events;
the pace and extent of continued globalization of investment activity and growth in worldwide financial assets;
regulatory and monetary policy developments;
failure to satisfy regulatory standards or to obtain regulatory approvals when required, including for the use and
distribution of capital;
changes in tax laws, accounting requirements or interpretations and other legislation in the U.S. or other countries that
could affect Northern Trust or its clients;
changes in the nature and activities of Northern Trust’s competition;
‰
‰ Northern Trust’s success in maintaining existing business and continuing to generate new business in existing and targeted
markets and its ability to deploy deposits in a profitable manner consistent with its liquidity requirements;
the impact of equity markets on fee revenue;
‰
‰ Northern Trust’s ability to address the complex needs of a global client base and manage compliance with legal, tax,
regulatory and other requirements;
‰ Northern Trust’s ability to maintain a product mix that achieves acceptable margins;
‰ Northern Trust’s ability to continue to generate investment results that satisfy clients and to develop an array of
investment products;
‰ Northern Trust’s success in recruiting and retaining the necessary personnel to support business growth and expansion and
maintain sufficient expertise to support increasingly complex products and services;
‰ Northern Trust’s success in controlling expenses and implementing revenue enhancement initiatives;
‰
uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and expected
contributions, returns and payouts;
‰ Northern Trust’s ability to address operating risks, including human errors or omissions, data security breach risks, pricing
or valuation of securities, fraud, systems performance or defects, systems interruptions, and breakdowns in processes or
internal controls;
‰
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‰ Northern Trust’s success in improving risk management practices and controls and managing risks inherent in
its businesses, including credit risk, operational risk, market and liquidity risk, fiduciary risk, compliance risk and
strategic risk;
increased costs of compliance and other risks associated with changes in regulation, the current regulatory environment,
and areas of increased regulatory emphasis and oversight in the U.S. and other countries such as anti-money laundering,
anti-bribery, and client privacy;
the potential for substantial changes in the legal, regulatory and enforcement framework and oversight applicable to
financial institutions, including changes that may affect leverage limits and risk-based capital and liquidity requirements,
require financial institutions to pay higher assessments, expose financial institutions to certain liabilities of their subsidiary
depository institutions, and restrict or increase the regulation of certain activities, including foreign exchange, carried on by
financial institutions, including Northern Trust;
risks and uncertainties inherent in the litigation and regulatory process, including the adequacy of contingent liability, tax,
and other accruals;
risks associated with being a holding company,
principal subsidiary;
the risk of damage to Northern Trust’s reputation which may undermine the confidence of clients, counterparties, rating
agencies, and stockholders; and
other factors identified elsewhere in this Annual Report on Form 10-K, including those factors described in Item 1A, “Risk
Factors,” and other filings with the SEC, all of which are available on Northern Trust’s website.
including Northern Trust’s dependence on dividends from its
‰
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Actual results may differ materially from those expressed or implied by the forward-looking statements. The information
contained herein is current only as of the date of that information. All forward-looking statements included in this document are
based upon information presently available, and Northern Trust assumes no obligation to update its forward-looking statements.
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management’s discussion and analysis of financial condition and results of operations
R E C O N C I L I A T I O N O F R E P O R T E D N E T I N T E R E S T I N C O M E T O F U L L Y T A X A B L E E Q U I V A L E N T
The table below presents a reconciliation of interest income and net interest income prepared in accordance with GAAP to
interest income and net interest income on a fully taxable equivalent (FTE) basis, which are non-GAAP financial measures.
Management believes this presentation provides a clearer indication of net interest margins for comparative purposes.
T A B L E 4 0 : R E C O N C I L I A T I O N O F R E P O R T E D N E T I N T E R E S T I N C O M E T O F U L L Y T A X A B L E E Q U I V A L E N T
2014
2013
2012
FOR THE YEAR ENDED DECEMBER 31,
REPORTED
FTE ADJ.
FTE*
REPORTED
FTE ADJ.
FTE*
REPORTED
FTE ADJ.
FTE*
$1,186.9
181.4
$29.4
–
$1,216.3
181.4
$1,155.5
222.4
$32.5
–
$1,188.0
222.4
$1,287.7
297.4
$40.8
–
$1,328.5
297.4
$1,005.5
$29.4
$1,034.9
$ 933.1
$32.5
$ 965.6
$ 990.3
$40.8
$1,031.1
1.05%
1.08%
1.09%
1.13%
1.18%
1.22%
(In Millions)
Interest Income
Interest Expense
Net Interest Income
Net Interest Margin
* Fully taxable equivalent (FTE)
I T E M 7 A – Q U A N T I T A T I V E A N D Q U A L I T A T I V E D I S C L O S U R E S A B O U T M A R K E T R I S K
The information called for by this item is incorporated herein by reference to the “Risk Management” section of
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of this
Annual Report on Form 10-K.
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I T E M 8 – F I N A N C I A L S T A T E M E N T S A N D S U P P L E M E N T A R Y D A T A
In addition to the Report of Independent Registered Public Accounting Firm and the consolidated financial statements and
accompanying notes provided below, the table titled “Quarterly Financial Data (Unaudited)” under “Supplemental Item –
Selected Statistical and Supplemental Financial Data” is incorporated herein by reference.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S O F N O R T H E R N T R U S T C O R P O R A T I O N :
We have audited the accompanying consolidated balance sheets of Northern Trust Corporation and subsidiaries (Northern
Trust) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes
in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These
consolidated financial statements are the responsibility of Northern Trust’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Northern Trust Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Northern Trust Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 26, 2015 expressed an unqualified opinion on the effectiveness of
Northern Trust Corporation’s internal control over financial reporting.
chicago, illinois
f e b r u a r y 2 6 , 2 0 1 5
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consolidated financial statements
C O N S O L I D A T E D B A L A N C E S H E E T
(In Millions Except Share Information)
ASSETS
Cash and Due from Banks
Federal Funds Sold and Securities Purchased under Agreements to Resell
Interest-Bearing Deposits with Banks
Federal Reserve Deposits
Securities
Available for Sale
Held to Maturity (Fair value of $4,176.1 and $2,321.4)
Trading Account
Total Securities
Loans and Leases
Commercial
Personal
Total Loans and Leases (Net of unearned income of $287.7 and $286.2)
Allowance for Credit Losses Assigned to Loans and Leases
Buildings and Equipment
Client Security Settlement Receivables
Goodwill
Other Assets
Total Assets
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing
Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices – Noninterest-Bearing
– Interest-Bearing
Total Deposits
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Other Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Other Liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Preferred Stock, No Par Value; Authorized 10,000,000 shares: Series C, Outstanding shares of 16,000 and 0
Common Stock, $1.66 2⁄ 3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 233,390,705 and
237,322,035
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock (11,780,819 and 7,849,489 shares, at cost)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements on pages 92-158.
DECEMBER 31,
2014
2013
$ 3,050.6
1,062.7
14,928.3
17,386.3
$ 3,162.4
529.6
19,397.4
12,911.5
29,558.5
4,170.8
4.7
33,734.0
14,353.6
17,286.6
31,640.2
(267.0)
444.3
1,568.8
533.2
5,865.1
28,392.8
2,325.8
1.7
30,720.3
12,620.0
16,765.5
29,385.5
(278.1)
458.8
1,355.2
540.7
4,764.0
$109,946.5
$102,947.3
$ 22,815.0
15,916.4
1,757.4
2,723.2
47,545.0
90,757.0
932.9
885.1
1,685.2
1,497.0
1,615.1
277.2
3,848.1
101,497.6
$ 16,888.7
14,991.5
1,874.4
1,881.8
48,461.7
84,098.1
965.1
917.3
1,558.6
1,996.6
1,709.2
277.1
3,513.3
95,035.3
388.5
–
408.6
1,050.9
7,625.4
(319.7)
(704.8)
8,448.9
408.6
1,035.7
7,134.8
(244.3)
(422.8)
7,912.0
$109,946.5
$102,947.3
88 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
consolidated financial statements
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
(In Millions Except Share Information)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Treasury Management Fees
Security Commissions and Trading Income
Other Operating Income
Investment Security Gains (Losses), net (Note)
Total Noninterest Income
Net Interest Income
Interest Income
Interest Expense
Net Interest Income
Provision for Credit Losses
Net Interest Income after Provision for Credit Losses
Noninterest Expense
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Other Operating Expense
Total Noninterest Expense
Income before Income Taxes
Provision for Income Taxes
NET INCOME
Preferred Stock Dividends
Net Income Applicable to Common Stock
PER COMMON SHARE
Net Income – Basic
– Diluted
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$
$
$
$
2,832.8
210.1
66.0
67.6
153.5
(4.3)
3,325.7
1,186.9
181.4
1,005.5
6.0
999.5
1,417.9
268.7
574.6
421.4
180.3
272.1
3,135.0
1,190.2
378.4
811.8
9.5
802.3
3.34
3.32
$
$
$
$
2,609.8
244.4
69.0
68.0
166.5
(1.5)
3,156.2
1,155.5
222.4
933.1
20.0
913.1
1,306.6
257.5
564.1
377.6
173.8
314.2
2,993.8
1,075.5
344.2
731.3
–
731.3
3.01
2.99
$
$
$
$
2,405.5
206.1
67.4
73.6
154.9
(1.7)
2,905.8
1,287.7
297.4
990.3
25.0
965.3
1,267.4
258.2
529.2
366.7
174.4
282.9
2,878.8
992.3
305.0
687.3
–
687.3
2.82
2.81
Average Number of Common Shares Outstanding – Basic
– Diluted
235,829,790
237,720,255
239,265,313
240,554,840
240,417,805
240,881,244
C O N S O L I D A T E D S T A T E M E N T O F C O M P R E H E N S I V E I N C O M E
(In Millions)
Net Income
Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized (Losses) Gains on Cash Flow Hedges
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Other Comprehensive (Loss) Income
Comprehensive Income
Note: Changes in Other-Than-Temporary-Impairment (OTTI) Losses
Noncredit-related OTTI Losses Recorded in (Reclassified from) OCI
Other Security Gains (Losses), net
Investment Security (Losses) Gains, net
See accompanying notes to consolidated financial statements on pages 92-158.
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$
811.8
$
731.3
$
687.3
21.6
(7.6)
(8.8)
(80.6)
(75.4)
$736.4
(4.9)
0.7
(0.1)
(4.3)
$
$
$
(95.0)
4.3
(3.4)
132.8
38.7
770.0
–
–
(1.5)
(1.5)
$
$
$
61.2
5.6
20.0
(24.2)
62.6
749.9
(2.7)
(0.6)
1.6
(1.7)
$
$
$
89 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
consolidated financial statements
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Millions)
PREFERRED STOCK
Balance at January 1
Issuance of Preferred Stock, Series C
Balance at December 31
COMMON STOCK
Balance at January 1 and December 31
ADDITIONAL PAID-IN CAPITAL
Balance at January 1
Treasury Stock Transactions – Stock Options and Awards
Stock Options and Awards – Amortization
Stock Options and Awards – Tax Benefits
Balance at December 31
RETAINED EARNINGS
Balance at January 1
Net Income
Dividends Declared – Common Stock
Dividends Declared – Preferred Stock
Balance at December 31
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at January 1
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized (Losses) Gains on Cash Flow Hedges
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Balance at December 31
TREASURY STOCK
Balance at January 1
Stock Options and Awards
Stock Purchased
Balance at December 31
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$
–
388.5
388.5
$
–
–
–
$
–
–
–
408.6
408.6
408.6
1,035.7
(71.1)
77.5
8.8
1,050.9
7,134.8
811.8
(311.7)
(9.5)
7,625.4
(244.3)
21.6
(7.6)
(8.8)
(80.6)
(319.7)
(422.8)
198.7
(480.7)
(704.8)
1,012.7
(55.0)
75.0
3.0
1,035.7
6,702.7
731.3
(299.2)
–
7,134.8
(283.0)
(95.0)
4.3
(3.4)
132.8
(244.3)
(314.0)
201.2
(310.0)
(422.8)
977.5
(41.5)
74.4
2.3
1,012.7
6,302.3
687.3
(286.9)
–
6,702.7
(345.6)
61.2
5.6
20.0
(24.2)
(283.0)
(225.5)
74.4
(162.9)
(314.0)
Total Stockholders’ Equity at December 31
$8,448.9
$7,912.0
$7,527.0
See accompanying notes to consolidated financial statements on pages 92-158.
90 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
consolidated financial statements
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
(In Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$
811.8
$ 731.3
$
687.3
Investment Security Losses (Gains), net
Amortization and Accretion of Securities and Unearned Income, net
Provision for Credit Losses
Depreciation on Buildings and Equipment
Amortization of Computer Software
Amortization of Intangibles
Change in Accrued Income Taxes
Pension Plan Contributions
Deferred Income Tax Provision
Change in Receivables
Change in Interest Payable
Change in Collateral With Derivative Counterparties, net
Other Operating Activities, net
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net Change in Federal Funds Sold and Securities Purchased under Agreements to Resell
Change in Interest-Bearing Deposits with Banks
Net Change in Federal Reserve Deposits
Purchases of Securities – Held to Maturity
Proceeds from Maturity and Redemption of Securities – Held to Maturity
Purchases of Securities – Available for Sale
Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale
Change in Loans and Leases
Purchases of Buildings and Equipment
Purchases and Development of Computer Software
Change in Client Security Settlement Receivables
Other Investing Activities, net
Net Cash (Used in) Provided by Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits
Change in Federal Funds Purchased
Change in Securities Sold under Agreements to Repurchase
Change in Short-Term Other Borrowings
Proceeds from Senior Notes and Long-Term Debt
Repayments of Senior Notes and Long-Term Debt
Contingent Consideration Liability Payment
Proceeds from Issuance of Preferred Stock – Series C
Treasury Stock Purchased
Net Proceeds from Stock Options
Cash Dividends Paid on Common Stock
Other Financing Activities, net
Net Cash Provided by (Used in) Financing Activities
Effect of Foreign Currency Exchange Rates on Cash
Decrease in Cash and Due from Banks
Cash and Due from Banks at Beginning of Year
Cash and Due from Banks at End of Year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid
Income Taxes Paid
Transfers from Loans to OREO
See accompanying notes to consolidated financial statements on pages 92-158.
4.3
34.8
6.0
90.6
225.6
19.5
55.2
(18.7)
(36.4)
20.9
(4.5)
(359.2)
86.1
936.0
(533.1)
3,297.2
(4,474.8)
(7,138.7)
4,907.7
(12,668.0)
11,476.6
(2,288.3)
(81.9)
(327.6)
(224.1)
(157.4)
(8,212.4)
8,487.7
(32.2)
(32.2)
(164.3)
–
(640.0)
(55.3)
388.5
(480.7)
127.5
(302.9)
(222.4)
7,073.7
90.9
(111.8)
3,162.4
1.5
44.7
20.0
92.3
205.1
21.1
(31.5)
(20.7)
66.6
(206.2)
(11.2)
(250.6)
176.9
839.3
(468.8)
(782.1)
(5,292.1)
(5,715.5)
5,853.9
(8,168.0)
8,456.4
17.8
(91.9)
(293.0)
690.6
109.4
(5,683.3)
2,938.9
184.9
217.5
1,258.8
750.0
(804.4)
–
–
(309.7)
146.2
(220.6)
226.7
4,388.3
(134.6)
(590.3)
3,752.7
1.7
(11.7)
25.0
88.3
180.8
20.3
18.5
(112.3)
79.7
(41.9)
(10.0)
(127.9)
16.6
814.4
60.5
(2,107.1)
5,829.0
(3,798.5)
2,220.9
(19,546.4)
21,183.3
(469.6)
(73.3)
(239.2)
(1,270.8)
(161.2)
1,627.6
(1,269.7)
(35.1)
(499.0)
(435.5)
500.0
(923.7)
–
–
(162.4)
106.8
(354.3)
–
(3,072.9)
68.3
(562.6)
4,315.3
$ 3,050.6
$ 3,162.4
$ 3,752.7
$
186.5
279.2
21.4
$ 231.9
262.6
24.7
$
307.4
188.5
48.5
91 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 1 – Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles
(GAAP) and reporting practices prescribed for the banking industry. A description of the more significant accounting
policies follows.
A. Basis of Presentation. The consolidated financial statements include the accounts of Northern Trust Corporation
(Corporation) and its wholly-owned subsidiary, The Northern Trust Company (Bank), and various other wholly-owned
subsidiaries of the Corporation and Bank. Throughout the notes, the term “Northern Trust” refers to the Corporation and its
subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Certain prior-year balances have
been reclassified consistent with the current-year’s presentation.
B. Nature of Operations. The Corporation is a bank holding company that has elected to be a financial holding company
under the Bank Holding Company Act of 1956, as amended. The Bank is an Illinois banking corporation headquartered in
Chicago and the Corporation’s principal subsidiary. The Corporation conducts business in the United States (U.S.) and
internationally through various U.S. and non-U.S. subsidiaries, including the Bank.
Northern Trust generates the majority of its revenue from 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.
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds,
foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors
around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: global
master trust and custody; employee benefit services, fund administration; investment operations outsourcing; investment risk
and analytical services; securities lending; foreign exchange; banking; cash management; treasury management; brokerage
services; and transition management services. Client relationships are managed through the Bank and the Bank’s and the
Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia
Pacific region.
Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting;
guardianship and estate administration; family business consulting; family financial education; brokerage services; and private
and business banking. Wealth Management focuses on high-net-worth individuals and families, business owners, executives,
professionals, retirees, and established privately-held businesses in its target markets. Wealth Management also includes the
Global Family Office, which provides customized services to meet the complex financial needs of individuals and family offices
in the United States and throughout the world with assets typically exceeding $200 million. Wealth Management services are
delivered by multidisciplinary teams through a network of offices in 18 U.S. states and Washington, D.C., as well as offices in
London, Guernsey, and Abu Dhabi.
C. Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ from those estimates.
D. Foreign Currency Remeasurement and Translation. Asset and liability accounts denominated in nonfunctional
currencies are remeasured into functional currencies at period end rates of exchange, except for certain balance sheet items
including buildings and equipment, goodwill and other intangible assets, which are remeasured at historical exchange rates.
Results from remeasurement of asset and liability accounts are reported in other operating income as currency translation gains
(losses), net. Income and expense accounts are remeasured at period average rates of exchange.
92 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Asset and liability accounts of entities with functional currencies that are not the U.S. dollar are translated at period end
rates of exchange. Income and expense accounts are translated at period average rates of exchange. Translation adjustments, net
of applicable taxes, are reported directly to accumulated other comprehensive income (AOCI), a component of
stockholders’ equity.
E. Securities. Securities Available for Sale are reported at fair value, with unrealized gains and losses credited or charged, net
of the tax effect, to AOCI. Realized gains and losses on securities available for sale are determined on a specific identification
basis and are reported within other security gains (losses), net, in the consolidated statement of income. Interest income is
recorded on the accrual basis, adjusted for the amortization of premium and accretion of discount.
Securities Held to Maturity consist of debt securities that management intends to, and Northern Trust has the ability to,
hold until maturity. Such securities are reported at cost, adjusted for amortization of premium and accretion of discount.
Interest income is recorded on the accrual basis adjusted for the amortization of premium and accretion of discount.
Securities Held for Trading are stated at fair value. Realized and unrealized gains and losses on securities held for trading are
reported in the consolidated statement of income within security commissions and trading income.
Nonmarketable Securities primarily consist of Federal Reserve and Federal Home Loan Bank stock and community
development investments, each of which are recorded in other assets on the consolidated balance sheet. Federal Reserve and
Federal Home Loan Bank stock are reported at cost, which represents redemption value. Community development
investments, are typically reported at amortized cost. Those community development investments that are designed to generate
a return primarily through realization of tax credits and other tax benefits, which are discussed in further detail in Note 28 –
Variable Interest Entities, are reported at amortized cost using the effective yield method or proportional amortization method
and amortized over the lives of the related tax credits and other tax benefits.
Other-Than-Temporary Impairment (OTTI). A security is considered to be other-than-temporarily impaired if the present
value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the
credit loss) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more-
likely-than-not will be required, to sell the security before recovery of the security’s amortized cost basis. If OTTI exists, the
charge to earnings is limited to the amount of credit loss if the investor does not intend to sell the security, and it is more-likely-
than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining
difference between fair value and amortized cost is recognized in AOCI, net of applicable taxes. Otherwise, the entire difference
between fair value and amortized cost is charged to earnings.
F. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase. 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 any
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.
G. Derivative Financial Instruments. Northern Trust is a party to various derivative instruments that are used in the
normal course of business to meet the needs of its clients; as part of its trading activity for its own account; and as part of its risk
management activities. These instruments include foreign exchange contracts, interest rate contracts, and credit default swap
contracts. Derivative financial instruments are recorded on the consolidated balance sheet at fair value within other assets and
other liabilities. Derivative asset and liability positions with the same counterparty are reflected on a net basis on the
consolidated balance sheet in cases where legally enforceable master netting arrangements or similar agreements exist.
Derivative assets and liabilities are further reduced by cash collateral received from, and deposited with, derivative
counterparties. The accounting for changes in the fair value of a derivative in the consolidated statement of income depends on
whether or not the contract has been designated as a hedge and qualifies for hedge accounting under GAAP. Derivative
financial instruments are recorded on the consolidated cash flow statement within the line item, ‘other operating activities, net,’
except for net investment hedges which are recorded within ‘other investing activities, net’.
93 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Changes in the fair value of client-related and trading derivative instruments, which are not designated hedges under
GAAP, are recognized currently in either foreign exchange trading income or security commissions and trading income.
Changes in the fair value of derivative instruments entered into for risk management purposes but not designated as hedges are
recognized currently in other operating income. Certain derivative instruments used by Northern Trust to manage risk are
formally designated and qualify for hedge accounting as fair value, cash flow, or net investment hedges.
Derivatives designated as fair value hedges are used to limit Northern Trust’s exposure to changes in the fair value of assets
and liabilities due to movements in interest rates. Changes in the fair value of the derivative instrument and changes in the fair
value of the hedged asset or liability attributable to the hedged risk are recognized currently in income. For substantially all fair
value hedges, Northern Trust applies the “shortcut” method of accounting, available under GAAP, which assumes there is no
ineffectiveness in a hedge. As a result, changes recorded in the fair value of the hedged item are equal to the offsetting gain or
loss on the derivative and are reflected in the same line item. For fair value hedges that do not qualify for the “shortcut” method
of accounting, Northern Trust utilizes regression analysis, a “long-haul” method of accounting, in assessing whether these
hedging relationships are highly effective at inception and quarterly thereafter. Ineffectiveness resulting from fair value hedges is
recorded in either interest income or interest expense.
Derivatives designated as cash flow hedges are used to minimize the variability in cash flows of earning assets or forecasted
transactions caused by movements in interest or foreign exchange rates. The effective portion of changes in the fair value of
such derivatives is recognized in AOCI, a component of stockholders’ equity, and there is no change to the accounting for the
hedged item. Balances in AOCI are reclassified to earnings when the hedged forecasted transaction impacts earnings. Northern
Trust applies the “shortcut” method of accounting for cash flow hedges of certain available for sale investment securities. For
cash flow hedges of certain other available for sale investment securities and forecasted foreign currency denominated revenue
and expenditure transactions, Northern Trust closely matches all terms of the hedged item and hedging derivative at inception
and on an ongoing basis which limits hedge ineffectiveness. For cash flow hedges of available for sale investment securities, to
the extent all terms are not perfectly matched, effectiveness is assessed using regression analysis and any ineffectiveness is
measured using the hypothetical derivative method. For cash flow hedges of forecasted foreign currency denominated revenue
and expenditure transactions, to the extent all terms are not perfectly matched, effectiveness is assessed using the dollar-offset
method and any ineffectiveness is measured using the hypothetical derivative method. Any ineffectiveness is recognized
currently in earnings.
Foreign exchange contracts and qualifying non-derivative instruments designated as net investment hedges are used to
minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches
and subsidiaries. The effective portion of changes in the fair value of the hedging instrument is recognized in AOCI consistent
with the related translation gains and losses of the hedged net investment. For net investment hedges, all critical terms of the
hedged item and the hedging instrument are matched at inception and on an ongoing basis to minimize the risk of hedge
ineffectiveness. To the extent all terms are not perfectly matched, any ineffectiveness is measured using the hypothetical
derivative method. Ineffectiveness resulting from net investment hedges is recorded in other operating income. Amounts
recorded in AOCI are reclassified to earnings only upon the sale or liquidation of an investment in a non-U.S. branch
or subsidiary.
Fair value, cash flow, and net investment hedges are designated and formally documented as such contemporaneous with
the transaction. The formal documentation describes the hedge relationship and identifies the hedging instruments and hedged
items. Included in the documentation is a discussion of the risk management objectives and strategies for undertaking such
hedges, the nature of the risk being hedged, a description of the method for assessing hedge effectiveness at inception and on an
ongoing basis, as well as the method that will be used to measure hedge ineffectiveness. For hedges that do not qualify for the
“shortcut” or the critical terms match methods of accounting, a formal assessment is performed on a calendar quarter basis to
verify that derivatives used in hedging transactions continue to be highly effective in offsetting the changes in fair value or cash
flows of the hedged item. Hedge accounting is discontinued if a derivative ceases to be highly effective, matures, is terminated
or sold, if a hedged forecasted transaction is no longer expected to occur, or if Northern Trust removes the derivative’s hedge
designation. Subsequent gains and losses on these derivatives are included in foreign exchange trading income or security
commissions and trading income. For discontinued cash flow hedges, the accumulated gain or loss on the derivative remains in
AOCI and is reclassified to earnings in the period in which the previously hedged forecasted transaction impacts earnings or is
94 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
no longer probable of occurring. For discontinued fair value hedges, the previously hedged asset or liability ceases to be
adjusted for changes in its fair value. Previous adjustments to the hedged item are amortized over the remaining life of the
hedged item.
H. Loans and Leases. Loans and leases are recognized assets that represent a contractual right to receive money either on
demand or on fixed or determinable dates. Loans and leases are disaggregated for disclosure purposes by portfolio segment
(segment) and by class. Segment is defined as the level at which management develops and documents a systematic
methodology to determine the allowance for credit losses. Northern Trust has defined its segments as commercial and personal.
A class of loans and leases is a subset of a segment, the components of which have similar risk characteristics, measurement
attributes, or risk monitoring methods. The classes within the commercial segment have been defined as commercial and
institutional, commercial real estate, lease financing, non-US and other. The classes within the personal segment have been
defined as residential real estate, private client and other.
Loan Classification. Loans that are held for investment are reported at the principal amount outstanding, net of unearned
income. Loans classified as held for sale are reported at the lower of aggregate cost or fair value. Loan commitments for
residential real estate loans that will be classified as held for sale at the time of funding and which have an interest rate lock are
recorded on the balance sheet at fair value with subsequent gains or losses recognized in other operating income. Unrealized
gains on these loan commitments are reported as other assets, with unrealized losses reported as other liabilities. Other
undrawn commitments relating to loans that are not held for sale are recorded in other liabilities and are carried at the amount
of unamortized fees with an allowance for credit loss liability recognized for any estimated probable losses.
Recognition of Income. Interest income on loans is recorded on an accrual basis unless, in the opinion of management, there
is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days
contractually past due and the loan is not well-secured and in the process of collection. Loans meeting such criteria are
classified as nonperforming and interest income is recorded on a cash basis. Past due status is based on how long since the
contractual due date a principal or interest payment has been past due. For disclosure purposes, loans that are 29 days past due
or less are reported as current. At the time a loan is determined to be nonperforming, interest accrued but not collected is
reversed against interest income in the current period. Interest collected on nonperforming loans is applied to principal unless,
in the opinion of management, collectability of principal is not in doubt. Management’s assessment of indicators of loan and
lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent
resumption of income recognition, do not meaningfully vary between loan and lease classes. Nonperforming loans are returned
to performing status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to
performing status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate
primarily to expected payment performance. Loans are eligible to be returned to performing status when: (i) no principal or
interest that is due is unpaid and repayment of the remaining contractual principal and interest is expected or (ii) the loan has
otherwise become well-secured (possessing realizable value sufficient to discharge the debt, including accrued interest, in full)
and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current
status in the near future). A loan that has not been brought fully current may be restored to performing status provided there
has been a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance
with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time.
Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance
according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of
the borrower’s financial condition and prospects of repayment under the revised terms, and there has been a sustained period
of repayment performance (generally a minimum of six months) under the revised terms.
Impaired Loans. A loan is considered to be impaired when, based on current information and events, management
determines that it is probable that Northern Trust will be unable to collect all amounts due according to the contractual terms
of the loan agreement. Impaired loans are identified through ongoing credit management and risk rating processes, including
the formal review of past due and watch list credits. Payment performance and delinquency status are critical factors in
identifying impairment for all loans and leases, particularly those within the residential real estate, private client and personal-
other classes. Other key factors considered in identifying impairment of loans and leases within the commercial and
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notes to consolidated financial statements
institutional, non-U.S., lease financing, and commercial-other classes relate to the borrower’s ability to perform under the
terms of the obligation as measured through the assessment of future cash flows, including consideration of collateral value,
market value, and other factors. A loan is also considered to be impaired if its terms have been modified as a concession by
Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties, referred to as a troubled debt
restructuring (TDR). All TDRs are reported as impaired loans in the calendar year of their restructuring. In subsequent years, a
TDR may cease being reported as impaired if the loan was modified at a market rate and has performed according to the
modified terms for at least six months. A loan that has been modified at a below market rate will return to performing status if
it satisfies the six month performance requirement; however, it will remain reported as impaired. Impairment is measured
based upon the loan’s market price, the present value of expected future cash flows, discounted at the loan’s original effective
interest rate, or at the fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded
value of the loan, based on the certainty of loss, either a specific allowance is established, or a charge-off is recorded, for the
difference. Smaller balance (individually less than $250,000) homogeneous loans are collectively evaluated for impairment and
excluded from impaired loan disclosures as allowed under applicable accounting standards. Northern Trust’s accounting
policies for impaired loans is consistent across all classes of loans and leases.
Premiums and Discounts. Premiums and discounts on loans are recognized as an adjustment of yield using the interest
method based on the contractual terms of the loan. Certain direct origination costs and fees are netted, deferred and amortized
over the life of the related loan as an adjustment to the loan’s yield.
Direct Financing and Leverage Leases. Unearned lease income from direct financing and leveraged leases is recognized using
the interest method. This method provides a constant rate of return on the unrecovered investment over the life of the lease.
The rate of return and the allocation of income over the lease term are recalculated from the inception of the lease if during the
lease term assumptions regarding the amount or timing of estimated cash flows change. Lease residual values are established at
the inception of the lease based on in-house valuations and market analyses provided by outside parties. Lease residual values
are reviewed at least annually for OTTI. A decline in the estimated residual value of a leased asset determined to be other-than-
temporary would be recorded in the period in which the decline is identified as a reduction of interest income.
I. Allowance for Credit Losses. The allowance for credit losses represents management’s estimate of probable losses which
have occurred as of the date of the consolidated financial statements. The loan and lease portfolio and other lending-related
credit exposures are regularly reviewed to evaluate the level of the allowance for credit losses. In determining an appropriate
allowance level, Northern Trust evaluates the allowance necessary for impaired loans and lending-related commitments and
also estimates losses inherent in other lending-related credit exposures. The allowance for credit losses consists of the
following components:
Specific Allowance. 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, the value of collateral, and other factors
that may impact the borrower’s ability to pay. For impaired loans where the amount of specific allowance, if any, is determined
based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and utilized by
management. These appraisals are generally less than twelve months old and are subject to adjustments to reflect management’s
judgment as to the realizable value of the collateral.
Inherent Allowance. The amount of inherent allowance is based on factors which incorporate management’s evaluation of
historical charge-off experience and various qualitative factors such as management’s evaluation of economic and business
conditions and changes in the character and size of the loan portfolio. Factors are applied to loan and lease credit exposures
aggregated by shared risk characteristics and are reviewed quarterly by Northern Trust’s Loan Loss Reserve Committee which
includes representatives from Credit Risk Management, reporting segment management and Corporate Financial Management.
Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance for credit losses. Subsequent
recoveries, if any, are credited to the allowance. Northern Trust’s policies relative to the charging-off of uncollectible loans and
leases are consistent across both loan and lease segments. Determinations as to whether loan balances for which the
collectability is in question are charged-off or a specific reserve is established are based on management’s assessment as to the
level of certainty regarding the amount of loss. The provision for credit losses, which is charged to income, is the amount
necessary to adjust the allowance for credit losses to the level determined to be appropriate through the above process. Actual
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notes to consolidated financial statements
losses may vary from current estimates and the amount of the provision for credit losses may be either greater than or less than
actual net charge-offs.
Northern Trust analyzes its exposure to credit losses from both on-balance-sheet and off-balance-sheet activity using a
consistent methodology. In estimating the allowance for credit losses for undrawn loan commitments and standby letters of
credit, management uses conversion rates to determine the estimated amount that will be funded. Factors based on historical
loss experience and specific risk characteristics of the loan product are utilized to calculate inherent losses related to undrawn
commitments and standby letters of credit as of the reporting date. The portion of the allowance assigned to loans and leases is
reported as a contra asset, directly following loans and leases in the consolidated balance sheet.
The portion of the allowance assigned to undrawn loan commitments and standby letters of credit is reported in other
liabilities in the consolidated balance sheet.
J. Standby Letters of Credit. Fees on standby letters of credit are recognized in other operating income using the straight-
line method over the lives of the underlying agreements. Northern Trust’s recorded other liability for standby letters of credit,
reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments.
K. Buildings and Equipment. Buildings and equipment owned are carried at original cost less accumulated depreciation.
The charge for depreciation is computed using the straight-line method based on the following range of lives: buildings – up
to 30 years; equipment – 3 to 10 years; and leasehold improvements–the shorter of the lease term or 15 years. Leased properties
meeting certain criteria are capitalized and amortized using the straight-line method over the lease period.
L. Other Real Estate Owned (OREO). OREO is comprised of commercial and residential real estate properties acquired in
partial or total satisfaction of loans. OREO assets are carried at the lower of cost or fair value less estimated costs to sell and are
recorded in other assets in the consolidated balance sheet. Fair value is typically based on third-party appraisals. Appraisals of
OREO properties are updated on an annual basis and are subject to adjustments to reflect management’s judgment as to the
realizable value of the properties. Losses identified during the 90-day period after the acquisition of such properties are charged
against the allowance for credit losses assigned to loans and leases. Subsequent write-downs that may be required to the
carrying value of these assets and gains or losses realized from asset sales are recorded within other operating expense.
M. Goodwill and Other Intangible Assets. Goodwill is not subject to amortization. Separately identifiable acquired
intangible assets with finite lives are amortized over their estimated useful lives, primarily on a straight-line basis. Purchased
software and allowable internal costs, including compensation relating to software developed for internal use, are capitalized.
Software is amortized using the straight-line method over the estimated useful lives of the assets, generally ranging from 3 to
10 years.
Goodwill and other intangible assets are reviewed for impairment on an annual basis or more frequently if events or
changes in circumstances indicate the carrying amounts may not be recoverable.
N. Assets Under Custody and Assets Under Management. Assets held in fiduciary or agency capacities are not included on
the consolidated balance sheet, since such items are not assets of Northern Trust.
O. Trust, Investment and Other Servicing Fees. Trust, investment and other servicing fees are recorded on the accrual
basis, over the period in which the service is provided. Fees are a function of the market value of assets custodied, managed and
serviced, the volume of transactions, securities lending volume and spreads, and fees for other services rendered, as set forth in
the underlying client agreement. This revenue recognition involves the use of estimates and assumptions,
including
components that are calculated based on estimated asset valuations and transaction volumes.
Client reimbursed out-of-pocket expenses that are an extension of existing services that are being rendered are recorded on
a gross basis as revenue.
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notes to consolidated financial statements
P. Client Security Settlement Receivables. These receivables result from custody client withdrawals from short-term
investment funds that settle on the following business day. Northern Trust advances cash to the client on the date of the client
withdrawal and awaits collection from the short-term investment funds the following business day.
Q. Income Taxes. Northern Trust follows an asset and liability approach to account for income taxes. The objective is to
recognize the amount of taxes payable or refundable for the current year, and to recognize deferred tax assets and liabilities
resulting from temporary differences between the amounts reported in the financial statements and the tax bases of assets and
liabilities. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates.
Tax positions taken or expected to be taken on a tax return are evaluated based on their likelihood of being sustained upon
examination by tax authorities. Only tax positions that are considered more-likely-than-not to be sustained are recorded in the
consolidated financial statements. Northern Trust recognizes any interest and penalties related to unrecognized tax benefits in
the provision for income taxes.
R. Cash Flow Statements. Cash and cash equivalents have been defined as “Cash and Due from Banks”.
S. Pension and Other Postretirement Benefits. Northern Trust records the funded status of its defined benefit pension and
other postretirement plans on the consolidated balance sheet. Prepaid pension and postretirement benefits are reported in
other assets and unfunded pension and postretirement benefits are reported in other liabilities. Plan assets and benefit
obligations are measured annually at December 31. Pension costs are recognized ratably over the estimated working lifetime of
eligible participants.
T. Share-Based Compensation Plans. Northern Trust recognizes as compensation expense the grant-date fair value of stock
and stock unit awards and other share-based compensation granted to employees within the consolidated income statement.
The fair values of stock and stock unit awards, including performance stock unit awards and director awards, are based on the
price of the Corporation’s stock on the date of grant. The fair value of stock options is estimated on the date of grant using the
Black-Scholes option pricing model. The model utilizes weighted-average assumptions regarding the period of time that
options granted are expected to be outstanding (expected term) based primarily on the historical exercise behavior attributable
to previous option grants, the estimated yield from dividends paid on the Corporation’s stock over the expected term of the
options, the historical volatility of Northern Trust’s stock price and the implied volatility of traded options on Northern Trust
stock, and a risk free interest rate based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected
term of the options granted.
Compensation expense for share-based award grants with terms that provide for a graded vesting schedule, whereby
portions of the award vest in increments over the requisite service period, are recognized on a straight-line basis over the
requisite service period for the entire award. Northern Trust does not include an estimate of future forfeitures in its recognition
of share-based compensation expense as historical forfeitures have not been significant. Share-based compensation expense is
adjusted based on forfeitures as they occur. Dividend equivalents are paid on stock units that have been granted but not yet
vested. Cash flows resulting from the realization of tax deductions from the exercise of stock options in excess of the
compensation cost recognized (excess tax benefits) are classified as financing cash flows.
U. Net Income Per Common Share. Basic net income per common share is computed by dividing net income/loss
applicable to common stock by the weighted average number of common shares outstanding during each period. Diluted net
income per common share is computed by dividing net income applicable to common stock and potential common shares by
the aggregate of the weighted average number of common shares outstanding during the period and common share equivalents
calculated for stock options and restricted stock outstanding using the treasury stock method. In a period of a net loss, diluted
net income per common share is calculated in the same manner as basic net income per common share.
Northern Trust has issued certain restricted stock awards, which are unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents. These restricted shares are considered participating securities.
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notes to consolidated financial statements
Accordingly, Northern Trust calculates net income applicable to common stock using the two-class method, whereby net
income is allocated between common stock and participating securities.
Note 2 – Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606).” The ASU is a converged standard between the FASB and the
International Accounting Standards Board (IASB) that provides a single comprehensive revenue recognition model for all
contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that
represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The ASU is effective for interim and annual reporting
periods beginning after December 15, 2016. Northern Trust is currently assessing the impact of adoption of ASU 2014-09.
In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity
Transactions, Repurchase Financings, and Disclosures.” This ASU requires secured borrowing accounting treatment for
repurchase-to-maturity transactions and provides guidance on accounting for repurchase financing arrangements. This ASU is
effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU will result in
additional disclosures, but is not expected to impact significantly Northern Trust’s consolidated financial position or results
of operations.
In June 2014, the FASB also issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for
Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite
Service Period.” This ASU requires that a performance target that affects vesting and that could be achieved after the requisite
service period be treated as a performance condition and should not be reflected in estimating the grant-date fair value of the
award. This ASU is effective for interim and annual reporting periods beginning after December 15, 2015 with earlier adoption
permitted. The adoption of this ASU is not expected to impact significantly Northern Trust’s consolidated financial position or
results of operations.
In August 2014, the FASB issued ASU No. 2014-14, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic
310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB
Emerging Issues Task Force).” This ASU requires that a mortgage loan be derecognized and a separate receivable, measured
based on the amount of the loan balance expected to be recovered from the guarantor, be recognized upon foreclosure if certain
conditions are met. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. The
adoption of this ASU is not expected to significantly impact Northern Trust’s consolidated financial position or results
of operations.
In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the
Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity (a consensus
of the FASB Emerging Issues Task Force)”. This ASU requires issuers or investors of hybrid instruments issued in the form of a
share to determine whether the nature of the host contract is more akin to debt or equity by considering all stated and implied
substantive terms and features of the hybrid instrument, including the embedded derivative feature, weighing each term and
feature on the basis of the relevant facts and circumstances. This ASU is effective for interim and annual periods beginning after
December 15, 2015. The adoption of this ASU is not expected to significantly impact Northern Trust’s consolidated financial
position or results of operations.
Note 3 – Fair Value Measurements
Fair value under GAAP is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price)
in an orderly transaction between market participants on the measurement date.
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notes to consolidated financial statements
Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair
value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a
recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable
inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best
information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the
use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the
hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers
into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred. No transfers
between fair value levels occurred during the years ended December 31, 2014, or 2013.
Level 1 – Quoted, active market prices for identical assets or liabilities. Northern Trust’s Level 1 assets are comprised of
available for sale investments in U.S. treasury securities.
Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted
prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in
active markets. Northern Trust’s Level 2 assets include available for sale and trading account securities, the fair values of which
are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and
third-party prices. If a security price obtained from a pricing vendor is determined to exceed pre-determined tolerance levels
that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated,
an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of December 31, 2014,
Northern Trust’s available for sale securities portfolio included 881 Level 2 securities with an aggregate market value of $25.0
billion. All 881 securities were valued by external pricing vendors. As of December 31, 2013, Northern Trust’s available for sale
securities portfolio included 831 Level 2 securities with an aggregate market value of $26.4 billion. Of those, 829 securities, with
a market value of $26.3 billion, were valued by external pricing vendors. The remaining 2 securities, with an aggregate market
value of $57.4 million, were valued consistent with prices of similar securities as there were no vended prices available for these
securities. Trading account securities, which totaled $4.7 million and $1.7 million as of December 31, 2014, and December 31,
2013, respectively, were all valued using external pricing vendors.
Northern Trust has established processes and procedures to assess the suitability of valuation methodologies used by
external pricing vendors, including reviews of valuation techniques and assumptions used for selected securities. On a daily
basis, periodic quality control reviews of prices received from vendors are conducted which include comparisons to prices on
similar security types received from multiple pricing vendors and to the previous day’s reported prices for each security.
Predetermined tolerance level exceptions are researched and may result in additional validation through available market
information or the use of an alternate pricing vendor. Quarterly, Northern Trust reviews documentation from third-party
pricing vendors regarding the valuation processes and assumptions used in their valuations and assesses whether the fair value
levels assigned by Northern Trust to each security classification are appropriate. Annually, valuation inputs used within third-
party pricing vendor valuations are reviewed for propriety on a sample basis through a comparison of inputs used to
comparable market data, including security classifications that are less actively traded and security classifications comprising
significant portions of the portfolio.
Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted income-
based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the
contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads,
default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and
forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact
of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the
likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after
giving effect to master netting arrangements or similar agreements, available collateral, and other credit enhancements in
determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been
considered material.
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notes to consolidated financial statements
Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. Northern Trust’s
Level 3 assets consist of auction rate securities purchased in 2008 from Northern Trust clients. To estimate the fair value of
auction rate securities, for which trading is limited and market prices are generally unavailable, Northern Trust developed and
maintains a pricing model that discounts estimated cash flows over their estimated remaining lives. Significant inputs to the
model include the contractual terms of the securities, credit risk ratings, discount rates, forward interest rates, credit/liquidity
spreads, and Northern Trust’s own assumptions about the estimated remaining lives of the securities. The significant
unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about the estimated remaining
lives of the securities and the applicable discount rates. Significant increases (decreases) in the estimated remaining lives or the
discount rates in isolation would result in a significantly lower (higher) fair value measurement. Level 3 liabilities at
December 31, 2013, consisted of an acquisition-related contingent consideration liability, the fair value of which was determined
using an income-based (discounted cash flow) model that incorporated Northern Trust’s own assumptions about business
growth rates and applicable discount rates, which represented unobservable inputs to the model. In April 2014, Northern Trust
made a payment of $55.3 million to extinguish the contingent consideration liability at the value agreed by the parties.
Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the
use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material
effect on the computation of their estimated fair values.
Management of various businesses and departments of Northern Trust (including Corporate Market Risk, Credit Risk
Management, Corporate Financial Management, C&IS and Wealth Management) determine the valuation policies and
procedures for Level 3 assets and liabilities. Generally, valuation policies are reviewed by management of each business or
department. Fair value measurements are performed upon acquisitions of an asset or liability. As necessary, the valuation
models are reviewed by management of the appropriate business or department, and adjusted for changes in inputs.
Management of each business or department reviews the inputs in order to substantiate the unobservable inputs used in each
fair value measurement. When appropriate, management reviews forecasts used in the valuation process in light of other
relevant financial projections to understand any variances between current and previous fair value measurements. In certain
circumstances, third party information is used to support the fair value measurements. If certain third party information seems
inconsistent with consensus views, a review of the information is performed by management of the respective business or
department to conclude as to the appropriate fair value of the asset or liability.
The following presents the fair values of, and the valuation techniques, significant unobservable inputs, and quantitative
information used to develop significant unobservable inputs for, Northern Trust’s Level 3 assets and liabilities as of
December 31, 2014.
T A B L E 4 1 : L E V E L 3 S I G N I F I C A N T U N O B S E R V A B L E I N P U T S
FINANCIAL INSTRUMENT
Auction Rate Securities
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF LIVES AND RATES
$18.1 million
Discounted Cash Flow
Remaining lives
Discount rates
1.4 – 8.6 years
0.2% – 8.1%
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notes to consolidated financial statements
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2014, and 2013,
segregated by fair value hierarchy level.
T A B L E 4 2 : R E C U R R I N G B A S I S H I E R A R C H Y L E V E L I N G
ASSETS/
LIABILITIES
AT FAIR
VALUE
$ 4,506.9
4.6
16,389.2
310.4
3,577.7
1,907.5
360.6
6.4
2,321.3
18.1
155.8
29,558.5
4.7
29,563.2
4,275.2
232.3
2,250.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(In Millions)
Securities
Available for Sale
DECEMBER 31, 2014
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
Supranational and Non-U.S. Agency Bonds
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
$4,506.9
–
–
–
–
–
–
–
–
–
–
$
–
4.6
16,389.2
310.4
3,577.7
1,907.5
360.6
6.4
2,321.3
–
155.8
Total Available for Sale
Trading Account
4,506.9
25,033.5
–
4.7
Total Available for Sale and Trading Securities
4,506.9
25,038.2
$
$
–
–
–
–
–
–
–
–
–
18.1
–
18.1
–
18.1
Other Assets
Derivative Assets
Foreign Exchange Contracts
Interest Rate Contracts
Total Derivative Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Swaps
Total Derivative Liabilities
$
–
–
–
–
–
–
4,275.2
232.3
4,507.5
4,095.5
131.8
$ 4,227.3
$
–
–
–
–
–
–
(2,257.1)
–
–
4,095.5
131.8
$(3,173.3)
$ 1,054.0
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the
counterparty. As of December 31, 2014, derivative assets and liabilities shown above also include reductions of $315.8 million and $1.2 billion, respectively, as a result of cash collateral
received from and deposited with derivative counterparties.
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notes to consolidated financial statements
DECEMBER 31, 2013
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
(In Millions)
Securities
Available for Sale
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
Supranational and Non-U.S. Agency Bonds
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
$1,917.9
–
–
–
–
–
–
–
–
–
–
$
–
4.6
17,528.0
310.6
3,524.5
1,943.9
410.0
48.1
2,391.8
–
214.5
Total Available for Sale
Trading Account
1,917.9
26,376.0
–
1.7
Total Available for Sale and Trading Securities
1,917.9
26,377.7
Other Assets
Derivative Assets
Foreign Exchange Contracts
Interest Rate Swaps
Total Derivatives Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Swaps
Credit Default Swaps
Total Derivative Liabilities
Contingent Consideration
–
–
–
–
–
–
–
$
2,865.7
237.9
3,103.6
2,905.7
195.2
3,100.9
$
–
–
–
–
–
–
–
–
–
98.9
–
98.9
–
98.9
–
–
–
–
–
–
ASSETS/
LIABILITIES
AT FAIR
VALUE
$ 1,917.9
4.6
17,528.0
310.6
3,524.5
1,943.9
410.0
48.1
2,391.8
98.9
214.5
28,392.8
1.7
28,394.5
2,865.7
237.9
1,734.6
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,369.0)
–
–
2,905.7
195.2
(1,926.0)
1,174.9
$
–
$55.4
$
–
$
55.4
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the
counterparty. As of December 31, 2013, derivative assets and liabilities shown above also include reductions of $210.7 million and $767.7 million, respectively, as a result of cash collateral
received from and deposited with derivative counterparties.
103 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following tables present the changes in Level 3 assets and liabilities for the years ended December 31, 2014, and 2013.
T A B L E 4 3 : C H A N G E S I N L E V E L 3 A S S E T S A N D L I A B I L I T I E S
L E V E L 3 A S S E T S
(In Millions)
Fair Value at January 1
Total Gains (Losses):
Included in Earnings(1)
Included in Other Comprehensive Income(2)
Purchases, Issuances, Sales, and Settlements:
Sales
Settlements
Fair Value at December 31
AUCTION RATE SECURITIES
2014
$ 98.9
4.4
(1.7)
(55.7)
(27.8)
2013
$97.8
0.1
3.8
(0.6)
(2.2)
$ 18.1
$98.9
(1) Realized gains for the year ended December 31, 2014, of $4.4 million represents gains from the sale of securities of $1.7 million and redemptions by issuers of $2.7 million. Realized
gains for the year ended December 31, 2013, of $0.1 million represents gains from redemptions by issuers. Gains on sales are recorded in investment security gains (losses) and gains on
redemptions are recorded in interest income within the consolidated statement of income.
(2) Unrealized gains (losses) are included in net unrealized gains (losses) on securities available for sale, within the consolidated statement of comprehensive income.
L E V E L 3 L I A B I L I T I E S
(In Millions)
Fair Value at January 1
Total (Gains) and Losses:
Included in Earnings(1)
Purchases, Issuances, Sales, and Settlements:
Settlements
Fair Value at December 31
Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at December 31(1)
(1) Gains (losses) are recorded in other operating income (expense) within the consolidated statement of income.
CONTINGENT CONSIDERATION
2014
$ 55.4
(0.1)
(55.3)
$
$
–
–
2013
$50.1
5.3
–
$55.4
$ 5.3
For the years ended December 31, 2014, and 2013, there were no assets or liabilities transferred into or out of Level 3.
Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value
in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to
separately disclose these subsequent fair value measurements and to classify them under the fair value hierarchy.
Assets measured at fair value on a nonrecurring basis at December 31, 2014, and 2013, all of which were categorized as
Level 3 under the fair value hierarchy, were comprised of impaired loans whose values were based on real-estate and other
available collateral, and of OREO properties. Fair values of real-estate loan collateral were estimated using a market approach
typically supported by third-party valuations and property-specific fees and taxes, and were subject to adjustments to reflect
management’s judgment as to realizable value. Other loan collateral, which typically consists of accounts receivable, inventory
and equipment, is valued using a market approach adjusted for asset specific characteristics and in limited instances third-party
valuations are used.
Collateral-based impaired loans and OREO assets that have been adjusted to fair value totaled $14.2 million and $4.1
million, respectively, at December 31, 2014, and $34.0 million and $1.4 million, respectively, at December 31, 2013. Assets
measured at fair value on a nonrecurring basis reflect management’s judgment as to realizable value.
The following table provides the fair value of, and the valuation technique, significant unobservable inputs, and
quantitative information used to develop the significant unobservable inputs for, Northern Trust’s Level 3 assets that were
measured at fair value on a nonrecurring basis as of December 31, 2014.
T A B L E 4 4 : L E V E L 3 N O N R E C U R R I N G B A S I S S I G N I F I C A N T U N O B S E R V A B L E I N P U T S
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF DISCOUNTS APPLIED
Loans
OREO
$14.2 million
$4.1 million
Market Approach
Market Approach
Discount to reflect realizable value
Discount to reflect realizable value
15% – 25%
15% – 20%
104 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Fair Value of Financial Instruments. GAAP requires disclosure of the estimated fair value of certain financial instruments
and the methods and significant assumptions used to estimate fair value. It excludes from this requirement nonfinancial assets
and liabilities, as well as a wide range of franchise, relationship, and intangible values that add value to Northern Trust.
Accordingly, the required fair value disclosures provide only a partial estimate of the fair value of Northern Trust. Financial
instruments recorded at fair value on Northern Trust’s consolidated balance sheet are discussed above. The following methods
and assumptions were used in estimating the fair values of financial instruments that are not carried at fair value.
Held to Maturity Securities. The fair values of held to maturity securities were modeled by external pricing vendors, or in
limited cases internally, using widely accepted models which are based on an income approach that incorporates current
market yield curves.
Loans (excluding lease receivables). The fair value of the loan portfolio was estimated using an income approach (discounted
cash flow) that incorporates current market rates offered by Northern Trust as of the date of the consolidated financial
statements. The fair values of all loans were adjusted to reflect current assessments of loan collectability.
Federal Reserve and Federal Home Loan Bank Stock. The fair values of Federal Reserve and Federal Home Loan Bank stock
are equal to their carrying values which represent redemption value.
Community Development Investments. The fair values of these instruments were estimated using an income approach
(discounted cash flow) that incorporates current market rates.
Employee Benefit and Deferred Compensation. These assets include U.S. treasury securities and investments in mutual and
collective trust funds held to fund certain supplemental employee benefit obligations and deferred compensation plans. Fair
values of U.S. treasury securities were determined using quoted, active market prices for identical securities. The fair values of
investments in mutual and collective trust funds were valued at the funds’ net asset values based on a market approach.
Savings Certificates and Other Time Deposits. The fair values of these instruments were estimated using an income approach
(discounted cash flow) that incorporates market interest rates currently offered by Northern Trust for deposits with
similar maturities.
Senior Notes, Subordinated Debt, and Floating Rate Capital Debt. Fair values were determined using a market approach
based on quoted market prices, when available. If quoted market prices were not available, fair values were based on quoted
market prices for comparable instruments.
Federal Home Loan Bank Borrowings. The fair values of these instruments were estimated using an income approach
(discounted cash flow) that incorporates market interest rates available to Northern Trust.
Loan Commitments. The fair values of loan commitments represent the estimated costs to terminate or otherwise settle the
obligations with a third party adjusted for any related allowance for credit losses.
Standby Letters of Credit. The fair values of standby letters of credit are measured as the amount of unamortized fees on
these instruments, inclusive of the related allowance for credit losses. Fees are determined by applying basis points to the
principal amounts of the letters of credit.
Financial Instruments Valued at Carrying Value. Due to their short maturity, the carrying values of certain financial
instruments approximated their fair values. These financial instruments include cash and due from banks; federal funds sold
and securities purchased under agreements to resell, interest-bearing deposits with banks, Federal Reserve deposits and other
interest-bearing assets; client security settlement receivables; non-U.S. offices interest-bearing deposits;
funds
purchased; securities sold under agreements to repurchase; and other borrowings (includes term federal funds purchased, and
other short-term borrowings). The fair values of demand, noninterest-bearing, savings, and money market deposits represent
the amounts payable on demand as of the reporting date, although such deposits are typically priced at a premium in banking
industry consolidations.
federal
105 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
DECEMBER 31, 2014
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
notes to consolidated financial statements
The following tables summarize the fair values of all financial instruments.
T A B L E 4 5 : F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S
(In Millions)
ASSETS
Cash and Due from Banks
Federal Funds Sold and Resell Agreements
Interest-Bearing Deposits with Banks
Federal Reserve Deposits
Securities
Available for Sale (Note)
Held to Maturity
Trading Account
Loans (excluding Leases)
Held for Investment
Held for Sale
Client Security Settlement Receivables
Other Assets
Federal Reserve and Federal Home Loan Bank Stock
Community Development Investments
Employee Benefit and Deferred Compensation
LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices Interest-Bearing
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Other Borrowings
Senior Notes
Long Term Debt (excluding Leases)
BOOK VALUE
$ 3,050.6
1,062.7
14,928.3
17,386.3
29,558.5
4,170.8
4.7
30,458.0
2.5
1,568.8
207.5
209.9
143.2
$41,454.6
1,757.4
47,545.0
932.9
885.1
1,685.2
1,497.0
TOTAL
FAIR VALUE
$ 3,050.6
1,062.7
14,928.3
17,386.3
29,558.5
4,176.1
4.7
30,600.4
2.5
1,568.8
207.5
210.8
146.7
$41,454.6
1,757.0
47,545.0
932.9
885.1
1,686.2
1,541.8
$ 3,050.6
–
–
–
4,506.9
–
–
–
–
–
–
–
96.7
$41,454.6
–
–
–
–
–
–
Subordinated Debt
Floating Rate Capital Debt
Other Liabilities
Standby Letters of Credit
Loan Commitments
DERIVATIVE INSTRUMENTS
Asset/Liability Management
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
1,583.3
277.2
1,583.4
242.8
60.1
28.3
60.1
28.3
$
125.7
23.5
$
125.7
23.5
$
126.8
30.5
126.8
30.5
4,149.5
4,072.0
105.5
101.3
4,149.5
4,072.0
105.5
101.3
–
–
–
–
–
–
–
–
–
–
–
–
Note: Refer to the table located on page 102 for the disaggregation of available for sale securities.
106 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
$
–
1,062.7
14,928.3
17,386.3
25,033.5
4,176.1
4.7
–
–
1,568.8
207.5
210.8
50.0
$
–
1,757.0
47,545.0
932.9
885.1
1,686.2
1,541.8
1,583.4
242.8
$
–
–
–
–
18.1
–
–
30,600.4
2.5
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
60.1
28.3
$
125.7
23.5
$
126.8
30.5
4,149.5
4,072.0
105.5
101.3
–
–
–
–
–
–
–
–
notes to consolidated financial statements
( I n M i l l i o n s )
ASSETS
Cash and Due from Banks
Federal Funds Sold and Resell Agreements
Interest-Bearing Deposits with Banks
Federal Reserve Deposits
Securities
Available for Sale (Note)
Held to Maturity
Trading Account
Loans (excluding Leases)
Held for Investment
Held for Sale
Client Security Settlement Receivables
Other Assets
Federal Reserve and Federal Home Loan Bank Stock
Community Development Investments
Employee Benefit and Deferred Compensation
LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices Interest-Bearing
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Other Borrowings
Senior Notes
Long Term Debt (excluding Leases)
Subordinated Debt
Federal Home Loan Bank Borrowings
Floating Rate Capital Debt
Other Liabilities
Standby Letters of Credit
Contingent Consideration
Loan Commitments
DERIVATIVE INSTRUMENTS
Asset/Liability Management
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Swaps
Assets
Liabilities
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
BOOK VALUE
$ 3,162.4
529.6
19,397.4
12,911.5
28,392.8
2,325.8
1.7
28,136.5
–
1,355.2
194.7
228.1
132.7
$33,762.0
1,874.4
48,461.7
965.1
917.3
1,558.6
1,996.6
1,537.3
135.0
277.1
59.6
55.4
35.7
TOTAL
FAIR VALUE
$ 3,162.4
529.6
19,397.4
12,911.5
28,392.8
2,321.4
1.7
28,147.2
–
1,355.2
194.7
227.8
126.9
$33,762.0
1,877.1
48,461.7
965.1
917.3
1,558.6
1,989.3
1,563.5
137.2
230.2
59.6
55.4
35.7
$
21.0
59.5
$
21.0
59.5
$
115.1
78.2
115.1
78.2
2,844.7
2,846.2
122.8
117.0
2,844.7
2,846.2
122.8
117.0
DECEMBER 31, 2013
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
$ 3,162.4
–
–
–
1,917.9
–
–
–
–
–
–
–
79.3
$33,762.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
529.6
19,397.4
12,911.5
26,376.0
2,321.4
1.7
–
–
1,355.2
194.7
227.8
47.6
$
–
1,877.1
48,461.7
965.1
917.3
1,558.6
1,989.3
1,563.5
137.2
230.2
$
–
–
–
–
98.9
–
–
28,147.2
–
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
59.6
55.4
35.7
$
21.0
59.5
$
115.1
78.2
2,844.7
2,846.2
122.8
117.0
–
–
–
–
–
–
–
–
Note: Refer to the table located on page 103 for the disaggregation of available for sale securities.
107 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 4 – Securities
Securities Available for Sale. The following tables provide the amortized cost, fair values, and remaining maturities of
securities available for sale.
T A B L E 4 6 : R E C O N C I L I A T I O N O F A M O R T I Z E D C O S T T O F A I R V A L U E O F S E C U R I T I E S A V A I L A B L E F O R S A L E
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
Supranational and Non-U.S. Agency Bonds
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
Total
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
Supranational and Non-U.S. Agency Bonds
Residential Mortgage-Backed
Other Asset-Backed
Auction Rate
Other
Total
AMORTIZED
COST
$ 4,493.5
4.5
16,326.4
309.5
3,617.5
1,899.9
360.0
6.9
2,321.8
18.4
155.7
$29,514.1
AMORTIZED
COST
$ 1,896.7
4.5
17,495.2
307.0
3,615.2
1,898.9
410.0
52.4
2,390.8
97.5
214.1
$ 28,382.3
DECEMBER 31, 2014
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$ 15.1
0.1
82.3
0.9
1.8
7.9
1.5
–
0.5
0.5
0.3
$110.9
$ 1.7
–
19.5
–
41.6
0.3
0.9
0.5
1.0
0.8
0.2
$ 66.5
DECEMBER 31, 2013
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$ 22.6
0.1
80.7
3.6
10.5
50.9
1.7
0.1
1.4
2.2
0.4
$ 174.2
$
1.4
–
47.9
–
101.2
5.9
1.7
4.4
0.4
0.8
–
FAIR
VALUE
$ 4,506.9
4.6
16,389.2
310.4
3,577.7
1,907.5
360.6
6.4
2,321.3
18.1
155.8
$29,558.5
FAIR
VALUE
$ 1,917.9
4.6
17,528.0
310.6
3,524.5
1,943.9
410.0
48.1
2,391.8
98.9
214.5
$163.7
$ 28,392.8
T A B L E 4 7 : R E M A I N I N G M A T U R I T Y O F S E C U R I T I E S A V A I L A B L E F O R S A L E
(In Millions)
Due in One Year or Less
Due After One Year Through Five Years
Due After Five Years Through Ten Years
Due After Ten Years
Total
DECEMBER 31, 2014
DECEMBER 31, 2013
AMORTIZED
COST
$ 7,467.4
17,132.7
3,394.2
1,519.8
FAIR
VALUE
AMORTIZED
COST
$ 7,487.9
17,157.6
3,418.0
1,495.0
$ 9,552.9
15,011.4
2,545.9
1,272.1
FAIR
VALUE
$ 9,565.7
15,067.2
2,494.1
1,265.8
$29,514.1
$29,558.5
$28,382.3
$28,392.8
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
108 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Securities Held to Maturity. The following tables provide the amortized cost, fair values and remaining maturities of
securities held to maturity.
T A B L E 4 8 : R E C O N C I L I A T I O N O F A M O R T I Z E D C O S T T O F A I R V A L U E S O F S E C U R I T I E S H E L D T O M A T U R I T Y
(In Millions)
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government
Certificates of Deposit
Supranational and Non-U.S. Agency Bonds
Other
Total
(In Millions)
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government
Certificates of Deposit
Supranational and Non-U.S. Agency Bonds
Other
Total
AMORTIZED
COST
$ 121.9
18.4
1,281.6
924.3
1,745.8
78.8
$4,170.8
AMORTIZED
COST
$
225.2
35.9
722.0
698.1
584.7
59.9
$ 2,325.8
DECEMBER 31, 2014
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$21.1
$4,176.1
DECEMBER 31, 2013
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
FAIR
VALUE
$ 129.3
19.5
1,287.8
924.3
1,756.2
59.0
$
FAIR
VALUE
235.5
37.0
721.7
697.9
581.5
47.8
$
–
–
0.4
0.1
0.5
20.1
$
–
–
1.1
0.2
3.2
12.2
$ 16.7
$ 2,321.4
$ 7.4
1.1
6.6
0.1
10.9
0.3
$26.4
$ 10.3
1.1
0.8
–
–
0.1
$ 12.3
T A B L E 4 9 : R E M A I N I N G M A T U R I T Y O F S E C U R I T I E S H E L D T O M A T U R I T Y
(In Millions)
Due in One Year or Less
Due After One Year Through Five Years
Due After Five Years Through Ten Years
Due After Ten Years
Total
DECEMBER 31, 2014
DECEMBER 31, 2013
AMORTIZED
COST
$1,503.5
2,602.8
23.5
41.0
FAIR
VALUE
$1,504.7
2,622.3
21.5
27.6
AMORTIZED
COST
$1,009.9
1,254.9
26.1
34.9
FAIR
VALUE
$1,011.2
1,257.0
27.1
26.1
$4,170.8
$4,176.1
$2,325.8
$2,321.4
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
Securities held to maturity consist of debt securities that management intends to, and Northern Trust has the ability to, hold
until maturity.
Investment Security Gains and Losses. Net investment security losses of $4.3 million were recognized in 2014 and include
$4.2 million of charges related to the OTTI of certain Community Reinvestment Act (CRA) eligible held to maturity securities.
Net investment security losses of $1.5 million, and $1.7 million were recognized in 2013, and 2012, respectively. Losses in 2012
include $3.3 million of OTTI losses. There were no OTTI losses in 2013. Proceeds of $851.8 million from the sale of securities
in 2014 resulted in gross realized gains and losses of $2.8 million and $2.9 million, respectively. Proceeds of $0.5 billion from
the sale of securities in 2013 resulted in gross realized gains and losses of $0.8 million and $2.3 million, respectively. Proceeds of
$2.7 billion from the sale of securities in 2012 resulted in gross realized gains and losses of $23.5 million and $21.9 million,
respectively.
109 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Securities with Unrealized Losses. The following tables provide information regarding securities that had been in a
continuous unrealized loss position for less than 12 months and for 12 months or longer as of December 31, 2014, and 2013.
T A B L E 5 0 : S E C U R I T I E S W I T H U N R E A L I Z E D L O S S E S
A S O F D E C E M B E R 3 1 , 2 0 1 4
LESS THAN 12 MONTHS
12 MONTHS OR LONGER
TOTAL
(In Millions)
U.S. Government
Government Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
Supranational and Non-U.S. Agency
Bonds
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
FAIR
VALUE
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
$ 998.2
2,344.9
292.9
1,244.5
142.3
313.2
–
1,297.6
438.6
2.4
27.1
$ 1.7
6.6
0.4
3.9
0.2
0.3
–
1.0
0.1
0.2
12.1
$
–
1,730.0
–
1,338.8
10.0
175.5
4.5
–
–
4.7
45.6
$
–
12.9
–
37.7
0.1
1.1
0.5
–
–
0.6
8.2
$
FAIR
VALUE
998.2
4,074.9
292.9
2,583.3
152.3
488.7
4.5
1,297.6
438.6
7.1
72.7
UNREALIZED
LOSSES
$ 1.7
19.5
0.4
41.6
0.3
1.4
0.5
1.0
0.1
0.8
20.3
Total
$7,101.7
$ 26.5
$3,309.1
$61.1
$10,410.8
$ 87.6
A S O F D E C E M B E R 3 1 , 2 0 1 3
LESS THAN 12 MONTHS
12 MONTHS OR LONGER
TOTAL
(In Millions)
U.S. Government
Government Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
Supranational and Non-U.S. Agency
Bonds
Residential Mortgage-Backed
Other Asset-Backed
Certificates of Deposit
Auction Rate
Other
FAIR
VALUE
UNREALIZED
LOSSES
$
896.4
4,340.8
176.7
1,759.5
278.8
612.7
–
677.0
684.2
22.1
25.7
$
1.4
42.6
1.1
85.4
5.7
4.9
–
0.4
0.2
0.1
4.0
$
FAIR
VALUE
–
413.7
–
267.0
9.9
–
42.0
–
–
14.0
29.5
UNREALIZED
LOSSES
$
–
5.3
–
15.8
0.2
–
4.4
–
–
0.7
8.2
$
FAIR
VALUE
896.4
4,754.5
176.7
2,026.5
288.7
612.7
42.0
677.0
684.2
36.1
55.2
UNREALIZED
LOSSES
$
1.4
47.9
1.1
101.2
5.9
4.9
4.4
0.4
0.2
0.8
12.2
Total
$ 9,473.9
$145.8
$
776.1
$ 34.6
$ 10,250.0
$180.4
As of December 31, 2014, 515 securities with a combined fair value of $10.4 billion were in an unrealized loss position, with
their unrealized losses totaling $87.6 million. Unrealized losses of $41.6 million within corporate debt securities primarily
reflect widened credit spreads and higher market rates since purchase; 40% of the corporate debt portfolio is backed by
guarantees provided by U.S. and non-U.S. governmental entities. Unrealized losses of $19.5 million related to government
sponsored agency securities are primarily attributable to changes in market rates since their purchase.
Unrealized losses on residential mortgage-backed securities totaling $0.5 million reflect the impact of wider credit and
liquidity spreads on the valuations of one residential mortgage-backed security since purchase, with it having been in an
unrealized loss position for more than 12 months. Securities classified as “other asset-backed” at December 31, 2014 had
average lives of less than 5 years, and 100% were rated triple-A.
The majority of the $20.3 million of unrealized losses in securities classified as “other” at December 31, 2014, relate to
securities primarily purchased at a premium or par by Northern Trust for compliance with the Community Reinvestment Act
(CRA). Unrealized losses on these CRA related other securities are attributable to yields that are below market rates for the
purpose of supporting institutions and programs that benefit low to moderate income communities within Northern Trust’s
market area. Unrealized losses of $0.8 million related to auction rate securities primarily reflect reduced market liquidity as a
majority of auctions continue to fail preventing holders from liquidating their investments at par. The remaining unrealized
losses on Northern Trust’s securities portfolio as of December 31, 2014, are attributable to changes in overall market interest
110 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
rates, increased credit spreads, or reduced market liquidity. As of December 31, 2014, Northern Trust does not intend to sell
any investment in an unrealized loss position and it is not more likely than not that Northern Trust will be required to sell any
such investment before the recovery of its amortized cost basis, which may be maturity.
Security impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible
OTTI. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration
numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in
determining whether impairment is other-than-temporary include, but are not limited to, the length of time the security has
been impaired; the severity of the impairment; the cause of the impairment and the financial condition and near-term
prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; Northern Trust’s
intent regarding the sale of the security as of the balance sheet date; and the likelihood that it will not be required to sell the
security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting
the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if OTTI
has occurred.
While all securities are considered, the process for identifying credit impairment within CRA eligible mortgage-backed
securities, the security type for which Northern Trust has recognized all of the OTTI in 2014, incorporates an expected loss
approach using discounted cash flows on the underlying collateral pools. To evaluate whether an unrealized loss on CRA
mortgage-backed securities is other-than-temporary, a calculation of the security’s present value is made using current pool
data, the current delinquency pipeline, default rates and loan loss severities based on the historical performance of like
collateral, and Northern Trust’s outlook for the housing market and the overall economy. If the present value of the collateral
pools was found to be less than the current amortized cost of the security, a credit-related OTTI loss would be recorded in
earnings equal to the difference between the two amounts.
Impairments of CRA mortgage-backed securities are influenced by a number of factors, including but not limited to, U.S.
economic and housing market performance, pool credit enhancement level, year of origination, and estimated credit quality of
the collateral. The factors used in estimating losses related to CRA mortgage-backed securities vary by vintage of loan
origination and collateral quality.
As of December 31, 2014, impairment estimates for CRA mortgage-backed securities were developed using default and loss
severity rates sourced from industry mortgage data. Ultimate recovery value of the securities was determined by applying
default and severity rates against remaining collateral balances in the pools. An expected loss amount was calculated by applying
loss severity rates on defaulted amounts. Lastly, book values were compared against collateral values net of expected losses in
order to determine OTTI.
The following describes Northern Trust’s process for identifying credit impairment within non-agency residential
mortgage-backed securities, the security type for which Northern Trust has previously recognized the majority of its OTTI. To
determine if an unrealized loss on a non-agency residential mortgage-backed security is other-than-temporary, economic
models are used to perform cash flow analyses by developing multiple scenarios in order to create reasonable forecasts of the
security’s future performance using available data including servicers’ loan charge off patterns, prepayment speeds, annualized
default rates, each security’s current delinquency pipeline, the delinquency pipeline’s growth rate, the roll rate from
delinquency to default, loan loss severities and historical performance of like collateral, along with Northern Trust’s outlook for
the housing market and the overall economy. If the present value of future cash flows projected as a result of this analysis is less
than the current amortized cost of the security, a credit-related OTTI loss is recorded in earnings equal to the difference
between the two amounts.
Impairments of non-agency residential mortgage-backed securities are influenced by a number of factors, including but not
limited to, U.S. economic and housing market performance, security credit enhancement level, insurance coverage, year of
origination, and type of collateral. The factors used in estimating losses on non-agency residential mortgage-backed securities
vary by year of origination and type of collateral.
As of December 31, 2014, loss estimates for prime and 2nd lien collateral portfolios were developed using default roll rates,
determined primarily by the stage of delinquency of the underlying instrument, that generally assumed ultimate default rates
approximating 5% to 30% for current loans; 30% for loans 30 to 60 days delinquent; 80% for loans 60 to 90 days delinquent;
90% for loans delinquent greater than 90 days; and 100% for OREO properties and loans that are in foreclosure.
111 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
December 31, 2014, amortized cost, weighted average ultimate default rates, and impairment severity rates for the non-
agency residential mortgage-backed securities portfolio, by security type, are provided in the following table.
T A B L E 5 1 : N O N - A G E N C Y R E S I D E N T I A L M O R T G A G E - B A C K E D S E C U R I T I E S
($ In Millions)
Prime
2nd Lien
Total Non-Agency Residential Mortgage-Backed Securities
DECEMBER 31, 2014
LOSS SEVERITY RATES
AMORTIZED
COST
$1.9
5.0
$6.9
WEIGHTED AVERAGE
ULTIMATE DEFAULT
RATES
LOW
HIGH
5.0%
32.2
32.1%
99.0
32.1%
99.0
25.3%
32.1%
99.0%
WEIGHTED
AVERAGE
32.1%
99.0
81.1%
Northern Trust’s processes for identifying credit impairment within auction rate securities are largely consistent with the
processes utilized for non-agency residential mortgage-backed securities and include analyses of loss severities and default rates
adjusted for the type of underlying loan and the presence of government guarantees, as applicable. There were $4.2 million of
OTTI losses recognized in 2014, all of which related to CRA eligible mortgage-backed securities. No OTTI losses were
recognized during the year ended December 31, 2013. There were $3.3 million of OTTI losses in 2012, of which $1.7 million
related to non-agency residential mortgage-backed securities and $1.6 million related to auction rate securities.
Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily impaired
including noncredit-related amounts recognized in other comprehensive income and net impairment losses
securities,
recognized in earnings, for the years ended December 31, 2014, 2013, and 2012.
T A B L E 5 2 : N E T I M P A I R M E N T L O S S E S R E C O G N I Z E D I N E A R N I N G S
(In Millions)
Changes in Other-Than-Temporary Impairment Losses(1)
Noncredit-related Losses Recorded in / (Reclassified from) OCI(2)
Net Impairment Losses Recognized in Earnings
DECEMBER 31,
2014
$(4.9)
0.7
$(4.2)
2013
$ –
–
$ –
2012
$(2.7)
(0.6)
$(3.3)
(1) For initial other-than-temporary impairments in the respective period, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For
subsequent impairments of the same security, the balance includes any additional changes in fair value of the security subsequent to its most recently recorded OTTI.
(2) For initial other-than-temporary impairments in the respective period, the balance includes the portion of the excess of amortized cost over the fair value of the impaired securities that
was recorded in OCI. For subsequent impairments of the same security, the balance includes additional changes in OCI for that security subsequent to its most recently recorded OTTI.
Provided in the table below are the cumulative credit-related losses recognized in earnings on debt securities other-than-
temporarily impaired.
T A B L E 5 3 : C U M U L A T I V E C R E D I T - R E L A T E D L O S S E S O N S E C U R I T I E S H E L D
YEAR ENDED DECEMBER 31,
(In Millions)
Cumulative Credit-Related Losses on Securities Held – Beginning of Year
Plus: Losses on Newly Identified Impairments
Additional Losses on Previously Identified Impairments
Less: Current and Prior Period Losses on Securities Sold During the Year
Cumulative Credit-Related Losses on Securities Held – End of Year
2014
$ 8.8
1.8
2.4
(7.8)
$ 5.2
2013
$ 42.3
–
–
(33.5)
$ 8.8
112 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 5 – Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are recorded at the
amounts at which the securities were acquired or sold plus accrued interest. To minimize any 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.
The following tables summarize information related to securities purchased under agreements to resell and securities sold
under agreements to repurchase.
T A B L E 5 4 : S E C U R I T I E S P U R C H A S E D U N D E R A G R E E M E N T S T O R E S E L L
($ In Millions)
Balance at December 31
Average Balance During the Year
Average Interest Rate Earned During the Year
Maximum Month-End Balance During the Year
T A B L E 5 5 : S E C U R I T I E S S O L D U N D E R A G R E E M E N T S T O R E P U R C H A S E
($ In Millions)
Balance at December 31
Average Balance During the Year
Average Interest Rate Paid During the Year
Maximum Month-End Balance During the Year
Note 6 – Loans and Leases
Amounts outstanding for loans and leases, by segment and class, are shown below.
T A B L E 5 6 : L O A N S A N D L E A S E S
(In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total Loans and Leases
Allowance for Credit Losses Assigned to Loans and Leases
Net Loans and Leases
2014
$1,000.0
742.1
0.45%
1,000.0
2014
$ 885.1
989.6
0.04%
1,038.1
2013
$500.0
396.3
0.46%
571.5
2013
$917.3
594.3
0.07%
917.3
DECEMBER 31,
2014
2013
$ 8,381.9
3,333.3
916.3
1,530.6
191.5
$ 7,375.8
2,955.8
975.1
954.7
358.6
14,353.6
12,620.0
9,782.6
7,466.9
37.1
17,286.6
$31,640.2
(267.0)
10,271.3
6,445.6
48.6
16,765.5
$29,385.5
(278.1)
$31,373.2
$29,107.4
Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan to
collateral value of no more than 65% to 80% at inception. Northern Trust’s equity credit line products generally have draw
periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest only with
variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding
balance to an amortizing payment loan. As of December 31, 2014, and 2013, equity credit lines totaled $1.8 billion and $2.0
113 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
billion, respectively, and equity credit lines for which first liens were held by Northern Trust represented 89% and 87%,
respectively, of the total equity credit lines as of those dates.
Included within the non-U.S., commercial-other, and personal-other classes are short duration advances, primarily related
to the processing of custodied client investments, that totaled $1.5 billion and $1.3 billion at December 31, 2014, and 2013,
respectively. Demand deposits reclassified as loan balances totaled $92.1 million and $104.1 million at December 31, 2014, and
2013, respectively. Loans classified as held for sale totaled $2.5 million at December 31, 2014. There were no loans classified as
held for sale at December 31, 2013.
The components of the net investment in direct finance and leveraged leases are as follows:
T A B L E 5 7 : D I R E C T F I N A N C E A N D L E V E R A G E D L E A S E S
(In Millions)
Direct Finance Leases:
Lease Receivable
Residual Value
Initial Direct Costs
Unearned Income
Investment in Direct Finance Leases
Leveraged Leases:
Net Rental Receivable
Residual Value
Unearned Income
Investment in Leveraged Leases
Lease Financing, net
DECEMBER 31,
2014
2013
$ 195.4
208.8
3.6
(39.1)
368.7
413.6
285.6
(151.6)
547.6
$ 189.4
143.1
2.5
(31.1)
303.9
544.4
295.6
(168.8)
671.2
$ 916.3
$ 975.1
The following schedule reflects the future minimum lease payments to be received over the next five years under direct finance
leases:
T A B L E 5 8 : F U T U R E M I N I M U M L E A S E P A Y M E N T S
(In Millions)
2015
2016
2017
2018
2019
FUTURE MINIMUM
LEASE PAYMENTS
$48.4
40.4
37.6
29.8
17.9
Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information
regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the
credit risk of loans and leases at the segment, class, and individual credit exposure levels.
As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification,
approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting, management reporting, and the
calculation of credit loss allowances and economic capital.
Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated
using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary
among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of
credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s
borrower rating models, by loan and lease class.
‰
‰
‰
Commercial and Institutional: leverage, profit margin, liquidity, asset size and capital levels;
Commercial Real Estate: debt service coverage, loan-to-value ratio, leasing status and guarantor support;
Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels;
114 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
(In Millions)
Commercial
Commercial and
Institutional
Commercial Real
Estate
Lease Financing, net
Non-U.S.
Other
notes to consolidated financial statements
‰ Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels;
‰
‰
‰
Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio;
Private Client: cash flow-to-debt and net worth ratios, leverage and liquidity; and
Personal-Other: cash flow-to-debt and net worth ratios.
While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking
of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range
from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted
borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required.
Risk ratings are generally validated at least annually.
Loan and lease segment and class balances at December 31, 2014, and 2013 are provided below, segregated by borrower
ratings into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.
T A B L E 5 9 : B O R R O W E R R A T I N G S
DECEMBER 31, 2014
DECEMBER 31, 2013
1 TO 3
CATEGORY
4 TO 5
CATEGORY
6 TO 9
CATEGORY
(WATCH LIST)
TOTAL
1 TO 3
CATEGORY
4 TO 5
CATEGORY
6 TO 9
CATEGORY
(WATCH LIST)
TOTAL
$ 5,340.9
$ 2,947.3
$ 93.7
$ 8,381.9
$ 4,432.5
$ 2,801.5
$141.8
$ 7,375.8
1,371.7
552.5
636.8
108.1
1,861.8
360.3
892.9
83.4
99.8
3.5
0.9
–
3,333.3
916.3
1,530.6
191.5
1,053.7
685.7
442.8
157.7
1,748.7
285.0
511.9
200.9
Total Commercial
8,010.0
6,145.7
197.9
14,353.6
6,772.4
5,548.0
Personal
Residential Real
Estate
Private Client
Other
3,148.0
5,143.8
21.1
6,207.0
2,311.7
16.0
427.6
11.4
–
9,782.6
7,466.9
37.1
3,204.6
3,957.6
21.2
6,563.6
2,481.2
27.4
Total Personal
8,312.9
8,534.7
439.0
17,286.6
7,183.4
9,072.2
153.4
4.4
–
–
299.6
503.1
6.8
–
509.9
2,955.8
975.1
954.7
358.6
12,620.0
10,271.3
6,445.6
48.6
16,765.5
Total Loans and Leases
$16,322.9
$14,680.4
$636.9
$31,640.2
$13,955.8
$14,620.2
$809.5
$29,385.5
Loans and leases in the “1 to 3” category are expected to exhibit minimal to modest probabilities of default and are
characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and
capital levels. Borrowers assigned these ratings are anticipated to experience very little to moderate financial pressure in adverse
down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a minimal to modest likelihood
of loss.
Loans and leases in the “4 to 5” category are expected to exhibit moderate to acceptable probabilities of default and are
characterized by borrowers with less financial flexibility than those in the “1 to 3” category. Cash flows and capital levels are
generally sufficient to allow for borrowers to meet current requirements, but have reduced cushion in adverse down cycle
scenarios. As a result of these characteristics, borrowers within this category exhibit a moderate likelihood of loss.
Loans and leases in the watch list category have elevated credit risk profiles that are monitored through internal watch lists,
and consist of credits with borrower ratings of “6 to 9”. These credits, which include all nonperforming credits, are expected to
exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default. Borrowers associated
with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital levels range
from acceptable to potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios. As a
result of these characteristics, borrowers in this category exhibit an elevated to probable likelihood of loss.
115 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following tables provide balances and delinquency status of performing and nonperforming loans and leases by segment
and class, as well as the other real estate owned and total nonperforming asset balances, as of December 31, 2014, and 2013.
T A B L E 6 0 : D E L I N Q U E N C Y S T A T U S
(In Millions)
DECEMBER 31, 2014
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
CURRENT
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PERFORMING
NONPERFORMING
TOTAL LOANS
AND LEASES
$ 8,340.5
3,274.3
916.3
1,530.6
191.5
$ 14.5
9.6
–
–
–
$ 4.0
9.8
–
–
–
$ 7.9
2.5
–
–
–
$ 8,366.9
3,296.2
916.3
1,530.6
191.5
$ 15.0
37.1
–
–
–
$ 8,381.9
3,333.3
916.3
1,530.6
191.5
14,253.2
24.1
13.8
10.4
14,301.5
52.1
14,353.6
9,556.3
7,396.0
37.1
49.5
56.0
–
9.9
5.9
–
4.5
7.8
–
9,620.2
7,465.7
37.1
162.4
1.2
–
9,782.6
7,466.9
37.1
16,989.4
105.5
15.8
12.3
17,123.0
163.6
17,286.6
Total Loans and Leases
$31,242.6
$129.6
$29.6
$22.7
$31,424.5
$215.7
$31,640.2
(In Millions)
DECEMBER 31, 2013
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Other Real Estate Owned
Total Nonperforming Assets
$ 16.6
$232.3
CURRENT
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PERFORMING
NONPERFORMING
TOTAL LOANS
AND LEASES
$ 7,332.3
2,881.1
975.1
954.7
358.6
$ 5.0
4.1
–
–
–
$12.1
14.6
–
–
–
$ 3.3
6.8
–
–
–
$ 7,352.7
2,906.6
975.1
954.7
358.6
$ 23.1
49.2
–
–
–
$ 7,375.8
2,955.8
975.1
954.7
358.6
12,501.8
9.1
26.7
10.1
12,547.7
72.3
12,620.0
9,934.4
6,404.2
48.6
16,387.2
129.3
29.1
–
158.4
15.6
7.5
–
23.1
2.9
3.4
–
6.3
10,082.2
6,444.2
48.6
16,575.0
189.1
1.4
–
10,271.3
6,445.6
48.6
190.5
16,765.5
Total Loans and Leases
$28,889.0
$167.5
$49.8
$16.4
$29,122.7
$262.8
$29,385.5
Other Real Estate Owned
Total Nonperforming Assets
$ 11.9
$274.7
116 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following tables provide information related to impaired loans by segment and class.
T A B L E 6 1 : I M P A I R E D L O A N S
(In Millions)
With no related specific allowance
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Residential Real Estate
Private Client
With a related specific allowance
Commercial and Institutional
Commercial Real Estate
Residential Real Estate
Private Client
Total
Commercial
Personal
Total
(In Millions)
With no related specific allowance
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Residential Real Estate
Private Client
With a related specific allowance
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Residential Real Estate
Private Client
Total
Commercial
Personal
Total
AS OF DECEMBER 31, 2014
AS OF DECEMBER 31, 2013
RECORDED
INVESTMENT
$ 9.0
47.0
4.2
160.9
0.2
6.5
12.2
1.4
0.8
78.9
163.3
UNPAID
PRINCIPAL
BALANCE
$ 12.0
52.4
4.2
204.8
0.5
6.6
18.3
1.4
0.8
93.5
207.5
SPECIFIC
ALLOWANCE
RECORDED
INVESTMENT
$ –
–
–
–
–
2.9
2.9
0.4
0.4
5.8
0.8
$ 12.2
46.6
4.4
185.0
0.8
9.6
26.7
8.1
–
99.5
193.9
UNPAID
PRINCIPAL
BALANCE
$ 18.1
57.1
4.4
227.8
0.8
12.1
31.5
8.7
–
123.2
237.3
SPECIFIC
ALLOWANCE
$
–
–
–
–
–
3.6
4.5
2.3
–
8.1
2.3
$242.2
$301.0
$6.6
$293.4
$360.5
$10.4
YEAR ENDED DECEMBER 31, 2014
YEAR ENDED DECEMBER 31, 2013
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
$ 11.3
46.1
4.3
176.7
0.5
9.6
18.8
–
3.3
0.6
90.1
181.1
$271.2
$0.1
1.0
0.2
2.6
–
–
–
–
–
–
1.3
2.6
$3.9
$ 11.7
42.4
4.5
160.2
10.2
12.5
31.0
0.7
5.7
4.0
102.8
180.1
$282.9
$0.2
0.9
0.2
2.5
–
–
–
–
–
–
1.3
2.5
$3.8
Note: Average recorded investments in impaired loans are calculated as the average of the month-end impaired loan balances for the period.
Interest income that would have been recorded on nonperforming loans in accordance with their original terms totaled
approximately $9.1 million in 2014, $10.6 million in 2013, and $11.6 million in 2012.
There were $2.4 million and $3.4 million of aggregate undrawn loan commitments and standby letters of credit at
December 31, 2014, and 2013, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.
117 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Troubled Debt Restructurings (TDRs): Included within impaired loans were $82.7 million and $72.7 million of
nonperforming TDRs and $68.6 million and $89.8 million of performing TDRs as of December 31, 2014, and 2013, respectively.
The following tables provide, by segment and class, the number of loans and leases modified in TDRs during the years ended
December 31, 2014, and 2013, and the recorded investments and unpaid principal balances as of December 31, 2014, and 2013.
T A B L E 6 2 : T R O U B L E D D E B T R E S T R U C T U R I N G S
($ In Millions)
December 31, 2014
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Residential Real Estate
Private Client
Total Personal
Total Loans and Leases
Note: Period end balances reflect all paydowns and charge-offs during the year.
($ In Millions)
December 31, 2013
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Residential Real Estate
Private Client
Total Personal
Total Loans and Leases
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
2
8
10
124
4
128
138
$ 0.7
3.9
4.6
15.0
0.2
15.2
$ 0.8
4.8
5.6
17.9
0.5
18.4
$19.8
$24.0
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
14
12
26
168
9
177
203
$ 3.4
27.7
31.1
49.1
12.9
62.0
UNPAID
PRINCIPAL
BALANCE
$ 4.7
36.2
40.9
60.0
12.9
72.9
$93.1
$113.8
Note: Period end balances reflect all paydowns and charge-offs during the year.
TDR modifications primarily involve interest rate concessions, extensions of term, deferrals of principal, and other
modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-
troubled situations. During the year ended December 31, 2014, the majority of TDR modifications of loans within commercial
and institutional, commercial real estate, and private client classes were primarily extensions of term and other modifications.
During the year ended December 31, 2014 TDR modifications of loans within residential real estate were primarily deferrals of
principal, extension of term and other modifications. During the year ended December 31, 2013, TDR modifications of loans
within commercial and institutional, commercial real estate, lease financing, and private client classes were primarily deferrals
of principal, extensions of term, and other modifications; modifications of residential real estate loans were primarily deferrals
of principal, extensions of term, interest rate concessions and other modifications.
There were no loans or leases modified in troubled debt restructurings during the previous twelve-month periods which
subsequently became nonperforming during the years ended December 31, 2014, or 2013.
All loans and leases modified in troubled debt restructurings are evaluated for impairment. The nature and extent of
impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an
appropriate level of allowance for credit losses.
118 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 7 – Allowance for Credit Losses
The allowance for credit losses, which represents management’s estimate of probable losses related to specific borrower
relationships and inherent in the various loan and lease portfolios, undrawn commitments, and standby letters of credit, is
determined by management through a disciplined credit review process. Northern Trust’s accounting policies related to the
estimation of the allowance for credit losses and the charging off of loans, leases and other extensions of credit deemed
uncollectible are consistent across both loan and lease segments.
In establishing the inherent portion of the allowance for credit losses, Northern Trust’s Loan Loss Reserve Committee
assesses a common set of qualitative factors applicable to both the commercial and personal
loan segments. The risk
characteristics underlying these qualitative factors, and management’s assessments as to the relative importance of a qualitative
factor, can vary between loan segments and between classes within loan segments. Factors evaluated include those related to
external matters, such as economic conditions and changes in collateral value, and those related to internal matters, such as
changes in asset quality metrics and loan review activities. In addition to the factors noted above, risk characteristics such as
portfolio delinquencies, percentage of portfolio on the watch list and on nonperforming status, and average borrower ratings
are assessed in the determination of the inherent allowance.
Loan-to-value levels are considered for collateral-secured loans and leases in both the personal and commercial segments.
Borrower debt service coverage is evaluated in the personal segment, and cash flow coverage is analyzed in the commercial segment.
Similar risk characteristics by type of exposure are analyzed when determining the allowance for undrawn commitments
and standby letters of credit. These qualitative factors, together with historical loss rates, serve as the basis for the allowance for
credit losses.
Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance for credit losses. Subsequent
recoveries, if any, are credited to the allowance. Determinations as to whether an uncollectible loan is charged off or a specific
allowance is established are based on management’s assessment as to the level of certainty regarding the amount of loss.
Changes in the allowance for credit losses by segment were as follows:
T A B L E 6 3 : C H A N G E S I N T H E A L L O W A N C E F O R C R E D I T L O S S E S
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
TOTAL
2014
2013
2012
Balance at Beginning of Year
Charge-Offs
Recoveries
Net (Charge-Offs) Recoveries
Provision for Credit Losses
Balance at End of Year
Allowance for Credit Losses Assigned to:
Loans and Leases
Undrawn Commitments and Standby
$168.0
(12.9)
11.1
$139.9
(23.2)
7.0
$307.9
(36.1)
18.1
(1.8)
3.5
(16.2)
2.5
(18.0)
6.0
$194.2
(16.7)
8.6
(8.1)
(18.1)
$133.4
(42.6)
11.0
$327.6
(59.3)
19.6
(31.6)
38.1
(39.7)
20.0
$211.0
(19.9)
20.3
0.4
(17.2)
$117.9
(43.1)
16.4
$328.9
(63.0)
36.7
(26.7)
42.2
(26.3)
25.0
$169.7
$126.2
$295.9
$168.0
$139.9
$307.9
$194.2
$133.4
$327.6
$143.8
$123.2
$267.0
$140.9
$137.2
$278.1
$166.1
$131.8
$297.9
Letters of Credit
25.9
3.0
28.9
27.1
2.7
29.8
28.1
1.6
29.7
Total Allowance for Credit Losses
$169.7
$126.2
$295.9
$168.0
$139.9
$307.9
$194.2
$133.4
$327.6
119 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following tables provide information regarding the recorded investments in loans and leases and the allowance for credit
losses by segment as of December 31, 2014, and 2013.
T A B L E 6 4 : R E C O R D E D I N V E S T M E N T S I N L O A N S A N D L E A S E S
(In Millions)
DECEMBER 31, 2014
Loans and Leases
Specifically Evaluated for Impairment
Evaluated for Inherent Impairment
Total Loans and Leases
Allowance for Credit Losses on Credit Exposures
Specifically Evaluated for Impairment
Evaluated for Inherent Impairment
Allowance assigned to loans and leases
Allowance for Undrawn Exposures
Commitments and Standby Letters of Credit
Total Allowance for Credit Losses
(In Millions)
DECEMBER 31, 2013
Loans and Leases
Specifically Evaluated for Impairment
Evaluated for Inherent Impairment
Total Loans and Leases
Allowance for Credit Losses on Credit Exposures
Specifically Evaluated for Impairment
Evaluated for Inherent Impairment
Allowance assigned to loans and leases
Allowance for Undrawn Exposures
Commitments and Standby Letters of Credit
Total Allowance for Credit Losses
Note 8 – Concentrations of Credit Risk
COMMERCIAL
PERSONAL
TOTAL
$
78.9
14,274.7
$
163.3
17,123.3
$
242.2
31,398.0
14,353.6
17,286.6
31,640.2
5.8
138.0
143.8
25.9
0.8
122.4
123.2
3.0
6.6
260.4
267.0
28.9
$
169.7
$
126.2
$
295.9
COMMERCIAL
PERSONAL
TOTAL
$
99.5
12,520.5
$
193.9
16,571.6
$
293.4
29,092.1
12,620.0
16,765.5
29,385.5
8.1
132.8
140.9
27.1
2.3
134.9
137.2
2.7
10.4
267.7
278.1
29.8
$
168.0
$
139.9
$
307.9
Concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have
similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions. The fact that a credit exposure falls into one of these groups does not necessarily
indicate that the credit has a higher than normal degree of credit risk. These groups are: banks and bank holding companies,
residential real estate, and commercial real estate.
Banks and Bank Holding Companies. On-balance sheet credit risk to banks and bank holding companies, both U.S. and non-
U.S., consists primarily of interest bearing deposits with banks, federal funds sold, and securities purchased under agreements to
resell, which totaled $16.0 billion and $19.9 billion at December 31, 2014, and 2013, respectively, and noninterest-bearing demand
balances maintained at correspondent banks, which totaled $1.1 billion and $3.0 billion at December 31, 2014, and 2013,
respectively. Credit risk associated with U.S. and non-U.S. banks and bank holding companies deemed to be counterparties by
Credit Risk Management is managed by the Counterparty Risk Management Committee. Credit limits are established through a
review process that includes an internally prepared financial analysis, use of an internal risk rating system and consideration of
external ratings from rating agencies. Northern Trust places deposits with banks that have strong internal and external credit ratings
and the average life to maturity of deposits with banks is maintained on a short-term basis in order to respond quickly to changing
credit conditions.
120 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Residential Real Estate. At December 31, 2014, residential real estate loans totaled $9.8 billion, or 32% of total U.S. loans at
December 31, 2014, compared with $10.3 billion, or 36% of total U.S. loans, at December 31, 2013. Residential real estate loans
consist of traditional first lien mortgages and equity credit lines, which generally require a loan-to-collateral value ratio 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. Of the total
$9.8 billion in residential real estate loans, $3.0 billion were in the greater Chicago area, $2.2 billion were in Florida, and $1.6
billion were in California, with the remainder distributed throughout the other geographic regions within the U.S. served by
Northern Trust. Legally binding undrawn commitments to extend residential real estate credit, which are primarily equity
credit lines, totaled $1.6 billion and $1.7 billion at December 31, 2014, and 2013, respectively.
Commercial Real Estate. The commercial real estate portfolio 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. Commercial mortgage financing is provided for the acquisition or refinancing of income-producing properties.
Cash flows from the properties generally are sufficient to amortize the loan. These loans are primarily located in the Illinois, Florida,
California, Texas and Arizona markets. Construction, acquisition and development loans provide financing for commercial real
estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or refinance the loan through
a commercial mortgage with Northern Trust or another financial institution upon completion.
The table below provides additional detail regarding commercial real estate loan types:
T A B L E 6 5 : C O M M E R C I A L R E A L E S T A T E L O A N S
(In Millions)
Commercial Mortgages
Apartment/ Multi-family
Office
Retail
Industrial/ Warehouse
Other
Total Commercial Mortgages
Construction, Acquisition and Development Loans
Single Family Investment
Other Commercial Real Estate Related
Total Commercial Real Estate Loans
Note 9 – Buildings and Equipment
A summary of buildings and equipment is presented below.
T A B L E 6 6 : B U I L D I N G S A N D E Q U I P M E N T
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Buildings Leased under Capital Leases
Total Buildings and Equipment
DECEMBER 31,
2014
2013
$ 728.7
735.5
854.1
323.7
125.7
2,767.7
256.8
121.3
187.5
$ 616.2
686.0
768.0
318.6
110.6
2,499.4
254.2
110.0
92.2
$3,333.3
$2,955.8
DECEMBER 31, 2014
ORIGINAL
COST
ACCUMULATED
DEPRECIATION
$
26.5
232.8
392.2
327.3
82.5
1,061.3
$ 0.7
117.5
234.7
212.1
52.0
617.0
NET BOOK
VALUE
$ 25.8
115.3
157.5
115.2
30.5
444.3
The charge for depreciation, which includes depreciation of assets recorded under capital leases and is included within
occupancy expense in the consolidated statement of income, amounted to $90.6 million in 2014, $92.3 million in 2013, and
$88.3 million in 2012.
121 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 10 – Lease Commitments
At December 31, 2014, Northern Trust was obligated under a number of non-cancelable operating leases for buildings and
equipment. Certain leases contain rent escalation clauses based on market indices or increases in real estate taxes and other
operating expenses and renewal option clauses calling for increased rentals. There are no restrictions imposed by any lease
agreement regarding the payment of dividends, debt financing or Northern Trust entering into further lease agreements.
Minimum annual lease commitments as of December 31, 2014, for all non-cancelable operating leases with a term of one year
or more are as follows:
T A B L E 6 7 : M I N I M U M L E A S E P A Y M E N T S
(In Millions)
2015
2016
2017
2018
2019
Later Years
Total Minimum Lease Payments
Less: Sublease Rentals
Net Minimum Lease Payments
FUTURE MINIMUM
LEASE PAYMENTS
$ 90.7
86.0
80.2
70.5
61.8
291.4
680.6
(24.0)
$656.6
Operating lease rental expense, net of rental income, is recorded in occupancy expense and amounted to $73.2 million in 2014,
$76.2 million in 2013, and $77.9 million in 2012.
One of the buildings and related land utilized for Chicago operations has been leased under an agreement that qualifies as a
capital lease. The original long-term financing for the property was provided by Northern Trust. In the event of sale or
refinancing, Northern Trust would anticipate receiving full repayment of any outstanding loans plus 42% of any proceeds in
excess of the original project costs. The following table reflects the future minimum lease payments required under capital
leases, net of any payments received on the long-term financing, and the present value of net capital lease obligations at
December 31, 2014.
T A B L E 6 8 : P R E S E N T V A L U E U N D E R C A P I T A L L E A S E O B L I G A T I O N S
(In Millions)
2015
2016
2017
2018
2019
Later Years
Total Minimum Lease Payments, net
Less: Amount Representing Interest
Net Present Value under Capital Lease Obligations
FUTURE MINIMUM
LEASE PAYMENTS, NET
$ 8.3
8.0
8.2
8.4
8.7
(1.7)
39.9
(8.1)
$31.8
122 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 11 – Goodwill and Other Intangibles
Goodwill. Changes by reporting segment in the carrying amount of goodwill for the years ended December 31, 2014, and 2013,
including the effect of foreign exchange rates on non-U.S.-dollar-denominated balances, were as follows:
T A B L E 6 9 : G O O D W I L L
(In Millions)
Balance at December 31, 2012
Foreign Exchange Rates
Balance at December 31, 2013
Foreign Exchange Rates
Balance at December 31, 2014
CORPORATE &
INSTITUTIONAL
SERVICES
$ 466.3
2.9
$ 469.2
(7.4)
$461.8
WEALTH
MANAGEMENT
$ 71.5
–
$ 71.5
(0.1)
$71.4
TOTAL
$ 537.8
2.9
$ 540.7
(7.5)
$533.2
Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other
intangible assets subject to amortization as of December 31, 2014, and 2013 were as follows.
T A B L E 7 0 : O T H E R I N T A N G I B L E A S S E T S
(In Millions)
Gross Carrying Amount
Accumulated Amortization
Net Book Value
DECEMBER 31,
2014
$189.5
129.5
$ 60.0
2013
$198.2
115.2
$ 83.0
Other intangible assets consist primarily of the value of acquired client relationships and are included within other assets in the
consolidated balance sheet. Amortization expense related to other intangible assets was $19.5 million, $21.1 million, and $20.3
million for the years ended December 31, 2014, 2013, and 2012, respectively. Amortization for the years 2015, 2016, 2017, 2018,
and 2019 is estimated to be $11.3 million, $8.8 million, $8.7 million, $8.1 million, and $7.9 million, respectively.
123 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 12 – Senior Notes and Long-Term Debt
Senior Notes. A summary of senior notes outstanding at December 31, 2014 and 2013 is presented below.
T A B L E 7 1 : S E N I O R N O T E S
($ In Millions)
Corporation-Senior Notes(1)(4)
Fixed Rate Due May 2014
Fixed Rate Due Nov. 2020(5)
Fixed Rate Due Aug. 2021(6)
Fixed Rate Due Aug. 2022(7)
Total Senior Notes
RATE
4.63
3.45
3.38
2.38
DECEMBER 31,
2014
2013
$
–
499.6
498.5
498.9
$1,497.0
$ 500.0
499.5
498.3
498.8
$1,996.6
Long-Term Debt. A summary of long-term debt outstanding at December 31, 2014 and 2013 is presented below.
T A B L E 7 2 : L O N G - T E R M D E B T
($ In Millions)
Bank-Subordinated Debt(1)(4)
5.85% Notes due Nov. 2017(2)(11)
6.50% Notes due Aug. 2018(2)(8)(11)
5.375% Sterling Denominated Notes due March 2015(9)
Total Bank-Subordinated Debt
Corporation-Subordinated 3.95% Notes due Oct. 2025(1)(4)(10)(11)
Federal Home Loan Bank Borrowings
One Year or Less (Average Rate at Year End – 4.40% in 2013)
Total Federal Home Loan Bank Borrowings
Capital Lease Obligations(3)
Total Long-Term Debt
Long-Term Debt Qualifying as Risk-Based Capital
DECEMBER 31,
2014
2013
$ 221.6
335.0
233.7
$ 228.9
342.4
248.3
790.3
793.0
–
–
31.8
819.6
717.7
135.0
135.0
36.9
$1,615.1
$1,009.1
$1,709.2
$1,158.7
(1) Not redeemable prior to maturity.
(2) Under the terms of its current Offering Circular dated November 6, 2013, the Bank has the ability to offer from time to time its senior bank notes in an aggregate principal amount of
up to $4.5 billion at any one time outstanding and up to an additional $1.0 billion of subordinated notes. Each senior note will mature from 30 days to fifteen years, and each
subordinated note will mature from five years to fifteen years, following its date of original issuance. Each note will mature on such date as selected by the initial purchaser and agreed to
by the Bank.
(3) Refer to Note 10 – Lease Commitments.
(4) Debt issue costs are recorded as an asset and amortized on a straight-line basis over the life of the Note.
(5) Notes issued at a discount of 0.117%.
(6) Notes issued at a discount of 0.437%
(7) Notes issued at a discount of 0.283%
(8) Notes issued at a discount of 0.02%
(9) Notes issued at a discount of 0.484%
(10) Notes issued at a discount of 0.114%
(11) Interest rate swap contracts were entered into to modify the interest expense on these subordinated notes from fixed rates to floating rates. The swaps are recorded as fair value hedges
and at December 31, 2014, increases in the carrying values of subordinated notes outstanding of $100.6 million were recorded. As of December 31, 2013, net adjustments in the carrying
values of subordinated notes outstanding of $40.1 million were recorded.
Note 13 – Floating Rate Capital Debt
In January 1997, the Corporation issued $150 million of Floating Rate Capital Securities, Series A, through a statutory business
trust wholly owned by the Corporation (NTC Capital I). In April 1997, the Corporation also issued, through a separate wholly-
owned statutory business trust (NTC Capital II), $120 million of Floating Rate Capital Securities, Series B. The sole assets of the
trusts are subordinated debentures of Northern Trust Corporation that have the same interest rates and maturity dates as the
corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. The Series A securities were
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notes to consolidated financial statements
issued at a discount to yield 60.5 basis points above the three-month London Interbank Offered Rate (LIBOR) and are due
January 15, 2027. The Series B securities were issued at a discount to yield 67.9 basis points above the three-month LIBOR and
are due April 15, 2027.
Under the provisions of The Dodd-Frank Wall Street Reform and Consumer Protection Act, the Tier 1 regulatory capital
treatment of these securities is required to be phased out over a three-year period that began on January 1, 2013. In 2014, 50%
of these securities were eligible for Tier 1 capital treatment. In 2015, Tier 1 capital eligibility declines to 25% before being fully
phased out in 2016. As these securities phase out of Tier 1 capital, they are eligible for inclusion in Tier 2 capital, beginning with
50% eligibility in 2014 and 75% eligibility in 2015. Beginning in 2016, 60% of these securities are eligible for Tier 2 capital
treatment, declining at an incremental 10% a year until they are fully phased out in 2022. As of December 31, 2014, 50% of
both Series A and B securities qualified as Tier 1 capital and 50% qualified as Tier 2 capital.
The Corporation has fully, irrevocably and unconditionally guaranteed all payments due on the Series A and B securities.
The holders of the Series A and B securities are entitled to receive preferential cumulative cash distributions quarterly in arrears
(based on the liquidation amount of $1,000 per security) at an interest rate equal to the rate on the corresponding subordinated
debentures. The interest rate on the Series A and Series B securities is equal to three-month LIBOR plus 0.52% and 0.59%,
respectively. Subject to certain exceptions, the Corporation has the right to defer payment of interest on the subordinated
debentures at any time or from time to time for a period not exceeding 20 consecutive quarterly periods provided that no
extension period may extend beyond the stated maturity date. If interest is deferred on the subordinated debentures,
distributions on the Series A and B securities will also be deferred and the Corporation will not be permitted, subject to certain
exceptions, to pay or declare any cash distributions with respect to the Corporation’s capital stock or debt securities that rank
the same as or junior to the subordinated debentures, until all past due distributions are paid. The subordinated debentures are
unsecured and subordinated to substantially all of the Corporation’s existing indebtedness.
The Corporation has the right to redeem the Series A and Series B subordinated debentures, in whole or in part, at a price
equal to the principal amount plus accrued and unpaid interest. The following table summarizes the book values of the
outstanding subordinated debentures as of December 31, 2014 and 2013:
T A B L E 7 3 : S U B O R D I N A T E D D E B E N T U R E S
(In Millions)
NTC Capital I Subordinated Debentures due January 15, 2027
NTC Capital II Subordinated Debentures due April 15, 2027
Total Subordinated Debentures
Note 14 – Stockholders’ Equity
DECEMBER 31,
2014
$154.0
123.2
$277.2
2013
$154.0
123.1
$277.1
Preferred Stock. The Corporation is authorized to issue 10 million shares of preferred stock without par value. The Board
is authorized to fix the particular preferences, rights, qualifications and restrictions for each series of preferred stock issued. On
August 5, 2014, the Corporation issued 16 million depositary shares, each representing 1/1000 ownership interest in a share of
Series C Non-Cumulative Perpetual Preferred Stock (Series C Preferred Stock), without par value, with a liquidation preference
of $25,000 ($25 per depositary share). The aggregate proceeds from the public offering of the depositary shares, net of
underwriting discounts, commissions and offering expenses, were $388.5 million.
Dividends on the Series C Preferred Stock, which are not mandatory, will accrue and be payable on the liquidation
preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January, April, July and October of each
year, commencing on January 1, 2015, at a rate per annum equal to 5.85%. On October 21, 2014, the Corporation declared a
cash dividend of $593.125 per share of Series C Preferred Stock payable on January 1, 2015 to stockholders of record on
December 15, 2014.
The Series C Preferred Stock has no maturity date. Shares of the Series C Preferred Stock rank senior to the Corporation’s
common stock, and will rank at least equally with any other series of preferred stock it may issue (except for any senior series
125 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
that may be issued with the requisite consent of the holders of the Series C Preferred Stock) and all other parity stock, with
respect to the payment of dividends and distributions upon liquidation, dissolution or winding up.
The Series C Preferred Stock is redeemable at the Corporation’s option, in whole or in part, on any dividend payment date
on or after October 1, 2019. The Series C Preferred stock is redeemable at the Corporation’s option, in whole, but not in part,
prior to October 1, 2019 within 90 days of a regulatory capital treatment event, as described in the Series C Preferred Stock
Certificate of Designation.
Common Stock. The Corporation’s current common stock repurchase authorization was approved by the Board in April
of 2014. The stock repurchase authorization remaining as of December 31, 2014, was 7.1 million shares. The repurchased
shares would be used for general purposes of the Corporation, including management of the Corporation’s capital level and the
issuance of shares under stock option and other incentive plans of the Corporation.
Under the Corporation’s capital plan submitted in January 2014, which was reviewed without objection by the Federal
Reserve in March 2014, the Corporation may repurchase up to $107.3 million of common stock after December 31, 2014,
through March 2015. In January 2015, the Corporation submitted its most recent capital plan to the Federal Reserve Board.
The average price paid per share for common stock repurchased in 2014, 2013, and 2012 was $64.20, $55.90, and
$46.32, respectively.
An analysis of changes in the number of shares of common stock outstanding follows:
T A B L E 7 4 : S H A R E S O F C O M M O N S T O C K
Balance at January 1
Incentive Plan and Awards
Stock Options Exercised
Treasury Stock Purchased
Balance at December 31
2014
2013
2012
237,322,035
1,040,015
2,515,769
(7,487,114)
238,914,988
863,958
3,088,490
(5,545,401)
241,008,509
449,463
973,270
(3,516,254)
233,390,705
237,322,035
238,914,988
Note 15 – Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of AOCI at December 31, 2014, 2013, and 2012, and changes during the years
then ended.
T A B L E 7 5 : S U M M A R Y O F C H A N G E S I N A C C U M U L A T E D O T H E R C O M P R E H E N S I V E I N C O M E ( L O S S )
(In Millions)
BALANCE AT
DECEMBER 31,
2014
NET
CHANGE
BALANCE AT
DECEMBER 31,
2013
NET
CHANGE
BALANCE AT
DECEMBER 31,
2012
NET
CHANGE
BALANCE AT
DECEMBER 31,
2011
Net Unrealized Gains (Losses) on Securities Available for Sale
Net Unrealized (Losses) Gains on Cash Flow Hedges
Net Foreign Currency Adjustments
Net Pension and Other Postretirement Benefit Adjustments
$ 27.6 $ 21.6
(7.6)
(8.8)
(80.6)
(4.7)
(1.7)
(340.9)
$
6.0
2.9
7.1
(260.3)
$ (95.0)
4.3
(3.4)
132.8
$ 101.0
(1.4)
10.5
(393.1)
$ 61.2
5.6
20.0
(24.2)
$ 39.8
(7.0)
(9.5)
(368.9)
Total
$(319.7) $(75.4)
$(244.3) $ 38.7
$(283.0)
$ 62.6
$(345.6)
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notes to consolidated financial statements
T A B L E 7 6 : D E T A I L S O F C H A N G E S I N A C C U M U L A T E D O T H E R C O M P R E H E N S I V E I N C O M E ( L O S S )
(In Millions)
Unrealized Gains (Losses) on Securities Available for Sale
Noncredit-Related Unrealized Losses on
FOR THE YEAR ENDED DECEMBER 31,
2014
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
2013
TAX
EFFECT
2012
AFTER
TAX
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
Securities OTTI
$
4.5
$ (1.7) $ 2.8
$
3.0
$ (1.1) $ 1.9
$ 15.7
$ (5.9)
$ 9.8
Other Unrealized Gains (Losses) on Securities
Available for Sale
Reclassification Adjustment for (Gains) Losses
Included in Net Income
Net Change
Unrealized Gains (Losses) on Cash Flow Hedges
Unrealized Gains (Losses) on Cash Flow Hedges
Reclassification Adjustment for (Gains) Losses
Included in Net Income
Net Change
Foreign Currency Adjustments
Foreign Currency Translation Adjustments
Long-Term Intra-Entity Foreign Currency
Transaction Losses
Net Investment Hedge Gains (Losses)
Net Change
Pension and Other Postretirement Benefit Adjustments
Net Actuarial Gains (Losses)
Reclassification Adjustment for Losses Included
in Net Income
Net Change
30.1
(11.4)
18.7
(156.8)
59.0
(97.8)
96.2
(36.1)
60.1
0.1
–
0.1
1.6
(0.7)
0.9
(13.9)
5.2
(8.7)
$ 34.7
$(13.1) $ 21.6
$(152.2) $ 57.2
$ (95.0)
$ 98.0
$(36.8)
$ 61.2
$ (8.7) $ 3.6
$ (5.1) $
2.1
$ (0.7) $ 1.4
$ 3.2
$ (0.6)
$ 2.6
(4.0)
1.5
(2.5)
4.7
(1.8)
2.9
4.8
(1.8)
3.0
$ (12.7) $ 5.1
$ (7.6) $
6.8
$ (2.5) $ 4.3
$ 8.0
$ (2.4)
$ 5.6
$(107.8) $ 10.8
$(97.0) $ 91.9
$(29.7) $ 62.2
$ 37.9
$ 3.1
$ 41.0
(1.0)
142.6
0.4
(53.8)
(0.6)
88.8
–
(107.3)
–
41.7
–
(65.6)
–
(33.7)
–
12.7
–
(21.0)
$ 33.8
$(42.6) $ (8.8) $ (15.4) $ 12.0
$ (3.4)
$ 4.2
$ 15.8
$ 20.0
$(137.8) $ 41.5
$(96.3) $ 157.7
$(54.9) $102.8
$(62.8) $ 15.8
$(47.0)
25.2
(9.5)
15.7
46.1
(16.1)
30.0
33.9
(11.1)
22.8
$(112.6) $ 32.0
$(80.6) $ 203.8
$(71.0) $132.8
$(28.9) $ 4.7
$(24.2)
The following table provides the location and before-tax amounts of reclassifications out of AOCI during the years ended
December 31, 2014, 2013 and 2012.
T A B L E 7 7 : R E C L A S S I F I C A T I O N A D J U S T M E N T O U T O F A C C U M U L A T E D O T H E R C O M P R E H E N S I V E I N C O M E
(In Millions)
Securities Available for Sale
Realized (Gains) Losses on Securities Available for Sale
Realized (Gains) Losses on Cash Flow Hedges
Foreign Exchange Contracts
Pension and Other Postretirement Benefit Adjustments
Amortization of Net Actuarial (Gains) Losses
Amortization of Prior Service Cost
Gross Reclassification Adjustment
LOCATION OF
RECLASSIFICATION ADJUSTMENTS
RECOGNIZED IN INCOME
AMOUNT OF RECLASSIFICATION
ADJUSTMENTS RECOGNIZED
IN INCOME
YEAR ENDED DECEMBER 31,
2014
2013
2012
Investment Security Gains (Losses), net
$ 0.1
$ 1.6
$(13.9)
Other Operating Income/ Expense
(4.0)
4.7
4.8
Employee Benefits
Employee Benefits
25.1
0.1
49.0
(2.9)
38.8
(4.9)
$25.2
$46.1
$ 33.9
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notes to consolidated financial statements
Note 16 – Net Income per Common Share
The computations of net income per common share are presented below.
T A B L E 7 8 : N E T I N C O M E P E R C O M M O N S H A R E
FOR THE YEAR ENDED DECEMBER 31,
($ In Millions Except Per Common Share Information)
BASIC NET INCOME PER COMMON SHARE
Average Number of Common Shares Outstanding
Net Income
Less: Dividends on Preferred Stock
Net Income Applicable to Common Stock
Less: Earnings Allocated to Participating Securities
Earnings Allocated to Common Shares Outstanding
Basic Net Income Per Common Share
DILUTED NET INCOME PER COMMON SHARE
Average Number of Common Shares Outstanding
Plus Dilutive Effect of Share-based Compensation
Average Common and Potential Common Shares
Earnings Allocated to Common and Potential Common Shares
Diluted Net Income Per Common Share
2014
2013
2012
$
235,829,790
811.8
9.5
$
239,265,313
731.3
–
$
240,417,805
687.3
–
$
802.3
13.3
789.0
3.34
$
731.3
11.9
719.4
3.01
$
687.3
10.0
677.3
2.82
235,829,790
1,890,465
239,265,313
1,289,527
240,417,805
463,439
237,720,255
240,554,840
240,881,244
$
789.0
3.32
$
719.5
2.99
$
677.3
2.81
Note: Common stock equivalents totaling 1,517,588, 3,498,894, and 12,158,601 for the years ended December 31, 2014, 2013, and 2012, respectively, were not included in the
computation of diluted net income per common share because their inclusion would have been antidilutive.
Note 17 – Net Interest Income
The components of net interest income were as follows:
T A B L E 7 9 : N E T I N T E R E S T I N C O M E
(In Millions)
Interest Income
Loans and Leases
Securities – Taxable
– Non-Taxable
Interest-Bearing Due from and Deposits with Banks (Note)
Federal Reserve Deposits and Other
Total Interest Income
Interest Expense
Deposits
Federal Funds Purchased
Securities Sold under Agreements to Repurchase
Other Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Total Interest Expense
Net Interest Income
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$ 735.9
274.9
7.2
127.6
41.3
$ 743.1
237.2
11.6
142.1
21.5
$ 828.6
250.6
17.7
176.4
14.4
$1,186.9
$1,155.5
$1,287.7
$
81.7
1.3
0.4
3.4
54.7
37.7
2.2
$ 103.3
1.5
0.4
3.3
74.4
37.1
2.4
$ 156.7
1.2
0.4
4.0
72.0
60.3
2.8
$ 181.4
$ 222.4
$ 297.4
$1,005.5
$ 933.1
$ 990.3
(Note): 2014 interest income was earned on cash and due from banks of $1.7 billion and interest-bearing deposits with banks of $14.9 billion as of December 31, 2014.
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notes to consolidated financial statements
Note 18 – Other Operating Income
The components of other operating income were as follows:
T A B L E 8 0 : O T H E R O P E R A T I N G I N C O M E
(In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
Note 19 – Other Operating Expense
The components of other operating expense were as follows:
FOR THE YEAR ENDED DECEMBER 31,
2014
$ 62.7
49.6
41.2
$153.5
2013
$ 61.9
50.9
53.7
$166.5
2012
$ 64.5
55.0
35.4
$154.9
T A B L E 8 1 : O T H E R O P E R A T I N G E X P E N S E
FOR THE YEAR ENDED DECEMBER 31,
(In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Legal Settlement Charge
Other Expenses
Total Other Operating Expense
Note 20 – Income Taxes
2014
$ 88.0
22.0
39.1
19.5
–
103.5
$272.1
2013
$ 91.6
23.5
39.1
21.1
19.2
119.7
$314.2
2012
$ 87.8
25.4
41.9
20.3
–
107.5
$282.9
The following table reconciles the total provision for income taxes recorded in the consolidated statement of income with the
amounts computed at the statutory federal tax rate of 35%.
T A B L E 8 2 : I N C O M E T A X E S
(In Millions)
Tax at Statutory Rate
Tax Exempt Income
Leveraged Lease Adjustments
Foreign Tax Rate Differential
State Taxes, net
Other
Provision for Income Taxes
FOR THE YEAR ENDED DECEMBER 31,
2014
$416.6
(4.9)
(3.4)
(44.1)
29.6
(15.4)
$378.4
2013
$376.4
(6.2)
(2.3)
(27.6)
26.3
(22.4)
$344.2
2012
$347.3
(8.0)
(12.0)
(27.1)
20.4
(15.6)
$305.0
The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no
longer subject to income tax examinations by U.S. federal tax authorities for years before 2009, or non-U.S. tax authorities for
years before 2006. The Corporation is no longer subject to income tax examinations by state or local tax authorities for years
before 2008.
129 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Included in other liabilities within the consolidated balance sheet at December 31, 2014, and 2013 were $11.9 million and
$15.6 million of unrecognized tax benefits, respectively. If recognized, 2014 and 2013 net income would have increased by $8.8
million and $12.6 million, respectively, resulting in a decrease of those years’ effective income tax rates. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows:
T A B L E 8 3 : U N R E C O G N I Z E D T A X B E N E F I T S
(In Millions)
Balance at January 1
Additions for Tax Positions Taken in Prior Years
Reductions for Tax Positions Taken in Prior Years
Reductions Resulting from Expiration of Statutes
Balance at December 31
2014
$15.6
3.0
(5.5)
(1.2)
$11.9
2013
$19.4
2.4
(4.4)
(1.8)
$15.6
Unrecognized tax benefits had net decreases of $3.7 million, resulting in a remaining balance of $11.9 million at December 31,
2014, compared to net decreases of $3.8 million resulting in a remaining balance of $15.6 million at December 31, 2013. It is
possible that changes in the amount of unrecognized tax benefits could occur in the next 12 months due to changes in
judgment related to recognition or measurement, settlements with taxing authorities, or expiration of statute of limitations.
Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or
liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.
The provision for income tax in 2012 included a $12.4 million tax benefit in connection with the resolution of certain
leveraged lease related matters.
A provision for interest and penalties of $0.2 million, net of tax, was included in the provision for income taxes for the year
ended December 31, 2014. This compares to a benefit for recoveries of interest and penalties of $1.7 million, net of tax, for the
year ended December 31, 2013. As of December 31, 2014, and 2013, the liability for the potential payment of interest and
penalties totaled $10.2 million and $11.0 million, net of tax, respectively.
Pre-tax earnings of non-U.S. subsidiaries are subject to U.S. taxation when effectively repatriated. Northern Trust provides
income taxes on the undistributed earnings of non-U.S. subsidiaries, except to the extent that those earnings are indefinitely
reinvested outside the U.S. Northern Trust elected to indefinitely reinvest $177.4 million, $141.0 million, and $137.4 million of
2014, 2013, and 2012 earnings, respectively, of certain non-U.S. subsidiaries and, therefore, no U.S. deferred income taxes were
recorded on those earnings. As of December 31, 2014, the cumulative amount of undistributed pre-tax earnings in these
subsidiaries was approximately $1.1 billion. Based on the current U.S. federal income tax rate, an additional deferred tax
liability of approximately $255.0 million would have been required as of December 31, 2014, if Northern Trust had not elected
to indefinitely reinvest those earnings.
The components of the consolidated provision for income taxes for each of the three years ended December 31 are
as follows:
T A B L E 8 4 : P R O V I S I O N F O R I N C O M E T A X E S
(In Millions)
Current Tax Provision:
Federal
State
Non-U.S.
Total
Deferred Tax Provision:
Federal
State
Non-U.S.
Total
Provision for Income Taxes
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$291.5
47.2
76.1
414.8
(31.1)
(1.6)
(3.7)
(36.4)
$185.6
24.6
67.4
277.6
53.9
14.1
(1.4)
66.6
$140.5
21.4
63.4
$225.3
$ 66.0
10.6
3.1
79.7
$378.4
$344.2
$305.0
130 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
In addition to the amounts shown above, tax charges (benefits) have been recorded directly to stockholders’ equity for the
following items:
T A B L E 8 5 : T A X C H A R G E S ( B E N E F I T S ) R E C O R D E D D I R E C T L Y T O S T O C K H O L D E R S ’ E Q U I T Y
FOR THE YEAR ENDED DECEMBER 31,
(In Millions)
Current Tax Benefit for Employee Stock Options and Other Stock-Based Plans
Tax Effect of Other Comprehensive Income
2014
$ 8.8
18.6
2013
$3.0
4.3
2012
$ 2.3
18.7
Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and
the tax bases of assets and liabilities. Deferred tax liabilities and assets have been computed as follows:
T A B L E 8 6 : D E F E R R E D T A X L I A B I L I T I E S
(In Millions)
Deferred Tax Liabilities:
Lease Financing
Software Development
Accumulated Depreciation
Compensation and Benefits
State Taxes, net
Other Liabilities
Gross Deferred Tax Liabilities
Deferred Tax Assets:
Allowance for Credit Losses
Other Assets
Gross Deferred Tax Assets
Valuation Reserve
Deferred Tax Assets, net of Valuation Reserve
Net Deferred Tax Liabilities
DECEMBER 31,
2014
2013
2012
$ 388.6
316.1
24.1
63.5
62.3
157.5
1,012.1
103.5
126.7
230.2
(3.9)
226.3
$392.0
299.0
22.0
112.2
63.3
104.0
992.5
107.8
85.0
192.8
(3.9)
188.9
$409.1
277.8
19.7
29.7
54.7
170.9
961.9
114.7
118.4
233.1
(3.9)
229.2
$ 785.8
$803.6
$732.7
Northern Trust had various state net operating loss carryforwards as of December 31, 2014, 2013, and 2012. The income tax
benefits associated with these loss carryforwards were approximately $3.9 million. A valuation allowance of $3.9 million was
recorded at December 31, 2014, 2013, and 2012, as management believes the net operating losses will not be fully realized. No
valuation allowance related to the remaining deferred tax assets was recorded at December 31, 2014, 2013, or 2012, as
management believes it is more likely than not that the deferred tax assets will be fully realized.
Note 21 – Employee Benefits
including defined benefit pension,
The Corporation and certain of its subsidiaries provide various benefit programs,
postretirement health care, and defined contribution plans. A description of each major plan and related disclosures are
provided below.
Pension. A noncontributory qualified defined benefit pension plan covers substantially all U.S. employees of Northern
Trust. Employees of various European subsidiaries retain benefits in local defined benefit plans, although those plans are closed
to new participants and to future benefit accruals.
Northern Trust also maintains a noncontributory supplemental pension plan for participants whose retirement benefit
payments under the U.S. plan are expected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified
trust, referred to as a “Rabbi” Trust, used to hold assets designated for the funding of benefits in excess of those permitted in
certain of its qualified retirement plans. This arrangement offers participants a degree of assurance for payment of benefits in
excess of those permitted in the related qualified plans. As the “Rabbi” Trust assets remain subject to the claims of creditors and
are not the property of the employees, they are accounted for as corporate assets and are included in other assets in the
consolidated balance sheet. Total assets in the “Rabbi” Trust related to the nonqualified pension plan at December 31, 2014,
131 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
and 2013 amounted to $93.2 million and $85.1 million, respectively. Contributions of $13.9 million and $16.4 million were
made to the “Rabbi” Trust in 2014 and 2013, respectively.
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. plan,
non-U.S. plans, and supplemental plan for 2014, 2013, and 2012. Prior service costs are being amortized on a straight-line basis
over 11 years for the U.S. plan and 9 years for the supplemental plan.
T A B L E 8 7 : E M P L O Y E E B E N E F I T P L A N S T A T U S
($ In Millions)
2014
2013
2014
2013
2014
2013
Accumulated Benefit Obligation
$ 974.8
$ 827.9
$184.6
$164.7
$ 109.2
$ 89.8
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
Projected Benefit Obligation
Plan Assets at Fair Value
Funded Status at December 31
Weighted-Average Assumptions:
Discount Rates
Rate of Increase in Compensation Level
Expected Long-Term Rate of Return
on Assets
1,091.5
1,440.8
919.7
1,342.1
184.6
157.6
164.7
148.5
123.0
–
101.5
–
$ 349.3
$ 422.4
$ (27.0)
$ (16.2)
$(123.0)
$(101.5)
4.25%
4.25
5.00%
4.25
3.20%
N/A
4.31%
N/A
4.25%
4.25
5.00%
4.25
7.25
7.75
4.00
4.84
N/A
N/A
T A B L E 8 8 : A M O U N T S I N C L U D E D I N A C C U M U L A T E D O T H E R C O M P R E H E N S I V E I N C O M E
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
(In Millions)
Net Actuarial Loss
Prior Service Cost
Gross Amount in Accumulated Other Comprehensive Income
Income Tax Effect
2014
$382.9
(3.1)
379.8
143.3
2013
$310.7
(3.5)
307.2
119.5
2014
$60.5
–
60.5
6.3
Net Amount in Accumulated Other Comprehensive Income
$236.5
$187.7
$54.2
2013
$40.9
–
40.9
4.8
$36.1
2014
$81.5
1.1
82.6
30.9
$51.7
2013
$64.2
1.6
65.8
25.6
$40.2
T A B L E 8 9 : N E T P E R I O D I C P E N S I O N E X P E N S E
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
($ In Millions)
2014
2013
2012
2014
2013
2012
2014
2013
2012
Service Cost
Interest Cost
Expected Return on Plan Assets
Amortization:
Net Loss (Gain)
Prior Service Cost
$ 32.7
44.4
(97.7)
$ 30.3
42.1
(93.3)
$ 35.3
41.4
(87.0)
$
–
6.9
(7.0)
$
–
6.6
(6.2)
$
–
6.2
(6.8)
$ 3.1
4.8
N/A
21.5
0.4
42.5
(0.4)
34.3
(0.4)
(1.6)
–
1.0
–
0.7
–
5.8
0.5
$ 1.6
4.4
N/A
6.7
0.5
$ 3.0
4.5
N/A
6.1
0.6
Net Periodic Pension Expense (Benefit)
$ 0.5
$ 21.2
$ 23.6
$ (1.7)
$ 1.4
$ 0.1
$14.2
$13.2
$14.2
Weighted-Average Assumptions:
Discount Rates
Rate of Increase in Compensation Level
Expected Long-Term Rate of Return
5.00%
4.25
4.25%
4.02
4.75%
4.02
4.31%
N/A
4.42%
N/A
5.02%
N/A
5.00%
4.25
4.25%
4.02
4.75%
4.02
on Assets
7.75
7.75
8.00
4.84
4.76
5.28
N/A
N/A
N/A
132 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Pension expense for 2015 is expected to include approximately $38.6 million and $(0.2) million related to the amortization of
net loss and prior service cost balances, respectively, from AOCI.
T A B L E 9 0 : C H A N G E I N P R O J E C T E D B E N E F I T O B L I G A T I O N
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
(In Millions)
2014
2013
2014
Beginning Balance
Service Cost
Interest Cost
Actuarial (Gain) Loss
Benefits Paid
Foreign Exchange Rate Changes
$ 919.7
32.7
44.4
153.1
(58.4)
–
$1,030.4
30.3
42.1
(125.4)
(57.7)
–
$164.7
–
6.9
33.2
(6.6)
(13.6)
Ending Balance
$1,091.5
$ 919.7
$184.6
2013
$158.1
–
6.6
0.4
(5.0)
4.6
$164.7
2014
$101.5
3.1
4.8
23.1
(9.5)
–
$123.0
2013
$106.4
1.6
4.4
(0.5)
(10.4)
–
$101.5
Effective December 31, 2014, Northern Trust adopted the RP-2014 mortality table with improvement scale MP-2014 released
by the Society of Actuaries in October 2014. The updated mortality table and improvement scale reflect greater projected
improvements in life expectancy and resulted in increases of $25.7 million and $0.7 million, respectively, in the projected
benefit obligations for the U.S. qualified and supplemental pension plans as of December 31, 2014.
T A B L E 9 1 : E S T I M A T E D F U T U R E B E N E F I T P A Y M E N T S
(In Millions)
2015
2016
2017
2018
2019
2020-2024
T A B L E 9 2 : C H A N G E I N P L A N A S S E T S
(In Millions)
Fair Value of Assets at Beginning of Period
Actual Return on Assets
Employer Contributions
Benefits Paid
Foreign Exchange Rate Changes
Fair Value of Assets at End of Period
U.S.
PLAN
$ 69.4
68.4
70.2
70.7
71.2
345.2
NON-U.S.
PLANS
SUPPLEMENTAL
PLAN
$ 2.5
3.1
2.6
3.0
3.3
22.4
$ 9.5
10.6
12.7
12.4
12.3
60.2
U.S. PLAN
NON-U.S. PLANS
2014
2013
2014
$1,342.1
157.1
–
(58.4)
–
$1,277.7
122.1
–
(57.7)
–
$148.5
22.2
4.8
(6.6)
(11.3)
$1,440.8
$1,342.1
$157.6
2013
$133.9
11.5
4.3
(5.0)
3.8
$148.5
The minimum required and maximum deductible contributions for the U.S. qualified plan in 2015 are estimated to be zero and
$150.0 million, respectively.
A total return investment strategy approach is employed for Northern Trust’s U.S. pension plan whereby a mix of U.S. and
non-U.S. equities, fixed income and alternative asset investments are used to maximize the long-term return of plan assets for a
prudent level of risk. This is accomplished by diversifying the portfolio across various asset classes, with the goal of reducing
volatility of return, and among various issuers of securities to reduce principal risk. Northern Trust utilizes an asset/liability
methodology to determine the investment policies that will best meet its short and long-term objectives. The process is
performed by modeling current and alternative strategies for asset allocation, funding policy and actuarial methods and
assumptions. The financial modeling uses projections of expected capital market returns and expected volatility of those returns
to determine alternative asset mixes having the greatest probability of meeting the plan’s investment objectives. Risk tolerance is
established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The intent of
this strategy is to minimize plan expenses by outperforming growth in plan liabilities over the long run.
133 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The target allocation of plan assets since May 2014, by major asset category, is 20% U.S. equities, 15% non-U.S. equities,
45% long duration fixed income securities, and 20% alternative investments, split among private equity funds (5%), hedge
funds (5%), real estate (5%) and global listed infrastructure (5%). Equity investments include common stocks that are listed on
an exchange and investments in comingled funds that invest primarily in publicly traded equities. Equity investments are
diversified across U.S. and non-U.S. stocks and divided by investment style and market capitalization. Fixed income securities
held include U.S. treasury securities and investments in commingled funds that invest in a diversified blend of longer duration
fixed income securities. Alternative investments, including private equity, hedge funds, real estate, and global infrastructure, are
used judiciously to enhance long-term returns while improving portfolio diversification. Private equity assets consist primarily
of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt
positions. Direct or co-investment in non-public stock by the plan is prohibited. The plan’s private equity investments are
limited to 20% of the total limited partnership and the maximum allowable loss cannot exceed the commitment amount. The
plan holds two investments in a hedge fund of funds, which invests, either directly or indirectly, in a diversified portfolio of
funds or other pooled investment vehicles.
Investment in real estate is designed to provide stable income returns and added diversification based upon the historical
low correlation between real estate and equity or fixed income investments. The plan’s real estate assets consist of one collective
index fund that invests in a diversified portfolio of global real estate investments, primarily equity securities.
Though not a primary strategy for meeting the plan’s objectives, derivatives may be used from time to time, depending on
the nature of the asset class to which they relate, to gain market exposure in an efficient and timely manner, to hedge foreign
currency exposure or interest rate risk, or to alter the duration of a portfolio. There were no derivatives held by the plan at
December 31, 2014 or 2013.
Investment risk is measured and monitored on an ongoing basis through quarterly liability measurements, periodic asset/
liability studies, and quarterly investment portfolio reviews. Standards used to evaluate the plan’s investment manager
performance include, but are not limited to, the achievement of objectives, operation within guidelines and policy, and
comparison against a relative benchmark. In addition, each manager of the investment funds held by the plan is ranked against
a universe of peers and compared to a relative benchmark. Total plan performance analysis includes an analysis of the market
environment, asset allocation impact on performance, risk and return relative to other ERISA plans, and manager impacts
upon plan performance.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used
by Northern Trust for the U.S. qualified plan assets measured at fair value.
Level 1 – Quoted, active market prices for identical assets or liabilities. The U.S. pension plan’s Level 1 investments include
foreign and domestic common stocks, a commodity return strategy fund, and mutual funds. The U.S. pension plan’s Level 1
investments are exchange traded and are valued at the closing price reported by the respective exchanges on the day of
valuation. Share prices of the funds, referred to as a fund’s Net Asset Value (NAV), are calculated daily based on the closing
market prices and accruals of securities in the fund’s total portfolio (total value of the fund) divided by the number of fund
shares currently issued and outstanding. Redemptions of the mutual and collective trust fund shares occur by contract at the
respective fund’s redemption date NAV.
Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted
prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in
active markets. The U.S. pension plan’s Level 2 assets include foreign preferred stocks, U.S. government securities, and collective
trust funds. U.S. government securities are valued by a third party pricing source that incorporates market observable data such
as reported sales of similar securities, broker quotes and reference data. The inputs used are based on observable data in active
markets. The NAVs of the funds are calculated monthly based on the closing market prices and accruals of securities in the
fund’s total portfolio (total value of the fund) divided by the number of fund shares currently issued and outstanding.
Redemptions of the mutual and collective trust fund shares occur by contract at the respective fund’s redemption date NAV.
Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The U.S. pension
plan’s Level 3 assets are private equity and hedge funds which invest in underlying groups of investment funds or other pooled
investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying
investments held by these investment funds are valued at fair value. In determining the fair value of the underlying investments
134 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
of each fund, the fund’s investment manager or general partner takes into account the estimated value reported by the
underlying funds as well as any other considerations that may, in their judgment, increase or decrease such estimated value.
While Northern Trust believes its valuation methods for plan assets are appropriate and consistent with other market
participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets, could have a material
effect on the computation of their estimated fair values.
The following table presents the fair values of Northern Trust’s U.S. pension plan assets, by major asset category, and their
level within the fair value hierarchy defined by GAAP as of December 31, 2014, and 2013.
T A B L E 9 3 : F A I R V A L U E O F U . S . P E N S I O N P L A N A S S E T S
(In Millions)
Common Stock
U.S.
Fixed Income – U.S. Government
Other Investments
Mutual Funds:
Global Large Cap Blend
Collective Trust Funds:
Foreign Large Cap Blend
Foreign Small Cap Blend
Domestic Large Cap Blend
Domestic Small Cap Value
Domestic Mid Cap Value
Domestic Small Cap Growth
Domestic Mid Cap Growth
Short-Term Investment
Global Real Estate Blend
Domestic Long-Term Bond
Emerging Market Large Cap Blend
Private Equity Funds
Hedge Funds
Cash and Other
Total Assets at Fair Value
DECEMBER 31, 2014
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$14.8
–
$
–
159.5
$
69.6
–
–
–
–
–
–
–
–
–
–
–
–
–
9.3
–
105.4
37.2
196.7
26.5
14.4
21.2
15.2
3.4
73.8
508.0
68.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
49.0
68.6
–
$
14.8
159.5
69.6
105.4
37.2
196.7
26.5
14.4
21.2
15.2
3.4
73.8
508.0
68.2
49.0
68.6
9.3
$93.7
$1,229.5
$117.6
$1,440.8
135 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
(In Millions)
Preferred and Common Stock
U.S.
Non-U.S.
Fixed Income – U.S. Government
Other Investments
Mutual Funds:
Domestic Large Cap Growth
Foreign Large Cap Blend
Collective Trust Funds:
Foreign Large Cap Blend
Foreign Small Cap Blend
Domestic Large Cap Blend
Domestic Small Cap Value
Domestic Mid Cap Value
Domestic Small Cap Growth
Domestic Mid Cap Growth
Short-Term Investment
Global Real Estate Blend
Domestic Long-Term Bond
Emerging Market Large Cap Blend
Commodity Linked Fund
Ishares Index Fund
Private Equity Funds
Hedge Funds
Cash and Other
Total Assets at Fair Value
DECEMBER 31, 2013
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$116.0
52.9
–
$
–
3.9
131.7
$
69.4
66.6
–
–
–
–
–
–
–
–
–
–
–
39.7
2.4
–
–
5.5
–
–
74.3
31.6
101.0
26.3
19.1
14.3
38.0
6.6
65.4
333.7
40.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
47.7
55.1
–
$ 116.0
56.8
131.7
69.4
66.6
74.3
31.6
101.0
26.3
19.1
14.3
38.0
6.6
65.4
333.7
40.9
39.7
2.4
47.7
55.1
5.5
$352.5
$886.8
$102.8
$1,342.1
The following table presents the changes in Level 3 assets for the years ended December 31, 2014, and 2013.
T A B L E 9 4 : C H A N G E I N L E V E L 3 A S S E T S
(In Millions)
Fair Value at January 1
Actual Return on Plan Assets
Realized Gain
Purchases
Sales
Fair Value at December 31
PRIVATE EQUITY
FUNDS
HEDGE FUNDS
2014
$ 47.7
10.3
–
3.5
(12.5)
$ 49.0
2013
$ 47.4
5.5
–
6.2
(11.4)
$ 47.7
2014
$55.1
1.8
1.7
15.0
(5.0)
$68.6
2013
$30.2
4.9
–
20.0
–
$55.1
Note: The return on plan assets represents the change in the unrealized gain (loss) on assets still held at December 31.
A building block approach is employed for Northern Trust’s U.S. pension plan in determining the long-term rate of return for
plan assets. Historical markets and long-term historical relationships between equities, fixed income and other asset classes are
studied using the widely-accepted capital market principle that assets with higher volatility generate a greater return over the
long-run. Current market factors such as inflation expectations and interest rates are evaluated before long-term capital market
assumptions are determined. The long-term portfolio rate of return is established with consideration given to diversification
and rebalancing. The rate is reviewed against peer data and historical returns to verify the return is reasonable and appropriate.
Based on this approach and the plan’s target asset allocation, the expected long-term rate of return on assets as of the plan’s
December 31, 2014, measurement date was set at 7.25%.
136 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Postretirement Health Care. Northern Trust maintains an unfunded postretirement health care plan under which those
employees who retire at age 55 or older under the provisions of the U.S. defined benefit plan and had attained 15 years of
service as of December 31, 2011 may be eligible for subsidized postretirement health care coverage. The provisions of this plan
may be changed further at the discretion of Northern Trust, which also reserves the right to terminate these benefits at
any time.
Effective in 2012 Northern Trust participates in an Employee Group Waiver Plan which allows Northern Trust to offer
substantially the same postretirement prescription benefits to eligible participants while increasing subsidy reimbursements
received by Northern Trust from the U.S. government. This action served to reduce the January 31, 2012 postretirement health
care plan liability by approximately $26.7 million and increased amortization of the net actuarial gain for the year ended
December 31, 2012 by approximately $3.3 million.
The following tables set forth the postretirement health care plan status and amounts included in AOCI at December 31,
the net periodic postretirement benefit cost of the plan for 2014 and 2013, and the change in the accumulated postretirement
benefit obligation during 2014 and 2013.
T A B L E 9 5 : P O S T R E T I R E M E N T H E A L T H C A R E P L A N S T A T U S
(In Millions)
Accumulated Postretirement Benefit Obligation at Measurement Date:
Retirees and Dependents
Actives Eligible for Benefits
Net Postretirement Benefit Obligation
DECEMBER 31,
2014
2013
$25.0
8.4
$33.4
$22.5
8.7
$31.2
T A B L E 9 6 : A M O U N T S I N C L U D E D I N A C C U M U L A T E D O T H E R C O M P R E H E N S I V E I N C O M E
DECEMBER 31,
(In Millions)
Net Actuarial Gain
Prior Service Benefit
Gross Amount in Accumulated Other Comprehensive Income
Income Tax Effect
Net Amount in Accumulated Other Comprehensive Income
2014
$(2.4)
–
(2.4)
(0.9)
2013
$(6.0)
–
(6.0)
(2.3)
$(1.5)
$(3.7)
T A B L E 9 7 : N E T P E R I O D I C P O S T R E T I R E M E N T ( B E N E F I T ) E X P E N S E
FOR THE YEAR ENDED DECEMBER 31,
(In Millions)
Service Cost
Interest Cost
Amortization
Net (Gain) Loss
Prior Service Benefit
Net Periodic Postretirement (Benefit) Expense
T A B L E 9 8 : C H A N G E I N A C C U M U L A T E D P O S T R E T I R E M E N T B E N E F I T O B L I G A T I O N
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss
Net Claims Paid
Medicare Subsidy
Ending Balance
2014
$ 0.1
1.5
(0.6)
–
2013
$ 0.1
1.2
(1.2)
(3.0)
2012
$ 0.2
1.3
(2.3)
(5.1)
$ 1.0
$(2.9)
$(5.9)
FOR THE YEAR ENDED
DECEMBER 31,
2014
$31.2
0.1
1.5
3.0
(3.1)
0.7
$33.4
2013
$30.6
0.1
1.2
1.9
(2.8)
0.2
$31.2
137 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Northern Trust’s December 31, 2014, adoption of the RP-2014 mortality table with improvement scale MP-2014 resulted in a
$2.2 million increase in the accumulated postretirement benefit obligation as of December 31, 2014.
T A B L E 9 9 : E S T I M A T E D F U T U R E B E N E F I T P A Y M E N T S
(In Millions)
2015
2016
2017
2018
2019
2020-2024
TOTAL
POSTRETIREMENT
MEDICAL
BENEFITS
$ 3.0
3.1
3.1
3.1
3.1
12.9
Net periodic postretirement (benefit) expense for 2015 is not expected to include any amortization from AOCI of the net
actuarial gain. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was
4.25% at December 31, 2014, and 5.0% at December 31, 2013. For measurement purposes, an 8.0% annual increase in the cost
of pre-age 65 medical and drug benefits and a 7.5% annual increase in the cost of post-age 65 medical and drug benefits were
assumed for 2014. These rates are both assumed to gradually decrease until they reach 5.0% in 2022. The health care cost trend
rate assumption has an effect on the amounts reported. For example, increasing or decreasing the assumed health care trend
rate by one percentage point in each year would have the following effect.
T A B L E 1 0 0 : H E A L T H C A R E C O S T T R E N D R A T E A S S U M P T I O N
(In Millions)
Effect on Postretirement Benefit Obligation
Effect on Total Service and Interest Cost Components
1–PERCENTAGE
POINT INCREASE
1–PERCENTAGE
POINT DECREASE
$1.0
–
$(0.9)
–
Defined Contribution Plans. The Corporation and its subsidiaries maintain various defined contribution plans covering
substantially all employees. The Corporation’s contribution includes a matching component. The expense associated with
defined contribution plans is charged to employee benefits and totaled $46.8 million in 2014, $43.0 million in 2013, and $41.0
million in 2012.
Note 22 – Share-Based Compensation Plans
Northern Trust recognizes expense for the grant-date fair value of stock options and other share-based compensation granted
to employees and non-employee directors.
Total compensation expense for share-based payment arrangements to employees and the associated tax impacts were as
follows for the periods presented:
T A B L E 1 0 1 : T O T A L C O M P E N S A T I O N E X P E N S E F O R S H A R E - B A S E D P A Y M E N T A R R A N G E M E N T S T O E M P L O Y E E S
(In Millions)
Restricted Stock Unit Awards
Stock Options
Performance Stock Units
Total Share-Based Compensation Expense
Tax Benefits Recognized
FOR THE YEAR ENDED
DECEMBER 31,
2014
$52.9
12.8
12.0
$77.7
$29.1
2013
$48.0
18.4
7.4
$73.8
$27.7
2012
$44.0
27.4
2.5
$73.9
$27.7
138 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
As of December 31, 2014, there was $112.6 million of unrecognized compensation cost related to unvested share-based
compensation arrangements granted under the Corporation’s share-based compensation plans. That cost is expected to be
recognized as expense over a weighted-average period of approximately three years.
The Northern Trust Corporation 2012 Stock Plan (2012 Plan) is administered by the Compensation and Benefits
Committee (Committee) of the Board. All employees of the Corporation and its subsidiaries and all directors of the
Corporation are eligible to receive awards under the 2012 Plan. The 2012 Plan provides for the grant of nonqualified stock
options, incentive stock options, stock appreciation rights, stock awards, stock units and performance stock units. Grants are
outstanding under the 2012 Plan and The Amended and Restated Northern Trust Corporation 2002 Stock Plan (2002 Plan), a
predecessor plan. The total number of shares of the Corporation’s common stock authorized for issuance under the 2012 Plan
is 30,000,000 plus shares forfeited under the 2002 Plan. As of December 31, 2014, shares available for future grant under the
2012 Plan, including shares forfeited under the 2002 Plan, totaled 29,803,955.
The following describes Northern Trust’s share-based payment arrangements and applies to awards under the 2012 Plan
and the 2002 Plan, as applicable.
Stock Options. Stock options consist of options to purchase common stock at prices not less than 100% of the fair value thereof
on the date the options are granted. Options have a maximum ten-year life and generally vest and become exercisable in one to
four years after the date of grant. In addition, all options may become exercisable either upon a “change of control” as defined
in the 2012 Plan and the 2002 Plan or, in the case of options issued after September 2012, upon certain involuntary
terminations of employment following a change of control. All options terminate at such time as determined by the Committee
and as provided in the terms and conditions of the respective option grants.
The weighted-average assumptions used for options granted during the years ended December 31 are as follows:
T A B L E 1 0 2 : W E I G H T E D - A V E R A G E A S S U M P T I O N S U S E D F O R O P T I O N S G R A N T E D
Expected Term (in Years)
Dividend Yield
Expected Volatility
Risk-Free Interest Rate
2014
2013
2012
7.3
2.16%
30.1
2.02
7.6
2.38%
29.5
1.43
7.5
2.79%
34.0
1.42
The expected term of options represents the period of time options granted are expected to be outstanding based primarily on
the historical exercise behavior attributable to previous option grants. Dividend yield represents the estimated yield from
dividends paid on the Corporation’s common stock over the expected term of the options. Expected volatility is determined
based on a combination of the historical volatility of Northern Trust’s stock price and the implied volatility of traded options
on Northern Trust stock. The risk free interest rate is based on the U.S. Treasury yield curve at the time of grant for a period
equal to the expected term of the options granted.
The following table provides information about stock options granted, vested, and exercised in the years ended
December 31, 2014, 2013, and 2012.
T A B L E 1 0 3 : S T O C K O P T I O N S G R A N T E D , V E S T E D , A N D E X E R C I S E D
FOR THE YEAR ENDED DECEMBER 31,
(In Millions, Except Per Share Information)
Weighted Average Grant-Date Per Share Fair Value of Stock Options Granted
Grant-Date Fair Value of Stock Options Vested
Stock Options Exercised
Intrinsic Value as of Exercise Date
Cash Received
Tax Deduction Benefits Realized
2014
$16.22
21.9
35.3
127.5
12.9
2013
$12.80
30.0
26.9
146.2
9.8
2012
$11.54
32.1
12.8
32.3
4.6
139 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following is a summary of changes in nonvested stock options for the year ended December 31, 2014.
T A B L E 1 0 4 : C H A N G E S I N N O N V E S T E D S T O C K O P T I O N S
NONVESTED OPTIONS
Nonvested at December 31, 2013
Granted
Vested
Forfeited or Cancelled
Nonvested at December 31, 2014
WEIGHTED-
AVERAGE
GRANT-
DATE FAIR
VALUE
PER SHARE
$13.40
16.22
13.85
13.09
$13.60
SHARES
3,303,826
386,749
(1,579,414)
(82,601)
2,028,560
A summary of the status of stock options under the 2012 Plan and the 2002 Plan at December 31, 2014, and changes during the
year then ended, are presented in the table below.
T A B L E 1 0 5 : S T A T U S O F S T O C K O P T I O N S A N D C H A N G E S
($ In Millions Except Per Share Information)
Options Outstanding, December 31, 2013
Granted
Exercised
Forfeited, Expired or Cancelled
Options Outstanding, December 31, 2014
Options Exercisable, December 31, 2014
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER SHARE
$53.64
60.85
50.70
53.54
$54.70
$55.82
SHARES
11,992,811
386,749
(2,515,769)
(192,710)
9,671,081
7,642,521
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC
VALUE
5.1
4.5
$132.6
$ 96.9
Restricted Stock Unit Awards. Restricted stock unit awards may be granted to participants which entitle them to receive a
payment in the Corporation’s common stock or cash under the terms of the 2012 Plan and such other terms and conditions as
the Committee deems appropriate. Each restricted stock unit provides the recipient the opportunity to receive one share of
stock for each stock unit that vests. The restricted stock units granted in 2014 predominately vest at a rate equal to 50% on the
third anniversary date of the grant and 50% on the fourth anniversary date. Restricted stock unit grants totaled 1,086,241,
1,181,321, and 988,421, with weighted average grant-date fair values of $61.17, $52.82, and $43.72 per share, for the years
ended December 31, 2014, 2013, and 2012, respectively. The total fair value of restricted stock units vested during the years
ended December 31, 2014, 2013, and 2012, was $63.9 million, $47.0 million, and $21.6 million, respectively.
A summary of the status of outstanding restricted stock unit awards under the 2012 Plan and the 2002 Plan at
December 31, 2013, and changes during the year then ended, is presented in the table below.
T A B L E 1 0 6 : O U T S T A N D I N G R E S T R I C T E D S T O C K U N I T A W A R D S
($ In Millions)
Restricted Stock Unit Awards Outstanding, December 31, 2013
Granted
Distributed
Forfeited
Stock and Stock Unit Awards Outstanding, December 31, 2014
Units Convertible, December 31, 2014
NUMBER
3,478,886
1,086,241
(1,015,253)
(167,965)
3,381,909
187,010
AGGREGATE
INTRINSIC
VALUE
$215.3
$227.9
$ 12.6
140 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following is a summary of nonvested restricted stock unit awards at December 31, 2013, and changes during the year
then ended.
T A B L E 1 0 7 : N O N V E S T E D R E S T R I C T E D S T O C K U N I T A W A R D S
NONVESTED RESTRICTED
STOCK UNITS
Nonvested at December 31, 2013
Granted
Vested
Forfeited
Nonvested at December 31, 2014
WEIGHTED
AVERAGE
GRANT-
DATE FAIR
VALUE
PER UNIT
$49.76
61.17
50.92
52.18
$53.14
WEIGHTED
AVERAGE
REMAINING
VESTING
TERM
(YEARS)
2.0
1.9
NUMBER
3,297,827
1,086,241
(1,021,204)
(167,965)
3,194,899
Performance Stock Units. Each performance stock unit provides the recipient the opportunity to receive one share of stock
for each stock unit that vests. The number of performance stock units granted that may vest ranges from 0% to 125% of the
original award granted based on the attainment of a three-year average return on equity target. Distribution of the shares is
then made after vesting.
During the years ended December 31, 2014 and 2013, respectively, 249,618 and 296,650 performance stock units were
granted with weighted average grant-date fair values of $53.08 and $49.07, respectively. Performance stock units outstanding at
December 31, 2014 and 2013, respectively, had aggregate intrinsic values of $48.8 and $30.6 million and weighted average
remaining vesting terms of 2.2 and 2.7 years, respectively.
Non-employee Director Stock Awards. Stock units with total values of $1.0 million (16,770 units), $1.1 million (20,599
units), and $0.9 million (20,148 units) were granted to non-employee directors in 2014, 2013 and 2012, respectively, which vest
or vested on the date of the annual meeting of the Corporation’s stockholders in the following years. Total expense recognized
on these grants was $1.0 million, $1.1 million, and $0.9 million in 2014, 2013, and 2012, respectively. Stock units granted to
non-employee directors do not have voting rights. Each stock unit entitles a director to one share of common stock at vesting,
unless a director elects to defer receipt of the shares. Directors may elect to defer the payment of their annual stock unit grant
and cash-based compensation until termination of services as director. Deferred cash compensation is converted into stock
units representing shares of common stock of the Corporation. Distributions of deferred stock units are made in stock.
Distributions of the stock unit accounts that relate to cash-based compensation are made in cash based on the fair value of the
stock units at the time of distribution.
Note 23 – Cash-Based Compensation Plans
Various incentive plans provide for cash incentives and bonuses to selected employees based upon accomplishment
of corporate net income objectives, goals of the reporting segments and support functions, and individual performance. The
provision for awards under these plans is charged to compensation expense and totaled $212.4 million in 2014, $192.4 million
in 2013, and $186.8 million in 2012.
Note 24 – Contingent Liabilities
Legal Proceedings. In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties
to a number of pending and threatened legal actions, including, but not limited to, actions brought on behalf of various
claimants or classes of claimants, regulatory matters, employment matters, and challenges from tax authorities regarding the
amount of taxes due. In certain of these actions and proceedings, claims for substantial monetary damages or adjustments to
recorded tax liabilities are asserted.
141 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Based on current knowledge, after consultation with legal counsel and after taking into account current accruals,
management does not believe that losses, if any, arising from pending litigation or threatened legal actions or regulatory matters
will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although such matters
could have a material adverse effect on the Corporation’s operating results for a particular period.
Under GAAP, (i) an event is “probable” if the “future event or events are likely to occur”; (ii) an event is “reasonably
possible” if “the chance of the future event or events occurring is more than remote but less than likely”; and (iii) an event is
“remote” if “the chance of the future event or events occurring is slight.”
For the reasons set out in this paragraph, the outcome of some matters is inherently difficult to predict and/or the range of
loss cannot be reasonably estimated. This may be the case in matters that (i) will be decided by a jury, (ii) are in early stages,
(iii) involve uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iv) are subject to appeals
or motions, (v) involve significant factual issues to be resolved, including with respect to the amount of damages, (vi) do not
specify the amount of damages sought, or (vii) seek very large damages based on novel and complex damage and liability legal
theories. Accordingly, the Corporation cannot reasonably estimate the eventual outcome of these pending matters, the timing
of their ultimate resolution, or what the eventual loss, fines or penalties, if any, related to each pending matter will be.
In accordance with applicable accounting guidance, the Corporation records accruals for litigation and regulatory matters
when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are
not both probable and reasonably estimable, the Corporation does not record accruals. No material accruals have been
recorded for pending litigation or threatened legal actions or regulatory matters.
For a limited number of the matters for which a loss is reasonably possible in future periods, whether in excess of an
accrued liability or where there is no accrued liability, the Corporation is able to estimate a range of possible loss. As of
December 31, 2014, the Corporation has estimated the upper end of the range of reasonably possible losses for these matters to
be approximately $130 million in the aggregate. This aggregate amount of reasonably possible loss is based upon currently
available information and is subject to significant judgment and a variety of assumptions, and known and unknown
uncertainties. The matters underlying the estimated range will change from time to time, and actual results will vary
significantly from the current estimate.
In certain other pending matters, there may be a range of reasonably possible losses (including reasonably possible losses in
excess of amounts accrued) that cannot be reasonably estimated for the reasons described above. Such matters are not included
in the estimate of reasonably possible losses identified above.
As previously disclosed, a number of participants in Northern Trust’s securities lending program, which is associated with
Northern Trust’s asset servicing business, have commenced either individual lawsuits or purported class actions in which they
claim, among other things, that Northern Trust failed to exercise prudence in the investment management of the collateral
received from the borrowers of the securities, resulting in losses that they seek to recover. The cases assert various contractual,
statutory and common law claims, including claims for breach of fiduciary duty under common law and under the Employee
Retirement Income Security Act (ERISA). In 2013, Northern Trust recorded a $19.2 million pre-tax charge in connection with
an agreement to resolve claims related to two of these lawsuits. The settlements are not final as they require court approval.
Other lawsuits related to securities lending are not part of the proposed settlement, and remain pending.
In April 2014, Northern Trust received a subpoena from the U.S. Securities and Exchange Commission (SEC) seeking
documents related to Northern Trust’s securities lending activities. Northern Trust is cooperating with the SEC in this
investigation.
In January 2015 the Public Prosecutor’s Office of France recommended that Northern Trust Fiduciary Services (Guernsey)
Limited (NTFS), an indirect subsidiary of the Corporation, be charged with complicity in tax fraud and aggravated money
laundering relating to the administration of two trusts for which NTFS serves as trustee. As trustee, NTFS provided no tax
advice and had no involvement in the preparation or filing of the challenged estate tax filings. Charges against a number of
other persons and entities also were recommended related to this matter. The parties currently are awaiting an investigating
judge’s decision whether to bring the recommended criminal charges. If charges are brought, NTFS will contest them in the
French court.
142 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Visa Membership. Northern Trust, as a member of Visa U.S.A. Inc. and in connection with the 2007 initial public offering
of Visa, Inc. (Visa), received shares of restricted stock in Visa. As of December 31, 2014, the Visa shares held by Northern Trust
are recorded at their original cost basis of zero and have restrictions as to their sale or transfer.
Northern Trust is obligated to indemnify Visa for losses resulting from certain indemnified litigation relating to
interchange fees and has been required to recognize, at its estimated fair value in accordance with GAAP, a guarantee liability
arising from such litigation that has not yet settled. During 2007, Northern Trust recorded liabilities relating to Visa
indemnified litigation. Subsequently, Visa established an escrow account to cover the settlements of, or judgments in,
indemnified litigation. The fundings by Visa of its escrow account resulted in reductions of Northern Trust’s indemnification
liability. Northern Trust’s indemnification liability was fully eliminated as of December 31, 2011. On October 19, 2012, Visa
signed a settlement agreement with plaintiff representatives for binding settlement of the indemnified litigation. On January 14,
2014, the trial court entered a final judgment order approving the settlement with the class plaintiffs, which is subject to appeal.
A number of objectors have appealed from that order and more than 30 opt-out cases have been filed by merchants in various
federal district courts.
While the ultimate resolution of the indemnified litigation and the timing for removal of selling restrictions on the Visa
shares are highly uncertain, Northern Trust anticipates that the value of its Visa shares will be adequate to offset any remaining
indemnification obligations related to Visa litigation.
Contingent Purchase Consideration. In connection with an acquisition consummated in 2011, contingent consideration
was recorded relating to certain performance-related purchase price adjustments. The fair value of the contingent consideration
was $55.4 million at December 31, 2013. In April 2014, Northern Trust made a payment of $55.3 million to extinguish the
contingent consideration liability at the value agreed by the parties.
Note 25 – Derivative Financial Instruments
Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the
needs of its clients; as part of its trading activity for its own account; and as part of its risk management activities. These
instruments include foreign exchange contracts, interest rate contracts, and credit default swap contracts.
Northern Trust’s primary risks associated with these instruments is the possibility that interest rates, foreign exchange rates,
or credit spreads could change in an unanticipated manner, resulting in higher costs or a loss in the underlying value of the
instrument. These risks are mitigated by establishing limits, monitoring the level of actual positions taken against such
established limits, and monitoring the level of any interest rate sensitivity gaps created by such positions. When establishing
position limits, market liquidity and volatility, as well as experience in each market, are taken into account.
Credit risk associated with derivative instruments relates to the failure of the counterparty and the failure of Northern Trust
to pay based on the contractual terms of the agreement, and is generally limited to the unrealized fair value gains and losses,
respectively, on these instruments, net of any cash collateral received or deposited. The amount of credit risk will increase or
decrease during the lives of the instruments as interest rates, foreign exchange rates, or credit spreads fluctuate. Northern
Trust’s risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the
same credit and quality controls as are followed in lending and investment activities. Credit Support Annexes and other similar
agreements are currently in place with a number of Northern Trust’s counterparties which mitigate the aforementioned credit
risk associated with derivative activity conducted with those counterparties by requiring that significant net unrealized fair
value gains be supported by collateral placed with Northern Trust.
Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or
similar agreements exist between Northern Trust and the counterparty. Derivative assets and liabilities recorded in the
consolidated balance sheet were each reduced by $1.9 billion and $1.2 billion as of December 31, 2014 and 2013, respectively, as
a result of master netting arrangements and similar agreements in place. Derivative assets and liabilities recorded at
December 31, 2014 also reflect reductions of $315.8 million and $1.2 billion, respectively, as a result of cash collateral received
from and deposited with derivative counterparties. This compares with reductions of derivative assets and liabilities of $210.7
million and $767.7 million, respectively, at December 31, 2013. Additional cash collateral received from and deposited with
143 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
derivative counterparties totaling $19.6 million and $153.2 million, respectively, as of December 31, 2014, and $36.4 million
and $39.3 million, respectively, as of December 31, 2013, were not offset against derivative assets and liabilities on the
consolidated balance sheet as the amounts exceeded the net derivative positions with those counterparties. Northern Trust
centrally clears certain interest rate derivative instruments as required under Title VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act. Securities posted as collateral for these transactions totaled $27.4 million and $27.6 million at
December 31, 2014 and 2013, respectively, are not offset against derivative assets and liabilities on the consolidated balance
sheet, and the counterparty receiving the securities as collateral does not have the right to repledge or sell the securities.
Certain master netting arrangements Northern Trust enters into with derivative counterparties contain credit risk-related
contingent features in which the counterparty has the option to declare Northern Trust in default and accelerate cash
settlement of net derivative liabilities with the counterparty in the event Northern Trust’s credit rating falls below specified
levels. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability
position was $299.5 million and $257.3 million at December 31, 2014 and 2013, respectively. Cash collateral amounts deposited
with derivative counterparties on those dates included $272.9 million and $197.0 million, respectively, posted against these
liabilities, resulting in a net maximum amount of termination payments that could have been required at December 31, 2014
and 2013 of $26.6 million and $60.3 million, respectively. Accelerated settlement of these liabilities would not have a material
effect on the consolidated financial position or liquidity of Northern Trust.
Foreign exchange contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of
exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients. Foreign
exchange contracts are also used for trading purposes and risk management. For risk management purposes, Northern Trust
uses foreign exchange contracts to reduce its exposure to changes in foreign exchange rates relating to certain forecasted non-
functional currency denominated revenue and expenditure transactions, foreign currency denominated assets and liabilities,
and net investments in non-U.S. affiliates.
Interest rate contracts include swap and option contracts. Interest rate swap contracts involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the underlying principal amounts. Northern Trust enters
into interest rate swap contracts with its clients and also may utilize such contracts to reduce or eliminate the exposure to
changes in the cash flows or fair value of hedged assets or liabilities due to changes in interest rates. Interest rate option
contracts may include caps, floors, collars and swaptions, and provide for the transfer or reduction of interest rate risk, typically
in exchange for a fee. Northern Trust enters into option contracts primarily as a seller of interest rate protection to clients.
Northern Trust receives a fee at the outset of the agreement for the assumption of the risk of an unfavorable change in interest
rates. This assumed interest rate risk is then mitigated by entering into an offsetting position with an outside counterparty.
Northern Trust may also purchase or enter into option contracts for risk management purposes including to reduce the
exposure to changes in the cash flows of hedged assets due to changes in interest rates.
Credit default swap contracts are agreements to transfer credit default risk from one party to another in exchange for a fee.
Northern Trust enters into credit default swaps with outside counterparties where the counterparty agrees to assume the
underlying credit exposure of a specific Northern Trust commercial loan or loan commitment.
Client-Related and Trading Derivative Instruments. Approximately 97% of Northern Trust’s derivatives outstanding at
December 31, 2014 and 2013, measured on a notional value basis, relate to client-related and trading activities. These activities
consist principally of providing foreign exchange services to clients in connection with Northern Trust’s global custody
business. However, in the normal course of business, Northern Trust also engages in trading of currencies for its own account.
144 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following table shows the notional and fair values of client-related and trading derivative financial instruments.
Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated
balance sheet. They are used merely to express the volume of this activity. Northern Trust’s credit-related risk of loss is limited
to the positive fair value of the derivative instrument, which is significantly less than the notional amount.
T A B L E 1 0 8 : N O T I O N A L A N D F A I R V A L U E S O F C L I E N T - R E L A T E D A N D T R A D I N G D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S
DECEMBER 31, 2014
DECEMBER 31, 2013
FAIR VALUE
FAIR VALUE
(In Millions)
Foreign Exchange Contracts
Interest Rate Contracts
Total
NOTIONAL
VALUE
$257,568.7
5,353.8
$262,922.5
ASSET
LIABILITY
$4,149.5
105.5
$4,255.0
$4,072.0
101.3
$4,173.3
NOTIONAL
VALUE
$243,135.0
5,001.7
$248,136.7
ASSET
LIABILITY
$2,844.7
122.8
$2,967.5
$2,846.2
117.0
$2,963.2
Changes in the fair value of client-related and trading derivative instruments are recognized currently in income. The following
table shows the location and amount of gains and losses recorded in the consolidated statement of income for the years ended
December 31, 2014, 2013, and 2012.
T A B L E 1 0 9 : L O C A T I O N A N D A M O U N T O F G A I N S A N D L O S S E S R E C O R D E D I N I N C O M E
(In Millions)
Foreign Exchange Contracts
Interest Rate Contracts
Total
LOCATION OF DERIVATIVE
GAIN/(LOSS) RECOGNIZED
IN INCOME
Foreign Exchange Trading Income
Security Commissions and Trading Income
AMOUNT OF DERIVATIVE GAIN/
(LOSS) RECOGNIZED IN INCOME DECEMBER 31,
2014
$210.1
9.3
$219.4
2013
$244.4
12.7
$257.1
2012
$206.1
11.6
$217.7
Risk Management Instruments. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest
rate, and credit risk.
The following table identifies the types and classifications of derivative instruments formally designated as hedges under
GAAP and used by Northern Trust to manage risk, their notional and fair values, and the respective risks addressed.
T A B L E 1 1 0 : N O T I O N A L A N D F A I R V A L U E S O F D E S I G N A T E D R I S K M A N A G E M E N T D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S
DERIVATIVE
INSTRUMENT
RISK
CLASSIFICATION
NOTIONAL
VALUE
ASSET
LIABILITY
NOTIONAL
VALUE
ASSET
LIABILITY
DECEMBER 31, 2014
DECEMBER 31, 2013
FAIR VALUE
FAIR VALUE
Interest Rate Swap Contracts
Interest Rate
$2,859.5
$ 12.7
$28.5
$3,296.9
$ 31.5
$ 44.8
Interest Rate Swap Contracts
Interest Rate
1,250.0
112.8
2.0
1,250.0
83.6
33.4
Foreign Exchange Contracts Foreign Currency
Interest Rate Swap Contracts
Interest Rate Options
Contracts
Interest Rate
Interest Rate
344.9
10.0
625.0
6.0
–
1.3
14.8
–
–
314.0
–
–
10.2
–
–
5.5
–
–
(In Millions)
FAIR VALUE HEDGES
Available for Sale Investment Securities
Senior Notes and Long-Term
Subordinated Debt
CASH FLOW HEDGES
Forecasted Foreign Currency
Denominated Transactions
Available for Sale Investment Securities
Available for Sale Investment Securities
NET INVESTMENT HEDGES
Net Investments in Non-U.S.
Affiliates
Foreign Exchange Contracts Foreign Currency
1,795.4
118.9
3.4
1,684.9
9.8
52.8
Total
$6,884.8
$251.7
$48.7
$6,545.8
$135.1
$136.5
145 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
In addition to the above, Sterling-denominated debt, totaling $243.9 million and $259.1 million at December 31, 2014 and
2013, respectively, was designated as a hedge of the foreign exchange risk associated with the net investment in certain non-U.S.
affiliates. Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets
and liabilities due to movements in interest rates. The following table shows the location and amount of derivative gains and
losses recorded in the consolidated statement of income related to fair value hedges for the years ended December 31, 2014,
2013, and 2012.
T A B L E 1 1 1 : L O C A T I O N A N D A M O U N T O F D E R I V A T I V E G A I N S A N D L O S S E S R E C O R D E D I N I N C O M E
DERIVATIVE
INSTRUMENT
LOCATION OF DERIVATIVE
GAIN/(LOSS) RECOGNIZED
IN INCOME
AMOUNT OF DERIVATIVE GAIN/
(LOSS) RECOGNIZED IN INCOME
DECEMBER 31,
(In Millions)
Available for Sale Investment Securities
Senior Notes and Long-Term Subordinated
Debt
Total
Interest Rate Swap Contracts
Interest Income
Interest Rate Swap Contracts
Interest Expense
2014
$ (36.4)
104.0
$ 67.6
2013
$ 26.3
(44.9)
$(18.6)
2012
$(48.4)
54.3
$ 5.9
There was no ineffectiveness or change in the fair value of hedged items recognized in earnings for fair value hedges during the
year ended December 31, 2014. There was $0.9 million of losses, and $0.4 million of gains recorded within the fair values of
hedged items for “long-haul” hedges during the years ended December 31, 2013, and 2012, respectively, and $0.8 million of
losses, and $0.3 million of gains from ineffectiveness recorded during the years ended December 31, 2013, and 2012,
respectively.
Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or
forecasted transactions caused by movements in interest or foreign exchange rates. There was no ineffectiveness recognized in
earnings for cash flow hedges during the years ended December 31, 2014, 2013, or 2012. As of December 31, 2014, 23 months
was the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign currency
denominated transactions was being hedged.
The following table provides cash flow hedge derivative gains and losses that were recognized in AOCI and the amounts
reclassified to earnings during the years ended December 31, 2014, 2013 and 2012.
T A B L E 1 1 2 : C A S H F L O W H E D G E D E R I V A T I V E G A I N S A N D L O S S E S R E C O G N I Z E D I N A O C I A N D R E C L A S S I F I E D T O E A R N I N G S
FOREIGN EXCHANGE
CONTRACTS
(BEFORE TAX)
INTEREST RATE SWAP
CONTRACTS
(BEFORE TAX)
INTEREST RATE OPTION
CONTRACTS
(BEFORE TAX)
(In Millions)
2014
2013
2012
2014
2013
2012
2014
2013
2012
Net Gain/(Loss) Recognized
in AOCI
$(9.4)
$ 2.1
$(3.2)
Net Gain/(Loss) Reclassified
from AOCI to Earnings
Other Operating Income
Interest Income
Other Operating Expense
3.3
–
(0.5)
(2.1)
–
(2.6)
(4.6)
–
–
Total
$ 2.8
$(4.7)
$(4.6)
$–
–
–
–
$–
$–
$
–
$0.7
–
–
–
$–
–
(0.2)
–
–
1.2
–
$(0.2)
$1.2
$–
–
–
–
$–
$–
–
–
–
$–
During the year ended December 31, 2012, there were $0.2 million of gains relating to net foreign exchange contract amounts
that were reclassified into earnings as a result of the discontinuance of forecasted transactions that were no longer probable of
occurring; there were no gains or losses reclassified during the years ended December 31, 2014 and 2013. It is estimated that a
net loss of $5.7 million will be reclassified into earnings within the next twelve months relating to cash flow hedges of foreign
currency denominated transactions. It is estimated that a net gain of $3.7 million will be reclassified into earnings upon the
receipt of interest payments on earning assets within the next twelve months relating to cash flow hedges of available for sale
investment securities.
146 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Certain foreign exchange contracts and qualifying nonderivative instruments are designated as net investment hedges to
minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches
and subsidiaries. For net investment hedges, there was $5.3 million of gains from ineffectiveness recorded for these hedges
during the year ended December 31, 2012, and no ineffectiveness recorded for these hedges during the years ended
December 31, 2014 and 2013.
The following table provides net investment hedge gains and losses recognized in AOCI during the years ended
December 31, 2014 and 2013.
T A B L E 1 1 3 : N E T I N V E S T M E N T H E D G E G A I N S A N D L O S S E S R E C O G N I Z E D I N A O C I
(In Millions)
Foreign Exchange Contracts
Sterling Denominated Subordinated Debt
Total
AMOUNT OF HEDGING
INSTRUMENT GAIN/(LOSS)
RECOGNIZED IN AOCI
(BEFORE TAX)
2014
$127.4
15.2
$142.6
2013
$(101.6)
(5.7)
$(107.3)
Derivatives that are not formally designated as hedges under GAAP are entered into for risk management purposes. Foreign
exchange contracts are entered into to manage the foreign currency risk of non-U.S.-dollar-denominated assets and liabilities,
the net investment in certain non-U.S. affiliates, commercial loans, and forecasted foreign-currency-denominated transactions.
Credit default swaps are entered into to manage the credit risk associated with certain loans and loan commitments. The
following table identifies the types of risk management derivative instruments not formally designated as hedges and their
notional amounts and fair values.
T A B L E 1 1 4 : N O T I O N A L A N D F A I R V A L U E S O F N O N D E S I G N A T E D R I S K M A N A G E M E N T D E R I V A T I V E I N S T R U M E N T S
(In Millions)
Foreign Exchange Contracts
Total
DECEMBER 31, 2014
DECEMBER 31, 2013
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
$246.3
$246.3
ASSET
$0.8
$0.8
LIABILITY
$5.3
$5.3
NOTIONAL
VALUE
$168.8
$168.8
ASSET
$1.0
$1.0
LIABILITY
$1.2
$1.2
The following table provides the location and amount of gains and losses recorded in the consolidated statement of income for
the years ended December 31, 2014, 2013, and 2012 for derivative instruments not formally designated as hedges under GAAP.
T A B L E 1 1 5 : L O C A T I O N A N D A M O U N T O F G A I N S A N D L O S S E S R E C O R D E D I N I N C O M E
(In Millions)
Credit Default Swap Contracts
Foreign Exchange Contracts
Total
LOCATION OF DERIVATIVE GAIN/
(LOSS) RECOGNIZED IN INCOME
Other Operating Income
Other Operating Income
AMOUNT RECOGNIZED IN INCOME
2014
$ —
(14.3)
$(14.3)
2013
$(0.1)
(4.0)
$(4.1)
2012
$ (2.6)
11.3
$ 8.7
147 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 26 – Offsetting of Assets and Liabilities
The following tables provide information regarding the offsetting of derivative assets and of securities purchased under
agreements to resell within the consolidated balance sheet as of December 31, 2014 and 2013.
T A B L E 1 1 6 : O F F S E T T I N G O F D E R I V A T I V E A S S E T S A N D S E C U R I T I E S P U R C H A S E D U N D E R A G R E E M E N T S T O R E S E L L
DECEMBER 31, 2014
(In Millions)
Derivative Assets(1)
Foreign Exchange Contracts Over the Counter (OTC)
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
GROSS
RECOGNIZED
ASSETS
$3,442.8
183.9
48.4
–
–
GROSS
AMOUNTS
OFFSET
$1,889.8
32.1
13.1
6.3
315.8
NET
AMOUNTS
PRESENTED
$1,553.0
151.8
35.3
–
–
Total Derivatives Subject to a Master Netting Arrangement
3,675.1
2,257.1
1,418.0
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
832.4
–
832.4
4,507.5
2,257.1
2,250.4
GROSS
AMOUNTS
NOT OFFSET
$
–
–
–
–
–
–
–
–
NET
AMOUNT(3)
$1,553.0
151.8
35.3
–
–
1,418.0
832.4
2,250.4
Securities Purchased under Agreements to Resell(2)
$1,000.0
$
—
$1,000.0
$1,000.0
$
–
DECEMBER 31, 2013
(In Millions)
Derivative Assets(1)
Foreign Exchange Contracts Over the Counter (OTC)
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
Total Derivatives Subject to a Master Netting Arrangement
Total Derivatives Not Subject to a Master Netting Arrangement
Total Derivatives
GROSS
RECOGNIZED
ASSETS
$2,612.5
228.8
9.1
–
–
2,850.4
253.2
3,103.6
GROSS
AMOUNTS
OFFSET
$1,073.3
47.5
9.1
28.4
210.7
1,369.0
–
1,369.0
NET
AMOUNTS
PRESENTED
$1,539.2
181.3
–
–
–
1,481.4
253.2
1,734.6
GROSS
AMOUNTS
NOT OFFSET
$
–
–
–
–
–
–
–
–
NET
AMOUNT(3)
$1,539.2
181.3
–
–
–
1,481.4
253.2
1,734.6
Securities Purchased under Agreements to Resell(2)
$ 500.0
$
–
$ 500.0
$500.0
$
–
(1) Derivative assets are reported in other assets in the consolidated balance sheet. Other assets (excluding derivative assets) totaled $3,614.7 million and $3,029.4 million as of
December 31, 2014 and 2013, respectively.
(2) Securities purchased under agreements to resell are reported in federal funds sold and securities purchased under agreements to resell in the consolidated balance sheet. Federal funds
sold totaled $62.7 million and $29.6 million as of December 31, 2014 and 2013, respectively.
(3) Northern Trust did not possess any cash collateral that was not offset in the consolidated balance sheet that could have been used to offset the net amounts presented in the
consolidated balance sheet as of December 31, 2014 and 2013.
148 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following tables provide information regarding the offsetting of derivative liabilities and of securities sold under
agreements to repurchase within the consolidated balance sheet as of December 31, 2014 and 2013.
T A B L E 1 1 7 : O F F S E T T I N G O F D E R I V A T I V E L I A B I L I T I E S A N D S E C U R I T I E S S O L D U N D E R A G R E E M E N T S T O R E P U R C H A S E
DECEMBER 31, 2014
(In Millions)
Derivative Liabilities(1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
GROSS
RECOGNIZED
LIABILITIES
$3,431.0
118.7
13.1
–
–
Total Derivatives Subject to a Master Netting Arrangement
3,562.8
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
664.5
4,227.3
GROSS
AMOUNTS
OFFSET
$1,889.8
32.1
13.1
6.3
1,232.0
3,173.3
–
3,173.3
NET
AMOUNTS
PRESENTED
$1,541.2
86.6
–
–
–
389.5
664.5
1,054.0
GROSS
AMOUNTS
NOT OFFSET
$
–
–
–
–
–
–
–
–
NET
AMOUNT(2)
$1,541.2
86.6
–
–
–
389.5
664.5
1,054.0
Securities Sold under Agreements to Repurchase
$ 885.1
$
–
$ 885.1
$885.1
$
–
DECEMBER 31, 2013
(In Millions)
Derivative Liabilities(1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
Total Derivatives Subject to a Master Netting Arrangement
Total Derivatives Not Subject to a Master Netting Arrangement
Total Derivatives
GROSS
RECOGNIZED
LIABILITIES
$2,039.0
163.7
31.5
–
–
2,234.2
866.7
3,100.9
GROSS
AMOUNTS
OFFSET
$1,073.3
47.5
9.1
28.4
767.7
1,926.0
–
NET
AMOUNTS
PRESENTED
$ 965.7
116.2
22.4
–
–
308.2
866.7
1,926.0
1,174.9
GROSS
AMOUNTS
NOT OFFSET
$
–
–
–
–
–
–
–
–
NET
AMOUNT(2)
$ 965.7
116.2
22.4
–
–
308.2
866.7
1,174.9
Securities Sold under Agreements to Repurchase
$ 917.3
$
–
$ 917.3
$917.3
$
–
(1) Derivative liabilities are reported in other liabilities in the consolidated balance sheet. Other liabilities (excluding derivative liabilities) totaled $2,794.1 million and $2,338.4 million
as of December 31, 2014 and 2013, respectively.
(2) Northern Trust did not place any cash collateral with counterparties that was not offset in the consolidated balance sheet that could have been used to offset the net amounts presented
in the consolidated balance sheet as of December 31, 2014 and 2013.
All of Northern Trust’s securities sold under agreements to repurchase (repurchase agreements) and securities purchased under
agreements to resell (reverse repurchase agreements) involve the transfer of financial assets in exchange for cash subject to a
right and obligation to repurchase those assets for an agreed upon amount. In the event of a repurchase failure, the cash or
financial assets are available for offset. All of Northern Trust’s repurchase agreements and reverse repurchase agreements are
subject to a master netting arrangement, which sets forth the rights and obligations for repurchase and offset. Under the master
netting arrangement, Northern Trust is entitled to set off receivables from and collateral placed with a single counterparty
against obligations owed to that counterparty. In addition, collateral held by Northern Trust can be offset against receivables
from that counterparty.
Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally
enforceable master netting arrangements or similar agreements exist. Derivative assets and liabilities can be further offset by
cash collateral received from, and deposited with, the transacting counterparty. The basis for this view is that, upon termination
of transactions subject to a master netting arrangement or similar agreement, the individual derivative receivables do not
represent resources to which general creditors have rights and individual derivative payables do not represent claims that are
equivalent to the claims of general creditors. Effective in the second quarter of 2013, Northern Trust centrally clears certain
149 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
interest rate derivative instruments as required under Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. These transactions are subject to an agreement similar to a master netting arrangement, which has the same
rights of offset as described above.
Note 27 – Off-Balance-Sheet Financial Instruments
Commitments and Letters of Credit. Northern Trust, in the normal course of business, enters into various types of
commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. The contractual
amounts of these instruments represent the potential credit exposure should the instrument be fully drawn upon and the client
default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust
subjects such activities to the same credit quality and monitoring controls as its lending activities. Commitments and letters of
credit consist of the following:
Legally Binding Commitments to Extend Credit generally have fixed expiration dates or other termination clauses. Since a
significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does
not necessarily represent future loans or liquidity requirements.
Standby Letters of Credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual
terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private
financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges, and
similar transactions. Northern Trust is obligated to meet the entire financial obligation of these agreements and in certain cases
is able to recover the amounts paid through recourse against collateral received or other participants.
Commercial Letters of Credit are instruments issued by Northern Trust on behalf of its clients that authorize a third party
(the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement.
Commercial letters of credit are issued primarily to facilitate international trade.
The following table shows the contractual amounts of commitments and letters of credit.
T A B L E 1 1 8 : C O M M I T M E N T S A N D L E T T E R S O F C R E D I T
(In Millions)
Legally Binding Commitments to Extend Credit(1)
Standby Letters of Credit(2)
Commercial Letters of Credit
DECEMBER 31,
2014
2013
$35,127.6
4,468.1
20.8
$32,174.8
4,451.1
24.8
(1) These amounts exclude $481.4 million and $418.5 million of commitments participated to others at December 31, 2014 and 2013, respectively.
(2) These amounts include $221.4 million and $208.9 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2014 and 2013, respectively.
The weighted average maturity of standby letters of credit was 27 months at December 31, 2014 and 25 months at December 31, 2013.
Other Off-Balance-Sheet Financial Instruments. As part of its securities custody activities and at the direction of its clients,
Northern Trust lends securities owned by clients to borrowers who are reviewed and approved by the Northern Trust
Counterparty Risk Management Committee. In connection with these activities, Northern Trust has issued indemnifications to
certain clients against certain losses that are a direct result of a borrower’s failure to return securities when due, should the value
of such securities exceed the value of the collateral required to be posted. Borrowers are required to fully collateralize securities
received with cash or marketable securities. As securities are loaned, collateral is maintained at a minimum of 100% of the fair
value of the securities plus accrued interest. The collateral is revalued on a daily basis. The amount of securities loaned as of
December 31, 2014 and 2013 subject to indemnification was $98.1 billion and $82.7 billion, respectively. Because of the credit
quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure
to credit loss from this activity is not significant and no liability was recorded related to these indemnifications.
The Bank is a participating member of various cash, securities, and foreign exchange clearing and settlement organizations
such as The Depository Trust Company in New York. It participates in these organizations on behalf of its clients and on its
own behalf as a result of its own activities. A wide variety of cash and securities transactions are settled through these
150 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
organizations, including those involving obligations of states and political subdivisions, asset-backed securities, commercial
paper, dollar placements, and securities issued by the Government National Mortgage Association.
As a result of its participation in cash, securities, and foreign exchange clearing and settlement organizations, the Bank could
be responsible for a pro rata share of certain credit-related losses arising out of the clearing activities. The method in which such
losses would be shared by the clearing members is stipulated in each clearing organization’s membership agreement. Credit
exposure related to these agreements varies from day to day, primarily as a result of fluctuations in the volume of transactions
cleared through the organizations. The estimated credit exposure at December 31, 2014, and 2013 was approximately $60 million
and $73 million, respectively, based on the membership agreements and clearing volume for those days. Controls related to these
clearing transactions are closely monitored by management to protect the assets of Northern Trust and its clients.
Note 28 – Variable Interest Entities
Variable Interest Entities (VIEs) are defined within GAAP as entities which either have a total equity investment that is
insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity
investors lack the characteristics of a controlling financial interest. Investors that finance a VIE through debt or equity interests,
or other counterparties that provide other forms of support, such as guarantees, subordinated fee arrangements, or certain
types of derivative contracts, are variable interest holders in the entity and the variable interest holder, if any, that has both the
power to direct the activities that most significantly impact the entity and a variable interest that could potentially be significant
to the entity is deemed to be the VIE’s primary beneficiary and is required to consolidate the VIE.
Leveraged Leases. In leveraged leasing transactions, Northern Trust acts as lessor of the underlying asset subject to the lease
and typically funds 20-30% of the asset’s cost via an equity ownership in a trust with the remaining 70-80% provided by third
party non-recourse debt holders. In such transactions, the trusts, which are VIEs, are created to provide the lessee use of the
property with substantially all of the rights and obligations of ownership. The lessee’s maintenance and operation of the leased
property has a direct effect on the fair value of the underlying property, and the lessee also has the ability to increase the benefits
it can receive and limit the losses it can suffer by the manner in which it uses the property. As a result, Northern Trust has
determined that it is not the primary beneficiary of these VIEs given it lacks the power to direct the activities that most
significantly impact the economic performance of the VIEs.
Northern Trust’s maximum exposure to loss as a result of its involvement with the leveraged lease trust VIEs is limited to
the carrying amounts of its leveraged lease investments. As of December 31, 2014 and 2013, the carrying amounts of these
investments, which are included in loans and leases in the consolidated balance sheet, were $547.6 million and $671.2 million,
respectively. Northern Trust’s funding requirements relative to the VIEs are limited to its invested capital. Northern Trust has
no other liquidity arrangements or obligations to purchase assets of the VIEs that would expose Northern Trust to a loss.
Tax Credit Structures. Northern Trust invests in qualified affordable housing projects and community development
entities (collectively, community development projects) that are designed to generate a return primarily through the realization
of tax credits. The community development projects are formed as limited partnerships and LLCs in which Northern Trust
invests as a limited partner/investor member through equity contributions. The economic performance of the community
development projects, which are VIEs, is subject to the performance of their underlying investment and their ability to operate
in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments.
Northern Trust has determined that it is not the primary beneficiary of any community development projects as it lacks the
power to direct the activities that most significantly impact the economic performance of the underlying investments or to
affect their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated
by equity investments. This power is held by the general partners and managing members who exercise full and exclusive
control of the operations of the VIEs.
Northern Trust’s maximum exposure to loss as a result of its involvement with community development projects is limited
to the carrying amounts of its investments, including any undrawn commitments. As of December 31, 2014 and 2013, the
carrying amounts of these investments in community development projects that generate tax credits, included in other assets in
151 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
the consolidated balance sheet, were $208.9 million and $222.3 million, respectively. As of December 31, 2014 and 2013,
liabilities related to unfunded commitments on investments in tax credit community development projects, included in other
liabilities in the consolidated balance sheet, were $15.6 million and $19.8 million, respectively. Northern Trust’s funding
requirements are limited to its invested capital and unfunded commitments for future equity contributions. Northern Trust has
no exposure to loss from liquidity arrangements and no obligation to purchase assets of the community development projects.
Affordable housing tax credits and other tax benefits attributable to community development projects totaled $58.1 million
as of December 31, 2014.
Trust Preferred Securities. As discussed in further detail in Note 13 – Floating Rate Capital Debt, in 1997, Northern Trust
issued Floating Rate Capital Securities, Series A and Series B, through NTC Capital I and NTC Capital II, respectively, statutory
business trusts wholly-owned by the Corporation. The sole assets of the trusts are Subordinated Debentures of the Corporation
that have the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the
Floating Rate Capital Securities. NTC Capital I and NTC Capital II are considered VIEs; however, as the sole asset of each trust
is a receivable from the Corporation and proceeds to the Corporation from the receivable exceed the Corporation’s investment
in the VIEs’ equity shares, the Corporation is not permitted to consolidate the trusts, even though the Corporation owns all of
the voting equity shares of the trusts, has fully guaranteed the trusts’ obligations, and has the right to redeem the preferred
securities in certain circumstances. Northern Trust recognizes the subordinated debentures on its consolidated balance sheet as
long-term liabilities.
Investment Funds. Northern Trust acts as asset manager for various funds in which clients of Northern Trust are investors.
As an asset manager of funds, the Corporation earns a competitively priced fee that is based on assets managed and varies with
each fund’s investment objective. Based on its analysis, Northern Trust has determined that it is not the primary beneficiary of
these VIEs under GAAP.
Note 29 – Pledged and Restricted Assets
Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits;
repurchase agreements; Federal Home Loan Bank borrowings; and for other purposes, including support for securities
settlement, primarily related to client activities, and for potential Federal Reserve Bank discount window borrowings. On
December 31, 2014, securities and loans totaling $32.3 billion ($23.1 billion of government sponsored agency and other
securities, $122.9 million of obligations of states and political subdivisions, and $9.1 billion of loans), were pledged. Collateral
required for these purposes totaled $5.9 billion. Included in the total pledged assets are available for sale securities with a total
fair value of $884.8 million which were pledged as collateral for agreements to repurchase securities sold transactions. The
secured parties to these transactions have the right to repledge or sell these securities.
Northern Trust is not permitted, by contract or custom, to repledge or sell collateral from agreements to resell securities
purchased transactions. The total fair value of accepted collateral as of December 31, 2014 was $1.0 billion. There was no
repledged or sold collateral as of December 31, 2014.
Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $1.3 billion in 2014.
152 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 30 – Restrictions on Subsidiary Dividends and Loans or Advances
Various federal and state statutory provisions limit the amount of dividends the Bank can pay to the Corporation without
regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state-chartered bank
that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would
exceed the total of its retained net income (as defined by regulatory agencies) for that year combined with its retained net
income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its
“undivided profits,” as defined, without regulatory and stockholder approval.
Under Illinois law, an Illinois state bank, prior to paying a dividend, must carry over to surplus at least one-tenth of its net
profits since the date of the declaration of the last preceding dividend, until the bank’s surplus is equal to its capital. In addition,
an Illinois state bank may not pay any dividend in an amount greater than its net profits then on hand, after deduction of losses
and bad debts (defined as debts due to a state bank on which interest is past due and unpaid for a period of 6 months or more,
unless the same are well secured and in the process of collection).
The Bank is also prohibited under federal law from paying any dividends if the Bank is undercapitalized or if the payment
of the dividends would cause the Bank to become undercapitalized. In addition, the federal regulatory agencies are authorized
to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of
dividends could, depending on the financial condition of the Bank, be deemed to constitute an unsafe or unsound practice. The
Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III impose additional restrictions on the ability of
banking institutions to pay dividends (e.g., the Corporation must include proposed dividends in the capital plan that it submits
to the Federal Reserve Board in connection with the CCAR exercise and such dividends may only be declared if the Federal
Reserve Board does not object to the Corporation’s capital plan).
Under federal law, financial transactions by the Bank, the Corporation’s insured banking subsidiary, with the Corporation
and its affiliates that are in the form of loans or extensions of credit, investments, guarantees, derivative transactions,
repurchase agreements, securities lending transactions or purchases of assets, are restricted. Transfers of this kind to the
Corporation or a nonbanking subsidiary by the Bank are limited to 10% of the Bank’s capital and surplus with respect to any
single affiliate, and to 20% of the Bank’s capital and surplus with all affiliates in the aggregate, and are also subject to certain
collateral requirements (in the case of credit transactions) and other restrictions on covered transactions. These transactions, as
well as other transactions between the Bank and the Corporation or its affiliates, also must be on terms substantially the same
as, or at least as favorable as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the
absence of comparable transactions, on terms, or under circumstances, including credit standards, that would be offered to, or
would apply to, non-affiliated companies. Other state and federal laws may limit the transfer of funds by the Corporation’s
banking subsidiaries to the Corporation and certain of its affiliates.
Note 31 – Reporting Segments and Related Information
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 Corporation’s and the Bank’s wholesale funding activities and
investment portfolios, 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 tables below.
C&IS and Wealth Management results are presented to promote a greater understanding of their financial performance.
The information, presented on an internal management-reporting basis as opposed to GAAP which is used for consolidated
financial reporting purposes, derives from internal accounting systems that support Northern Trust’s strategic objectives and
management structure. The accounting policies used for management reporting are consistent with those described in Note 1 –
Summary of Significant Accounting Policies.
153 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
The following tables show the earnings contribution of Northern Trust’s reporting segments for the years ended
December 31, 2014, 2013, and 2012.
T A B L E 1 1 9 : C O R P O R A T E A N D I N S T I T U T I O N A L S E R V I C E S R E S U L T S O F O P E R A T I O N S
(In Millions)
NONINTEREST INCOME
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
Percentage of Consolidated Net Income
Average Assets
Note: Stated on an FTE basis.
T A B L E 1 2 0 : W E A L T H M A N A G E M E N T R E S U L T S O F O P E R A T I O N S
(In Millions)
NONINTEREST INCOME
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
Percentage of Consolidated Net Income
Average Assets
Note: Stated on an FTE basis.
T A B L E 1 2 1 : T R E A S U R Y A N D O T H E R R E S U L T S O F O P E R A T I O N S
(In Millions)
Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Noninterest Expense
Income before Income Taxes (Note)
Provision (Benefit) for Income Taxes (Note)
Net Income
Percentage of Consolidated Net Income
Average Assets
Note: Stated on an FTE basis.
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$ 1,584.0
200.4
177.9
310.0
2,272.3
5.8
1,732.8
533.7
149.4
$ 1,443.8
238.8
177.3
275.9
2,135.8
(3.4)
1,657.9
481.3
145.6
$ 1,334.1
193.5
193.6
280.1
2,001.3
(2.1)
1,599.9
403.5
114.3
$
384.3
$
335.7
$
289.2
47%
46%
42%
$59,462.9
$53,308.2
$49,904.0
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$ 1,248.8
9.7
98.3
536.1
1,892.9
0.2
1,268.7
624.0
234.8
$ 1,166.0
5.6
116.7
557.7
1,846.0
23.4
1,215.0
607.6
229.2
$ 1,071.4
12.6
93.6
629.9
1,807.5
27.1
1,182.3
598.1
226.4
$
389.2
$
378.4
$
371.7
48%
52%
54%
$23,629.3
$22,887.6
$23,917.9
FOR THE YEAR ENDED DECEMBER 31,
2014
6.6
188.8
195.4
133.5
61.9
23.6
38.3
$
$
2013
8.0
132.0
140.0
120.9
19.1
1.9
17.2
$
$
2012
7.0
121.1
128.1
96.6
31.5
5.1
26.4
$
$
5%
2%
4%
$20,991.3
$18,661.9
$19,153.6
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notes to consolidated financial statements
T A B L E 1 2 2 : C O N S O L I D A T E D F I N A N C I A L I N F O R M A T I O N
(In Millions)
NONINTEREST INCOME
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (FTE) (Note)
Revenue (FTE) (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
Average Assets
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$ 2,832.8
210.1
282.8
1,034.9
4,360.6
6.0
3,135.0
1,219.6
407.8
$ 2,609.8
244.4
302.0
965.6
4,121.8
20.0
2,993.8
1,108.0
376.7
$ 2,405.5
206.1
294.2
1,031.1
3,936.9
25.0
2,878.8
1,033.1
345.8
$
811.8
$
731.3
$
687.3
$104,083.5
$94,857.7
$92,975.5
Note: Stated on an FTE basis. The consolidated figures include $29.4 million, $32.5 million, and $40.8 million, of FTE adjustments for 2014, 2013, and 2012, respectively.
Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash
management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis
and include components of both U.S and non-U.S. source income and assets. Non-U.S. source income and assets are not
separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to
disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern
Trust’s activities, it is difficult to segregate with precision revenues, expenses and assets between U.S. and non-U.S.-domiciled
customers. Therefore, certain subjective estimates and assumptions have been made to allocate revenues, expenses and assets
between U.S. and non-U.S. operations.
For purposes of this disclosure, all foreign exchange trading income has been allocated to non-U.S. operations. Interest
expense is allocated to non-U.S. operations based on specifically matched or pooled funding. Allocations of indirect noninterest
expenses related to non-U.S. activities are not significant, but when made, are based on various methods such as time, space,
and number of employees.
The table below summarizes Northern Trust’s performance based on the allocation process described above without regard
to guarantors or the location of collateral.
T A B L E 1 2 3 : D I S T R I B U T I O N O F T O T A L A S S E T S A N D O P E R A T I N G P E R F O R M A N C E
(In Millions)
2014
Non-U.S.
U.S.
Total
2013
Non-U.S.
U.S.
Total
2012
Non-U.S.
U.S.
Total
TOTAL ASSETS
TOTAL
REVENUE
INCOME BEFORE
INCOME TAXES
NET INCOME
$ 28,326.1
81,620.4
$1,341.8
2,989.4
$109,946.5
$4,331.2
$
30,241.3
72,706.0
$ 1,101.0
2,988.3
$ 102,947.3
$ 4,089.3
$
29,198.4
68,265.4
$
992.5
2,903.6
$
97,463.8
$ 3,896.1
$ 446.5
743.7
$1,190.2
$
272.4
803.1
$ 1,075.5
$
194.9
797.4
$
992.3
$322.7
489.1
$811.8
$ 201.3
530.0
$ 731.3
$ 147.6
539.7
$ 687.3
Note: Total revenue is comprised of net interest income and noninterest income.
155 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Note 32 – Regulatory Capital Requirements
Northern Trust and the Bank are subject to various regulatory capital requirements administered by the federal bank regulatory
authorities. Under these requirements, banks must maintain specific ratios of total and Tier 1 capital to risk-weighted assets and
of Tier 1 capital to adjusted average quarterly assets in order to be classified as “well-capitalized.” The regulatory capital
requirements impose certain restrictions upon banks that meet minimum capital requirements but are not “well-capitalized” and
obligate the federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not maintain
such minimum ratios. Such prompt corrective action could have a direct material effect on a bank’s financial statements.
As of December 31, 2014, and 2013, the Bank had capital ratios above the levels required for classification as a “well-
capitalized” institution and had not received any regulatory notification of a lower classification. Additionally, Northern Trust’s
subsidiary banks located outside the U.S. are subject to regulatory capital requirements in the jurisdictions in which they
operate. As of December 31, 2014, and 2013, Northern Trust’s non-U.S. banking subsidiaries had capital ratios above their
specified minimum requirements. There were no conditions or events since December 31, 2014, that management believes have
adversely affected the capital categorization of any Northern Trust subsidiary bank.
The table below summarizes the risk-based capital amounts and ratios for Northern Trust on a consolidated basis and for
the Bank.
T A B L E 1 2 4 : R I S K - B A S E D C A P I T A L A M O U N T S A N D R A T I O S
DECEMBER 31, 2014
($ In Millions)
ADVANCED APPROACH(1)
STANDARDIZED APPROACH(2)
DECEMBER 31, 2013(3)
BALANCE
RATIO
BALANCE
RATIO
BALANCE
RATIO
Common Equity Tier 1 Capital
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized
Tier 1 Capital
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
Total Capital
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
Leverage (Tier 1 Capital to Adjusted Average Fourth
Quarter Assets)
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
$7,813.3
7,327.3
N/A
12.4%
12.0
N/A
$7,813.3
7,327.3
N/A
12.5%
11.8
N/A
$7,853.2
6,765.6
N/A
12.9%
11.5
N/A
8,318.0
7,327.3
3,773.8
3,665.8
9,449.2
8,420.4
6,289.7
6,109.7
N/A
N/A
N/A
N/A
13.2
12.0
6.0
6.0
15.0
13.8
10.0
10.0
N/A
N/A
N/A
N/A
8,317.6
7,327.3
3,759.1
3,738.0
9,723.0
8,695.1
6,265.1
6,229.9
8,317.6
7,327.3
5,340.7
5,324.9
13.3
11.8
6.0
6.0
15.5
14.0
10.0
10.0
7.8
6.9
5.0
5.0
7,853.2
6,765.6
3,526.4
3,515.2
9,294.9
8,366.2
5,877.4
5,858.8
7,853.2
6,765.6
4,953.7
4,939.9
13.4
11.5
6.0
6.0
15.8
14.3
10.0
10.0
7.9
6.8
5.0
5.0
(1) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the December 31, 2014, capital balances and ratios are calculated in compliance with the
Basel III Advanced Approach final rules released by the Federal Reserve Board on July 2, 2013.
(2) Standardized Approach capital components in 2014 are determined by Basel III phased-in requirements and risk-weighted assets are determined by Basel I requirements. The
December 31, 2014, ratios calculated under the Standardized Approach comply with the final rules released by the Federal Reserve Board on July 2, 2013.
(3) The December 31, 2013, capital balances and ratios were calculated in accordance with Basel I requirements.
As of January 1, 2015, the risk-based capital guidelines that apply to the Corporation and the Bank, commonly referred to as
Basel III, are based upon the 2011 capital accord of the (Basel Committee). The Basel III rules are currently being phased in,
and will come into full effect by January 1, 2022.
156 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
notes to consolidated financial statements
Under the final Basel III rules, the Corporation is one of a small number of “core” banking organizations. The rules require
core banking organizations to have rigorous processes for assessing overall capital adequacy in relation to their total risk
profiles, and to publicly disclose certain information about their risk profiles and capital adequacy. In order to implement the
capital rules, a core banking organization, such as the Corporation, is required to satisfactorily complete a parallel run, in which
it calculates capital requirements under both the Basel III rules and previously effective regulations. On February 21, 2014, the
Corporation was notified by the Federal Reserve Board that both the Corporation and the Bank would be permitted to exit
parallel run. Accordingly, the Corporation and the Bank were required to use the advanced approaches methodologies to
calculate and publicly disclose their risk-based capital ratios beginning with the second quarter of 2014. The parallel run of the
risk-based capital framework demonstrated that the use of the advanced approaches methodologies, inclusive of commitments
the Corporation provided to the Federal Reserve Board regarding the Corporation’s approach to the calculation of risk-
weighted assets, did not result in the Tier 1 or total risk-based capital ratios falling below the levels required for categorization
as “well-capitalized.”
The U.S.’s implementation of Basel III has increased the minimum capital thresholds for banking organizations and
tightened the standards for what qualifies as capital. The Corporation and the Bank believe their capital strength, balance sheets
and business models leave them well positioned for the continued U.S. implementation of Basel III.
Note 33 – Northern Trust Corporation (Corporation only)
Condensed financial information is presented below. Investments in wholly-owned subsidiaries are carried on the equity
method of accounting.
T A B L E 1 2 5 : C O N D E N S E D B A L A N C E S H E E T
(In Millions)
ASSETS
Cash on Deposit with Subsidiary Bank
Time Deposits with Subsidiary Banks
Securities
Advances to Wholly-Owned Subsidiaries – Banks
Investments in Wholly-Owned Subsidiaries – Banks
– Nonbank
– Nonbank
Buildings and Equipment
Other Assets
Total Assets
LIABILITIES
Senior Notes
Long Term Debt
Floating Rate Capital Debt
Other Liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
Preferred Stock
Common Stock
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
DECEMBER 31,
2014
2013
$
869.4
–
2.3
2,273.5
5.0
7,604.5
123.0
–
605.8
$ 1,566.4
–
5.3
2,035.0
5.0
7,101.7
168.5
–
608.8
$11,483.5
$11,490.7
$ 1,497.0
793.0
277.2
467.4
$ 1,996.6
717.8
277.1
587.2
3,034.6
3,578.7
388.5
408.6
1,050.9
7,625.4
(319.7)
(704.8)
8,448.9
–
408.6
1,035.7
7,134.8
(244.3)
(422.8)
7,912.0
$11,483.5
$11,490.7
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notes to consolidated financial statements
T A B L E 1 2 6 : C O N D E N S E D S T A T E M E N T O F I N C O M E
(In Millions)
OPERATING INCOME
Dividends – Bank Subsidiaries
– Nonbank Subsidiaries
Intercompany Interest and Other Charges
Interest and Other Income
Total Operating Income
OPERATING EXPENSES
Interest Expense
Other Operating Expenses
Total Operating Expenses
Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries
Benefit for Income Taxes
Income before Equity in Undistributed Net Income of Subsidiaries
Equity in Undistributed Net Income of Subsidiaries – Banks
– Nonbank
Net Income
Preferred Stock Dividends
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$300.0
3.8
42.9
(0.3)
346.4
66.6
17.0
83.6
262.8
16.6
279.4
522.1
10.3
$811.8
9.5
$ 880.0
21.7
33.2
9.0
943.9
78.3
20.8
99.1
844.8
24.2
869.0
(152.5)
14.8
$ 731.3
–
$440.0
26.2
30.0
10.6
506.8
74.9
13.0
87.9
418.9
21.1
440.0
266.9
(19.6)
$687.3
–
Net Income Applicable to Common Stock
$802.3
$ 731.3
$687.3
T A B L E 1 2 7 : C O N D E N S E D S T A T E M E N T O F C A S H F L O W S
(In Millions)
OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
FOR THE YEAR ENDED DECEMBER 31,
2014
2013
2012
$ 811.8
$ 731.3
$ 687.3
Equity in Undistributed Net Income of Subsidiaries
Change in Prepaid Expenses
Change in Accrued Income Taxes
Other, net
Net Cash Provided by Operating Activities
INVESTING ACTIVITIES:
Change in Time Deposits with Banks
Purchases of Securities – Available for Sale
Proceeds from Sale, Maturity and Redemption of Securities – Available for Sale
Change in Capital Investments in Subsidiaries
Advances to Wholly-Owned Subsidiaries
Other, net
Net Cash Provided by (Used in) Investing Activities
FINANCING ACTIVITIES:
Change in Senior Notes and Long-Term Debt
Proceeds from Issuance of Preferred Stock – Series C
Treasury Stock Purchased
Net Proceeds from Stock Options
Cash Dividends Paid on Common Stock
Other, net
Net Cash Used in Financing Activities
Net Change in Cash on Deposit with Subsidiary Bank
Cash on Deposit with Subsidiary Bank at Beginning of Year
Cash on Deposit with Subsidiary Bank at End of Year
(532.4)
0.2
(30.7)
56.1
305.0
–
–
2.9
–
(238.5)
1.1
(234.5)
(500.0)
388.5
(480.7)
127.5
(302.9)
0.1
(767.5)
(697.0)
1,566.4
131.0
(1.1)
(18.1)
102.6
945.7
1,691.4
–
0.2
(13.0)
(1,000.0)
1.8
680.4
317.9
–
(309.7)
146.2
(220.6)
–
(66.2)
1,559.9
6.5
(247.3)
(0.9)
34.7
(36.0)
437.8
(422.2)
(0.4)
94.3
0.3
–
–
(328.0)
300.0
–
(162.4)
106.8
(354.3)
0.1
(109.8)
–
6.5
$ 869.4
$ 1,566.4
$
6.5
158 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
S U P P L E M E N T A L I T E M – S E L E C T E D S T A T I S T I C A L A N D S U P P L E M E N T A L F I N A N C I A L D A T A
T A B L E 1 2 8 : Q U A R T E R L Y F I N A N C I A L D A T A ( U N A U D I T E D )
STATEMENT OF INCOME
2014
2013
($ In Millions Except Per Share Information)
Trust, Investment and Other Servicing Fees $
Other Noninterest Income
Net Interest Income
Interest Income
Interest Expense
Net Interest Income
Provision for Credit Losses
Noninterest Expense
Provision for Income Taxes
Net Income
Preferred Stock Dividends
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
728.2 $
138.0
718.2 $
111.4
706.9 $
128.2
679.5 $
115.3
673.8 $
121.5
648.0 $
162.2
657.3 $
143.1
630.7
119.6
303.9
40.0
263.9
3.0
781.3
101.8
293.8
44.5
249.3
–
774.7
99.7
293.8
47.2
246.6
–
811.0
88.8
295.4
49.7
245.7
3.0
768.0
88.1
302.4
52.5
249.9
5.0
794.5
76.0
291.1
54.1
237.0
5.0
740.7
95.0
275.3
55.2
220.1
5.0
729.7
94.7
286.7
60.6
226.1
5.0
728.9
78.5
$
244.0 $
204.5 $
181.9 $
181.4 $
169.7 $
206.5 $
191.1 $
164.0
9.5
–
–
–
–
–
–
–
Net Income Applicable to Common Stock $
234.5 $
204.5 $
181.9 $
181.4 $
169.7 $
206.5 $
191.1 $
164.0
PER COMMON SHARE
Net Income – Basic
– Diluted
AVERAGE BALANCE SHEET ASSETS
Cash and Due from Banks
Federal Funds Sold and Securities
$
0.98 $
0.98
0.85 $
0.84
0.76 $
0.75
0.75 $
0.75
0.70 $
0.70
0.85 $
0.84
0.78 $
0.78
0.68
0.67
$ 1,217.4 $ 2,783.0 $ 2,838.4 $ 2,806.6 $ 2,676.5 $ 2,776.8 $ 2,964.6 $ 3,392.5
Purchased under Agreements to Resell
1,045.8
923.1
554.1
530.3
549.7
548.2
309.8
249.5
Interest-Bearing Due from and Deposits
with Banks(1)
Federal Reserve Deposits
Securities(2)
Loans and Leases
Allowance for Credit Losses Assigned to
Loans and Leases
Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’
EQUITY
Deposits
Demand and Other Noninterest-
Bearing
Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices – Interest-Bearing
Total Deposits
Short-Term Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Other Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
ANALYSIS OF NET INTEREST INCOME
Earning Assets
Interest-Related Funds
Noninterest-Related Funds
Net Interest Income (Fully Taxable
Equivalent)
Net Interest Margin (Fully Taxable
Equivalent)
COMMON STOCK DIVIDEND AND
MARKET PRICE
Dividends-Common Stock
Market Price Range – High
– Low
16,458.7
17,020.9
33,511.7
31,351.4
16,288.3
15,914.3
33,585.4
30,256.4
17,294.6
13,266.4
34,304.7
30,052.9
17,062.5
12,702.5
32,368.0
29,177.4
18,264.9
13,220.9
30,708.1
28,858.1
17,767.6
7,987.5
30,563.4
28,662.4
18,192.6
5,275.5
30,742.0
28,601.8
18,099.5
3,872.0
31,275.1
28,661.9
(267.1)
7,091.2
(273.4)
5,767.6
(276.8)
5,289.8
(277.8)
5,874.0
(283.8)
5,712.3
(289.6)
7,196.2
(290.2)
7,053.5
(296.1)
6,314.9
$107,430.0 $105,244.7 $103,324.1 $100,243.5 $99,706.7 $95,212.5 $92,849.6 $91,569.3
$ 21,732.7 $ 20,069.8 $ 18,832.3 $ 17,642.1 $16,004.8 $16,134.2 $17,468.1 $16,899.1
14,713.8
14,880.3
1,825.5
2,385.6
46,566.4
39,221.1
15,051.2
1,829.3
48,817.9
15,019.0
1,902.9
48,725.5
14,828.6
1,996.2
48,988.1
14,340.8
1,861.6
47,920.3
14,634.7
2,199.1
39,043.3
14,286.5
1,969.0
43,064.7
87,431.1
4,364.4
1,496.9
1,613.4
277.2
3,747.8
8,499.2
85,717.2
4,860.3
1,496.8
1,636.5
277.2
2,971.2
8,285.5
84,645.2
4,217.8
1,661.6
1,642.4
277.2
2,932.7
7,947.2
80,747.8
4,552.0
1,996.6
1,728.9
277.1
3,014.7
7,926.4
80,127.5
4,989.9
1,996.5
1,485.8
277.1
3,054.2
7,775.7
75,454.4
5,447.2
2,192.5
978.5
277.1
3,165.0
7,697.8
73,345.2
4,750.0
2,400.1
1,105.2
277.1
3,323.7
7,648.3
73,386.1
3,405.5
2,403.9
1,277.7
277.1
3,275.8
7,543.2
$107,430.0 $105,244.7 $103,324.1 $100,243.5 $99,706.7 $95,212.5 $92,849.6 $91,569.3
$ 99,388.5 $ 96,967.5 $ 95,472.7 $ 91,840.7 $91,601.7 $85,529.1 $83,121.7 $82,158.0
71,660.3
63,851.2
$ 25,938.2 $ 23,049.3 $ 21,860.8 $ 20,180.4 $18,729.7 $17,313.6 $18,712.2 $18,306.8
73,450.3
73,611.9
73,918.2
72,872.0
64,409.5
68,215.5
270.9
256.2
253.4
254.4
259.1
244.8
228.0
233.7
1.08%
1.05%
1.06%
1.12%
1.12%
1.14%
1.10%
1.15%
$
0.33 $
0.33 $
0.33 $
0.31 $
0.31 $
0.31 $
0.31 $
69.15
60.78
70.84
63.11
65.98
58.30
67.17
58.31
62.00
52.40
62.02
53.92
59.33
51.90
0.30
55.50
49.27
(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 sheet.
(2) Securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in other assets in the consolidated
balance sheet as of December 31, 2014, and 2013.
Note: The common stock of the Corporation is traded on the NASDAQ Global Select Market under the symbol “NTRS”.
159 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
T A B L E 1 2 9 : A V E R A G E C O N S O L I D A T E D B A L A N C E S H E E T W I T H A N A L Y S I S O F N E T I N T E R E S T I N C O M E
( I N T E R E S T A N D R A T E O N A F U L L Y T A X A B L E E Q U I V A L E N T B A S I S )
($ In Millions)
AVERAGE EARNING ASSETS
2014
AVERAGE
BALANCE
INTEREST
2013
2012
RATE(3)
INTEREST
AVERAGE
BALANCE RATE(4)
INTEREST
AVERAGE
BALANCE RATE(3)
Federal Funds Sold and Resell Agreements
Interest-Bearing Due from and Deposits with Banks(1)
Federal Reserve Deposits
$
3.5
127.6
37.8
$765.2
16,783.6
14,737.2
0.45%
0.76
0.26
$1.9 $
415.5 0.46%
$0.5 $
258.0 0.17%
142.1
19.6
18,080.7 0.79
7,615.7 0.26
176.4
13.9
18,652.2 0.95
5,388.8 0.26
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other(2)
31.2
11.1
148.9
114.3
2,892.7
165.8
17,514.8
12,872.6
1.08
6.69
0.85
0.89
18.3
18.0
141.2
97.5
1,625.8 1.12
281.0 6.40
17,548.8 0.80
11,364.3 0.86
23.8
27.4
146.9
105.2
2,269.4 1.05
421.1 6.52
18,381.5 0.80
9,821.8 1.07
Total Securities
Loans and Leases(3)
Total Earning Assets
Allowance for Credit Losses Assigned to Loans and
305.5
33,445.9
0.91
275.0
30,819.9 0.89
303.4
30,893.8 0.98
741.9
30,215.6
2.46
749.4
28,696.5 2.61
834.3
28,975.7 2.88
1,216.3
95,947.5
1.27
1,188.0
85,628.3 1.39
1,328.5
84,168.5 1.58
Leases
Cash and Due from Banks
Buildings and Equipment
Client Security Settlement Receivables
Goodwill
Other Assets
Total Assets
AVERAGE SOURCE OF FUNDS
Deposits
Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices – Interest-Bearing
Total Interest-Bearing Deposits
Short-Term Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Total Interest-Related Funds
$
$
–
–
–
–
–
–
(273.7)
2,401.4
448.7
865.2
540.2
4,154.2
–
–
–
–
–
–
–
–
–
–
–
–
(289.9)
2,950.4
459.0
785.8
533.6
4,790.5
–
–
–
–
–
–
–
–
–
–
–
(296.7)
3,841.8
471.0
492.3
535.2
3,763.4
–
–
–
–
–
–
– $104,083.5
–%
$–
$94,857.7
–%
$– $92,975.5
–%
9.9 $ 14,904.4 $0.07% $
6.1
65.7
1,888.5
48,281.9
0.32
0.14
81.7
5.1
54.7
37.7
2.2
65,074.8
4,499.1
1,661.2
1,654.9
277.2
0.13
0.11
3.29
2.28
0.81
9.7 $ 14,533.4 0.07% $
12.4
81.2
103.3
5.2
74.4
37.1
2.4
2,102.0 0.59
42,338.3 0.19
58,973.7 0.18
4,654.7 0.11
2,247.0 3.31
1,211.7 3.06
277.1 0.85
18.3 $14,101.9 0.13%
20.1
118.3
2,995.1 0.67
37,943.8 0.31
156.7
5.6
72.0
60.3
2.8
55,040.8 0.28
3,045.9 0.18
2,295.2 3.14
1,634.1 3.69
277.0 1.04
181.4
73,167.2
0.25
222.4
67,364.2 0.33
297.4
62,293.0 0.48%
Interest Rate Spread
Demand and Other Noninterest-Bearing Deposits
Other Liabilities
Stockholders’ Equity
–
–
–
–
–
19,581.8
3,168.0
8,166.5
1.02
–
–
–
–
–
–
–
– 1.06
–
–
–
16,622.6
3,203.9
7,667.0
–
–
–
–
– 1.10
–
–
–
20,179.0
3,145.3
7,358.2
Total Liabilities and Stockholders’ Equity
$
– $104,083.5
–%
$– $ 94,857.7
–% $
– $92,975.5
–%
Net Interest Income/Margin (FTE Adjusted)
Net Interest Income/Margin (Unadjusted)
Net Interest Income/Margin Components
U.S.
Non-U.S.
$1,034.9 $
$1,005.5 $
–
–
$ 843.1 $ 71,803.1
24,144.4
191.8
1.08% $ 965.6 $
– 1.13% $1,031.1 $
– 1.22%
1.05% $ 933.1 $
– 1.09% $ 990.3 $
– 1.18%
1.17% $ 814.9 $ 61,223.6 1.33% $ 889.3 $59,907.2 1.48%
0.79
24,404.7 0.62
24,261.3 0.58
150.7
141.8
Consolidated
$1,034.9 $ 95,947.5
1.08% $ 965.6 $ 85,628.3 1.13% $1,031.1 $84,168.5 1.22%
(1) Interest-Bearing Due from and Deposits with Banks includes interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the
consolidated balance sheet in our periodic filings with the SEC.
(2) Other securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments for purposes of presenting earning assets; such securities
are presented in other assets on the consolidated balance sheet in our periodic filings with the SEC.
(3) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(4) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheet with Analysis of Net Interest Income.
Notes: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state
tax rate of 37.8%. Total taxable equivalent interest adjustments amounted to $29.4 million in 2014, $32.5 million in 2013 and $40.8 million in 2012. 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.
160 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
T A B L E 1 3 0 : C H A N G E S I N N E T I N T E R E S T I N C O M E
( I N T E R E S T A N D R A T E O N A F U L L Y T A X A B L E
E Q U I V A L E N T B A S I S )
2014/2013
CHANGE DUE TO
(In Millions)
Increase (Decrease) in Interest Income
Money Market Assets
Federal Funds Sold and Resell Agreements
Time Deposits with Banks
Other Interest-Bearing
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Loans and Leases
AVERAGE
BALANCE
$ 1.6
(10.2)
18.5
14.2
(7.4)
(0.3)
13.0
114.0
RATE
TOTAL
$
–
(4.3)
(0.3)
(1.3)
0.5
8.0
3.8
(121.5)
$ 1.6
(14.5)
18.2
12.9
(6.9)
7.7
16.8
(7.5)
2013/2012
CHANGE DUE TO
RATE
TOTAL
$
1.1
(28.9)
(0.1)
1.3
(0.3)
1.0
(24.2)
(76.9)
$
1.4
(34.3)
5.7
(5.5)
(9.4)
(5.7)
(7.7)
(84.9)
AVERAGE
BALANCE
$ 0.3
(5.4)
5.8
(6.8)
(9.1)
(6.7)
16.5
(8.0)
Total
$143.4
$(115.1)
$ 28.3
$(13.4)
$(127.0)
(140.4)
Increase (Decrease) in Interest Expense
Deposits
Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices Time
Short-Term Borrowings
Senior Notes
Subordinated Notes
Long-Term Debt
Floating Rate Capital Debt
Total
Increase (Decrease) in Net Interest Income
$ 0.3
(1.3)
11.3
(0.2)
(19.4)
28.4
–
$ 19.1
$124.3
$ (0.1)
(5.0)
(26.8)
0.1
(0.3)
(27.8)
(0.2)
$ (60.1)
$ (55.0)
$ 0.2
(6.3)
(15.5)
(0.1)
(19.7)
0.6
(0.2)
$(41.0)
$ 69.3
$ 0.6
(6.0)
13.6
2.9
(1.5)
(15.6)
–
$ (6.0)
$ (7.4)
$ (9.2)
(1.7)
(50.7)
(3.3)
3.9
(7.6)
(0.4)
$ (69.0)
$ (58.0)
$ (8.6)
(7.7)
(37.1)
(0.4)
2.4
(23.2)
(0.4)
$ (75.0)
$ (65.4)
Note: Changes not due solely to average balance changes or rate changes are included in the change due to rate column.
I n v e s t m e n t S e c u r i t i e s P o r t f o l i o
T A B L E 1 3 1 : R E M A I N I N G M A T U R I T Y A N D A V E R A G E Y I E L D O F S E C U R I T I E S H E L D T O M A T U R I T Y A N D A V A I L A B L E F O R S A L E
($ in Millions)
Securities Held to Maturity
ONE YEAR OR LESS
ONE TO FIVE YEARS
FIVE TO TEN YEARS
OVER TEN YEARS
BOOK
YIELD
BOOK
YIELD
BOOK
YIELD
BOOK
YIELD
AVERAGE
MATURITY
DECEMBER 31, 2014
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other – Fixed
– Floating
$
41.2
7.3
1,453.7
1.3
4.12% $
2.70
0.56
2.11
72.8
4.0
2,338.5
187.5
4.68% $
3.13
0.91
2.42
7.9
1.6
14.0
–
4.84% $
5.07
2.40
–
–
5.5
35.5
–
–% 33 mos.
75 mos.
20 mos.
31 mos.
5.10
3.07
–
Total Securities Held to Maturity
$1,503.5
0.67% $ 2,602.8
1.13% $
23.5
3.40% $
41.0
3.34% 21 mos.
Securities Available for Sale
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Asset-Backed – Fixed
Asset-Backed – Floating
Auction Rate Securities
Other – Fixed
– Floating
$ 609.3
4.6
3,964.0
1,678.9
106.8
–
843.8
280.5
1.98% $ 3,897.6
–
6.82
8,323.6
0.82
308.7
0.58
217.1
0.44
0.8
–
3,705.7
1.5
704.1
0.68
0.97% $
–
0.92
0.78
0.51
0.59
1.42
0.60
–
–
2,745.3
1.7
14.4
1.3
545.9
109.4
–% $
–
0.93
5.13
0.83
0.44
1.80
0.56
–
–
1,356.3
0.1
–
16.0
14.0
108.6
–% 29 mos.
10 mos.
–
47 mos.
1.34
8 mos.
3.36
21 mos.
–
79 mos.
1.56
30 mos.
1.91
39 mos.
0.60
Total Securities Available for Sale
$7,487.9
0.89% $17,157.6
1.02% $3,418.0
1.06% $1,495.0
1.29% 38 mos.
Note: Yield is calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates.
As of December 31, 2014, Northern Trust had no holdings of the securities of any single issuer greater than 10% of stockholders’ equity,
except for U.S. government, government agencies, government corporations and government-sponsored agencies. See Note 4 to the
consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data” for more information on securities.
161 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
L o a n s a n d L e a s e s P o r t f o l i o
T A B L E 1 3 2 : R E M A I N I N G M A T U R I T Y O F S E L E C T E D L O A N S A N D L E A S E S
(In Millions)
U.S. (Excluding Residential Real Estate and Private Client Loans):
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Other-Commercial
Other-Personal
Total U.S.
Non-U.S.
Total Selected Loans and Leases
Interest Rate Sensitivity of Loans and Leases:
Fixed Rate
Variable Rate
Total
DECEMBER 31, 2014
TOTAL
ONE YEAR
OR LESS
ONE TO FIVE
YEARS
OVER FIVE
YEARS
$ 8,381.9
3,333.3
916.3
37.1
191.5
$5,884.8
690.7
102.3
1.5
141.1
$1,655.0
1,832.4
329.0
4.7
35.3
$ 842.1
810.2
485.0
30.9
15.1
$12,860.1
$6,820.4
$3,856.4
$2,183.3
$ 1,530.6
$14,390.7
$10,618.4
3,772.3
$1,516.8
$8,337.2
$7,288.6
1,131.1
$
13.3
$3,869.7
$2,135.0
1,698.1
$
0.5
$2,183.8
$1,194.8
943.1
$14,390.7
$8,419.7
$3,833.1
$2,137.9
T A B L E 1 3 3 : D I S T R I B U T I O N O F N O N - U . S . L O A N S B Y T Y P E
(In Millions)
Commercial
Non-U.S. Governments and Official Institutions
Banks
Other
Total
2014
$ 154.0
–
–
1,376.6
$1,530.6
2013
$497.0
250.1
10.4
197.2
$954.7
DECEMBER 31,
2012
2011
2010
$ 498.0
252.4
9.9
432.0
$ 335.9
197.8
13.3
510.5
$ 874.0
110.3
9.3
52.6
$1,192.3
$1,057.5
$1,046.2
Note: Non-U.S. loans primarily include short duration advances related to the processing of custodied client investments.
T A B L E 1 3 4 : A L L O W A N C E F O R C R E D I T L O S S E S R E L A T I N G T O N O N - U . S . O P E R A T I O N S
The following table should be read in conjunction with the “Risk Management” section of Management’s Discussion and
Analysis of Financial Condition and Results of Operations (Item 7).
(In Millions)
Balance at Beginning of Year
Charge-Offs
Recoveries
Provision for Credit Losses
Balance at End of Year
2014
2.1
–
–
1.2
3.3
$
$
$
2013
3.4
–
–
(1.3)
$
2012
4.7
–
–
(1.3)
$
2.1
$
3.4
2011
3.8
–
–
0.9
4.7
$
$
$
2010
4.9
–
–
(1.1)
$
3.8
The SEC requires the disclosure of the allowance for credit losses that is applicable to international operations. The above table
has been prepared in compliance with this disclosure requirement and is used in determining non-U.S. operating performance.
The amounts shown in the table should not be construed as being the only amounts that are available for non-U.S. loan charge-
offs, since the entire allowance for credit losses assigned to loans and leases is available to absorb losses on both U.S. and non-
U.S. loans. In addition, these amounts are not intended to be indicative of future charge-off trends.
162 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
S u m m a r y o f L o a n s a n d L e a s e s L o s s E x p e r i e n c e
T A B L E 1 3 5 : A N A L Y S I S O F A L L O W A N C E F O R C R E D I T L O S S E S
The following table should be read in conjunction with the “Risk Management” section of Management’s Discussion and
Analysis of Financial Condition and Results of Operations (Item 7).
($ in Millions)
Balance at Beginning of Year
Charge-Offs
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Residential Real Estate
Private Client
Other
Total Personal
Total Charge-Offs
Recoveries
Commercial
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Total Commercial
Personal
Residential Real Estate
Private Client
Total Personal
Total Recoveries
Net Charge-Offs
Provision for Credit Losses
Effect of Foreign Exchange Rates
Net Change in Allowance
Balance at End of Year
Allowance Assigned To:
Loans and Leases
Undrawn Commitments and Standby Letters of Credit
Total Allowance for Credit Losses
Loans and Leases at Year-End
Average Total Loans and Leases
As a Percent of Year-End Loans and Leases
2014
2013
2012
2011
2010
$
307.9
$
327.6
$
328.9
$
357.3
$
340.6
5.4
7.5
12.9
21.2
2.0
–
23.2
36.1
1.3
9.8
–
11.1
5.6
1.4
7.0
18.1
18.0
6.0
–
(12.0)
295.9
267.0
28.9
295.9
5.0
11.7
16.7
37.0
5.5
0.1
42.6
59.3
3.6
5.0
–
8.6
9.4
1.6
11.0
19.6
39.7
20.0
–
(19.7)
307.9
278.1
29.8
307.9
5.5
14.4
19.9
40.3
2.8
–
43.1
63.0
3.1
14.5
2.7
20.3
9.8
6.6
16.4
36.7
26.3
25.0
–
(1.3)
$
$
$
327.6
297.9
29.7
327.6
$
$
$
22.0
34.3
56.3
55.0
5.0
–
60.0
13.3
62.9
76.2
63.7
10.2
–
73.9
116.3
150.1
15.0
6.5
–
21.5
7.8
3.6
11.4
32.9
83.4
55.0
–
(28.4)
328.9
294.8
34.1
328.9
0.8
2.8
–
3.6
2.3
1.0
3.3
6.9
143.2
160.0
(0.1)
16.7
357.3
319.6
37.7
357.3
$
$
$
31,640.2
30,215.6
29,385.5
28,696.5
$29,504.5
$28,975.7
$29,063.9
$28,346.7
$28,132.0
$27,514.4
Net Loan Charge-Offs
Provision for Credit Losses
Allowance at Year-End Assigned to Loans and Leases
As a Percent of Average Loans and Leases
Net Loan Charge-Offs
Allowance at Year-End Assigned to Loans and Leases
0.06%
0.02
0.84
0.06%
0.88
0.14%
0.07
0.95
0.14%
0.97
0.09%
0.08
1.01
0.09%
1.03
0.29%
0.19
1.01
0.29%
1.04
0.51%
0.57
1.14
0.52%
1.16
163 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
D e p o s i t s
T A B L E 1 3 6 : A V E R A G E D E P O S I T S B Y T Y P E
(In Millions)
U.S. Offices
Demand and Noninterest-Bearing
Individuals, Partnerships and Corporations
Correspondent Banks
Other Noninterest-Bearing
Total Demand and Noninterest-Bearing
Interest-Bearing
Savings and Money Market
Savings Certificates less than $100,000
Savings Certificates $100,000 and more
Other
Total Interest-Bearing
Total U.S. Offices
Non-U.S. Offices
Noninterest-Bearing
Interest-Bearing
Total Non-U.S. Offices
Total Deposits
T A B L E 1 3 7 : D I S T R I B U T I O N O F N O N - U . S . D E P O S I T S B Y T Y P E
(In Millions)
Commercial
Non-U.S. Governments and Official Institutions
Banks
Other Time
Other Demand
Total
T A B L E 1 3 8 : R E M A I N I N G M A T U R I T Y O F T I M E D E P O S I T S $ 1 0 0 , 0 0 0 O R M O R E
(In Millions)
3 Months or Less
Over 3 through 6 Months
Over 6 through 12 Months
Over 12 Months
Total
T A B L E 1 3 9 : A V E R A G E R A T E S P A I D O N I N T E R E S T - R E L A T E D D E P O S I T S B Y T Y P E
Interest-Related Deposits – U.S. Offices
Savings and Money Market
Savings Certificates less than $100,000
Savings Certificates $100,000 and more
Other Time
Total U.S. Offices Interest-Related Deposits
Total Non-U.S. Offices Interest-Related Deposits
Total Interest-Related Deposits
DECEMBER 31,
2014
2013
2012
$17,816.4
78.9
111.6
$12,816.4
71.6
161.7
$16,736.5
72.8
118.0
18,006.9
13,049.7
16,927.3
14,904.4
767.6
209.1
911.8
16,792.9
34,799.8
1,574.9
48,281.9
49,856.8
14,533.4
252.5
968.4
881.1
16,635.4
29,685.1
3,572.9
42,338.3
45,911.2
14,101.9
300.4
1,149.6
1,545.1
17,097.0
34,024.3
3,251.7
37,943.8
41,195.5
$84,656.6
$75,596.3
$75,219.8
DECEMBER 31,
2014
2013
2012
$43,466.6
6,094.6
678.5
21.9
6.6
$43,638.1
6,370.5
306.0
26.4
2.5
$36,948.8
5,990.4
248.8
37.0
8.4
$50,268.2
$50,343.5
$43,233.4
DECEMBER 31, 2014
U.S. OFFICES
NON-U.S. OFFICES
CERTIFICATES
OF DEPOSIT
$ 640.7
289.4
480.5
141.3
$1,551.9
OTHER
TIME
$–
–
–
–
$–
$7,460.6
16.6
7.5
–
$7,484.7
DECEMBER 31,
2013
0.07%
0.56
0.73
0.44
0.13
0.19
0.18%
2014
0.07%
0.28
0.46
0.25
0.10
0.14
0.13%
2012
0.13%
0.73
0.91
0.48
0.22
0.31
0.28%
164 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
I n f o r m a t i o n a b o u t S h o r t - T e r m B o r r o w i n g s
Information on short-term borrowings is excluded as the average balances of each category of short-term borrowings for the
years ended December 31, 2014, 2013 and 2012 was less than 30% of stockholders’ equity as of the years then ended.
N o n - U . S . O p e r a t i o n s ( B a s e d o n O b l i g o r ’ s D o m i c i l e )
See also “Note 31 to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.”
T A B L E 1 4 0 : S E L E C T E D A V E R A G E A S S E T S A N D L I A B I L I T I E S A T T R I B U T A B L E T O N O N - U . S . O P E R A T I O N S
(In Millions)
Total Assets
Time Deposits with Banks
Loans
Customers’ Acceptance Liability
Non-U.S. Investments
Total Liabilities
Deposits
Liability on Acceptances
2014
2013
2012
2011
2010
$28,072.8
16,106.9
1,490.2
–
6,446.5
52,123.3
49,854.7
–
$29,315.6
17,785.5
1,164.0
0.5
5,334.1
48,144.4
45,865.7
0.5
$29,237.4
18,580.4
1,091.1
0.7
4,470.4
43,436.7
41,160.9
0.7
$29,201.2
16,906.5
1,301.7
0.3
5,370.2
45,757.5
43,370.3
0.3
$22,664.0
14,592.4
692.9
0.5
2,688.8
36,196.0
33,479.3
0.5
T A B L E 1 4 1 : P E R C E N T O F N O N - U . S . - R E L A T E D A V E R A G E A S S E T S A N D L I A B I L I T I E S T O T O T A L C O N S O L I D A T E D A V E R A G E A S S E T S
Assets
Liabilities
2014
2013
2012
2011
2010
27%
50%
31%
51%
31%
47%
32%
50%
30%
48%
NON-U.S. OUTSTANDINGS
As used in this discussion and the following table, non-U.S. outstandings are cross-border outstandings as defined by the U.S.
Securities and Exchange Commission. They consist of loans, acceptances, interest-bearing deposits with financial institutions,
accrued interest and other monetary assets. Not included are letters of credit, loan commitments, and non-U.S. office local
currency claims on residents funded by local liabilities. Non-U.S. outstandings related to a country are net of guarantees given
by third parties resident outside the country and the value of tangible, liquid collateral held outside the country. However,
transactions with branches of non-U.S. banks are included in these outstandings and are classified according to the country
location of the non-U.S. bank’s head office.
Short-term interbank time deposits with non-U.S. banks represent the largest category of non-U.S. outstandings. Northern
Trust actively participates in the interbank market with U.S. and non-U.S. banks.
Northern Trust places deposits with non-U.S. counterparties that have strong internal (Northern Trust) risk ratings and
external credit ratings. These non-U.S. banks are approved and monitored by Northern Trust’s Counterparty Risk
Management Committee, which has credit authority for exposure to all non-U.S. banks and approves credit limits. This process
includes financial analysis of the non-U.S. banks, use of an internal risk rating system and consideration of external market
indicators. Each counterparty is reviewed at least annually and potentially more frequently based on deteriorating credit
fundamentals or general market conditions. Separate from the entity-specific review process, the average life to maturity of
deposits with non-U.S. banks is deliberately maintained on a short-term basis in order to respond quickly to changing credit
conditions. Northern Trust also utilizes certain risk mitigation tools and agreements that may reduce exposures through use of
collateral and/or balance sheet netting. Additionally, the Counterparty Risk Management Committee oversees country-risk
analyses and imposes limits to country exposure.
165 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
The following table provides information on non-U.S. outstandings by country that exceed 1.00% of Northern Trust’s
assets.
T A B L E 1 4 2 : N O N - U . S . O U T S T A N D I N G S
(In Millions)
AT DECEMBER 31, 2014
Canada
Australia
Singapore
Netherlands
Germany
AT DECEMBER 31, 2013
Canada
Australia
Singapore
AT DECEMBER 31, 2012
Canada
United Kingdom
Australia
Singapore
Sweden
France
BANKS
$2,209
878
1,180
575
950
$ 2,779
1,347
1,992
$ 2,447
1,814
998
1,474
1,490
1,311
COMMERCIAL
AND OTHER
$ 304
1,076
59
658
165
$
$
322
126
13
8
156
636
17
–
125
TOTAL
$2,513
1,954
1,239
1,233
1,115
$ 3,101
1,473
2,005
$ 2,455
1,970
1,634
1,491
1,490
1,436
Countries whose aggregate outstandings totaled between 0.75% and 1.00% of total assets were as follows: Switzerland with aggregate outstandings of $879 million and Japan with
aggregate outstandings of $859 million at December 31, 2014, France with aggregate outstandings of $820 million at December 31, 2013, and Japan with aggregate outstandings of $914
million and Luxembourg with aggregate outstandings of $859 million at December 31, 2012.
166 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
I T E M 9 – C H A N G E S I N A N D D I S A G R E E M E N T S W I T H A C C O U N T A N T S O N A C C O U N T I N G A N D
F I N A N C I A L D I S C L O S U R E
None.
I T E M 9 A – C O N T R O L S A N D P R O C E D U R E S
Disclosure Controls and Procedures
As of December 31, 2014, the Corporation’s management, with the participation of the Corporation’s Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed
by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms. Based on such evaluation, such officers have concluded
that, as of December 31, 2014, the Corporation’s disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial Reporting
Management of the Corporation is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance to the
Corporation’s management and board of directors regarding the preparation of reliable published financial statements. This
internal control includes monitoring mechanisms, and actions are taken to correct deficiencies identified.
Management assessed the Corporation’s internal control over financial reporting as of December 31, 2014, based on the
criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management
concluded that, as of December 31, 2014, the Corporation maintained effective internal control over financial reporting.
Additionally, KPMG LLP, the independent registered public accounting firm that audited the Corporation’s consolidated
financial statements as of, and for the year ended, December 31, 2014, included in this Annual Report on Form 10-K, has issued
an attestation report on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the
evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
167 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
report of independent registered public accounting firm
T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S O F N O R T H E R N T R U S T C O R P O R A T I O N :
We have audited Northern Trust Corporation’s internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Northern Trust Corporation’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on Northern Trust Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Northern Trust Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Northern Trust Corporation and subsidiaries as of December 31, 2014 and 2013, and
the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2014, and our report dated February 26, 2015 expressed an
unqualified opinion on those consolidated financial statements.
chicago, illinois
f e b r u a r y 2 6 , 2 0 1 5
168 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
I T E M 9 B – O T H E R I N F O R M A T I O N
Not applicable.
P A R T I I I
I T E M 1 0 – D I R E C T O R S , E X E C U T I V E O F F I C E R S a n d C O R P O R A T E G O V E R N A N C E
The information called for by this item is incorporated by reference to “Supplemental Item – Executive Officers of the
Registrant” in Part I of this Annual Report on Form 10-K, as well as the following sections of the Corporation’s definitive Proxy
Statement for the 2015 Annual Meeting of Stockholders: “Election of Directors,” “Information about the Nominees for
Director,” “Security Ownership by Directors and Executive Officers – Section 16(a) Beneficial Ownership Reporting
Compliance,” “Corporate Governance – Code of Business Conduct and Ethics,” “Corporate Governance – Director
Nominations and Qualifications” and “Board and Board Committee Information – Audit Committee.”
I T E M 1 1 – E X E C U T I V E C O M P E N S A T I O N
The information called for by this item is incorporated herein by reference to the “Executive Compensation” and “Director
Compensation” sections of the Corporation’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders.
I T E M 1 2 – S E C U R I T Y O W N E R S H I P O F C E R T A I N B E N E F I C I A L O W N E R S A N D M A N A G E M E N T A N D
R E L A T E D S T O C K H O L D E R M A T T E R S
The information called for by this item is incorporated herein by reference to the “Security Ownership by Directors and
Executive Officers,” “Security Ownership of Certain Beneficial Owners,” and “Equity Compensation Plan Information”
sections of the Corporation’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders.
I T E M 1 3 – C E R T A I N R E L A T I O N S H I P S A N D R E L A T E D T R A N S A C T I O N S , A N D D I R E C T O R
I N D E P E N D E N C E
The information called for by this item is incorporated herein by reference to the “Corporate Governance – Director
Independence” and the “Corporate Governance – Related Person Transactions Policy” sections of the Corporation’s definitive
Proxy Statement for the 2015 Annual Meeting of Stockholders.
I T E M 1 4 – P R I N C I P A L A C C O U N T A N T F E E S A N D S E R V I C E S
The information called for by this item is incorporated herein by reference to the “Audit Matters” section of the Corporation’s
definitive Proxy Statement for the 2015 Annual Meeting of Stockholders.
169 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
P A R T I V
I T E M 1 5 – E X H I B I T S A N D F I N A N C I A L S T A T E M E N T S C H E D U L E S
I T E M 1 5 ( a ) ( 1 ) A N D ( 2 ) – N O R T H E R N T R U S T C O R P O R A T I O N A N D S U B S I D I A R I E S L I S T O F
F I N A N C I A L S T A T E M E N T S A N D F I N A N C I A L S T A T E M E N T S C H E D U L E S
The following financial statements of the Corporation and its Subsidiaries included in Item 8 of this Annual Report on
Form 10-K are incorporated herein by reference.
For Northern Trust Corporation and Subsidiaries:
Consolidated Balance Sheet – December 31, 2014 and 2013
Consolidated Statement of Income – Years Ended December 31, 2014, 2013, and 2012
Consolidated Statement of Comprehensive Income – Years Ended December 31, 2014, 2013, and 2012
Consolidated Statement of Changes in Stockholders’ Equity – Years Ended December 31, 2014, 2013, and 2012
Consolidated Statement of Cash Flows – Years Ended December 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial statement schedules have been omitted for the reason that they are not required or are not applicable.
The Quarterly Financial Data (Unaudited) of the Corporation included in “Supplemental Item – Selected Statistical and
Supplemental Financial Data” is incorporated herein by reference.
I T E M 1 5 ( a ) ( 3 ) – E X H I B I T S
The exhibits listed on the Exhibit Index to this Annual Report on Form 10-K are filed herewith or are incorporated herein by
reference to other filings.
170 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 26, 2015
Northern Trust Corporation
(Registrant)
By:
/s/ Frederick H. Waddell
Frederick H. Waddell
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature
Capacity
/s/ Frederick H. Waddell
Frederick H. Waddell
/s/
S. Biff Bowman
S. Biff Bowman
/s/
Jane B. Karpinski
Jane B. Karpinski
/s/ Linda Walker Bynoe
Linda Walker Bynoe
/s/ Nicholas D. Chabraja
Nicholas D. Chabraja
/s/
Susan Crown
Susan Crown
/s/ Dean M. Harrison
Dean M. Harrison
/s/ Dipak C. Jain
Dipak C. Jain
/s/ Robert W. Lane
Robert W. Lane
Chairman and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
171 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
Signature
Capacity
/s/
Jose Luis Prado
Jose Luis Prado
/s/
John W. Rowe
John W. Rowe
/s/ Martin P. Slark
Martin P. Slark
/s/ David H.B. Smith, Jr.
David H.B. Smith, Jr.
Director
Director
Director
Director
/s/ Charles A. Tribbett, III
Director
Charles A. Tribbett, III
Date: February 26, 2015
172 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
E X H I B I T I N D E X
Exhibit
Number
Description
3.1
3.2
3.3
4.1
4.2
10.1**
(i)**
(ii)**
10.2**
10.3**
(i)**
10.4**
Restated Certificate of Incorporation of Northern Trust Corporation, as amended to date (incorporated herein by
reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed April 19, 2006).
Certificate of Designation of Series C Non-Cumulative Perpetual Preferred Stock of Northern Trust Corporation,
dated August 4, 2014 (incorporated herein by reference to Exhibit 4.1 to the Corporation’s Current Report on
Form 8-K filed August 4, 2014).
By-laws of Northern Trust Corporation, as amended to date (incorporated herein by reference to Exhibit 3.1 to
the Corporation’s Current Report on Form 8-K filed November 24, 2014).
Deposit Agreement, dated August 5, 2014, between Northern Trust Corporation, Wells Fargo Bank, N.A., as
depositary, and the holders from time to time of the depositary receipts described therein (incorporated by
reference to Exhibit 4.1 to the Corporation’s Current Report on Form 8-K filed August 5, 2014).
Certain instruments defining the rights of the holders of long-term debt of the Corporation and certain of its
subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the
Corporation and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Corporation hereby
agrees to furnish a copy of any of these agreements to the SEC upon request.
Deferred Compensation Plans Trust Agreement, dated May 11, 1998, between Northern Trust Corporation and
Harris Trust and Savings Bank as Trustee (which, effective August 31, 1999, was succeeded by U.S. Trust
Company, N.A. and effective June 1, 2009, was succeeded by Evercore Trust Company, N.A.) regarding the
Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company,
the
Supplemental Thrift-Incentive Plan for Employees of The Northern Trust Company, the Supplemental Pension
Plan for Employees of The Northern Trust Company, and the Northern Trust Corporation Deferred
Compensation Plan (incorporated herein by reference to Exhibit 10(iv) to the Corporation’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
Amendment, dated August 31, 1999 (incorporated herein by reference to Exhibit 10(vi) to the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
Second Amendment, dated as of May 16, 2000 (incorporated herein by reference to Exhibit 10(v) to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
Northern Trust Corporation Supplemental Employee Stock Ownership Plan, as amended and restated effective as
of January 1, 2008 (incorporated herein by reference to Exhibit 10(vi) to the Corporation’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008).
Northern Trust Corporation Supplemental Thrift-Incentive Plan, as amended and restated effective as of
January 1, 2008 (incorporated herein by reference to Exhibit 10(vii) to the Corporation’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008).
Amendment Number One, dated October 29, 2009 and effective January 1, 2010 (incorporated herein by
reference to Exhibit 10(vi)(1) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2009).
Northern Trust Corporation Supplemental Pension Plan, as amended and restated effective January 1, 2009
(incorporated herein by reference to Exhibit 10(viii) to the Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008).
173 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
Exhibit
Number
10.5**
10.6**
(i)**
(ii)**
(iii)**
(iv)**
(v)**
(vi)**
(vii)**
10.7**
(i)**
(ii)**
(iii)**
(iv)**
(v)**
(vi)**
(vii)**
(viii)**
Description
Northern Trust Corporation Deferred Compensation Plan, as amended and restated effective as of January 1,
2008 (incorporated herein by reference to Exhibit 10(ix) to the Corporation’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2008).
Amended and Restated Northern Trust Corporation 2002 Stock Plan, effective as of January 1, 2008
(incorporated herein by reference to Exhibit 10(xiv) to the Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008).
Form of 2010 Stock Option Terms and Conditions (incorporated herein by reference to Exhibit 10(x)(9) to the
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009).
Form of 2010 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10(x)(10) to
the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009).
Form of 2011 Executive Stock Option Terms and Conditions (incorporated herein by reference to Exhibit 10(v)
to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).
2011 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10(vi) to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).
Form of 2012 Executive Stock Option Award Terms and Conditions (incorporated herein by reference to
Exhibit 10.7(xix) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011).
Form of 2012 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit
10.7(xxii) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011).
Form of 2012 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.7(xxiii) to
the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011).
Northern Trust Corporation 2012 Stock Plan (incorporated herein by reference to Exhibit 10.1 to the
Corporation’s Current Report on Form 8-K filed April 19, 2012).
Form of 2012 Director Stock Unit Agreement (incorporated herein by reference to Exhibit 10(iii) to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
Form of 2012 Director Prorated Stock Agreement (incorporated herein by reference to Exhibit 10(iv) to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
Form of 2012 New Director Stock Unit Agreement (incorporated herein by reference to Exhibit 10(v) to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
Form of 2012 Executive Stock Option Terms and Conditions (incorporated herein by reference to Exhibit 10(i)
to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
Form of 2012 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to
Exhibit 10(iv) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
Form of 2012 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10(v) to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
Form of 2013 Executive Stock Option Terms and Conditions (incorporated herein by reference to
Exhibit 10.7(xii) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012).
Form of 2013 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to
Exhibit 10.7(xiv) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012).
174 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
Exhibit
Number
(ix)**
(x)**
(xi)**
(xii)**
(xiii)**
(xiv)**
10.8**
10.9**
10.10**
10.11**
10.12**
10.13**
10.14**
(i)**
Description
Form of 2013 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.7(xviii) to
the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012).
Form of 2013 Stock Unit Award Terms and Conditions (Alternate Vesting) (incorporated herein by reference to
Exhibit 10.7(xix) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012).
Form of 2014 Executive Stock Option Terms and Conditions (incorporated herein by reference to
Exhibit 10.7(xi) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013
Form of 2014 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to
Exhibit 10.7(xii) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013).
Form of 2014 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.7(xiii) to
the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013).
Form of 2014 Stock Unit Award Terms and Conditions (Alternate Vesting) (incorporated herein by reference to
Exhibit 10.7(xiv) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31,
2013).
Northern Trust Corporation Management Performance Plan, as amended and restated effective October 16, 2012
(incorporated herein by reference to Exhibit 10(viii) to the Corporation’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2012).
Northern Trust Corporation 1997 Stock Plan for Non-Employee Directors (incorporated herein by reference to
Exhibit 10(xix) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
Northern Trust Corporation 1997 Deferred Compensation Plan for Non-Employee Directors, as amended and
restated effective as of July 15, 2014 (incorporated herein by reference to Exhibit 10.1 to the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
Form of Employment Security Agreement (Tier 1) (incorporated herein by reference to Exhibit 10(ii) to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).
Revised Form of Employment Security Agreement (Tier 1) (incorporated herein by reference to Exhibit 10(i) to
the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011).
Form of Non-Solicitation Agreement and Confidentiality Agreement (incorporated herein by reference to
Exhibit 10(iii) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009).
Northern Trust Corporation 2012 Long Term Cash Incentive Plan (incorporated herein by reference to Exhibit
10(i) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
Form of 2012 Long Term Cash Incentive Award Terms and Conditions (incorporated herein by reference to
Exhibit 10.19 to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011).
(ii)**
Amendment Number One to the 2012 Long Term Cash Incentive Plan, dated as of January 20, 2015.
10.15**
Northern Trust Corporation Executive Financial Consulting and Tax Preparation Services Plan, as amended and
restated effective January 1, 2008 (incorporated herein by reference to Exhibit 10 (xxxiii) to the Corporation’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
21
23
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
175 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
Exhibit
Number
31.1
31.2
32
101
Description
Rule 13a-14(a)/15d-14(a) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Rule 13a-14(a)/15d-14(a) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
The following financial and related information from the Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the
Consolidated Balance Sheet, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of
Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the
Consolidated Statement of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
** Indicates a management contract or a compensatory plan or agreement.
176 | 2 0 1 4 A N N U A L R E P O R T T O S H A R E H O L D E R S | N O R T H E R N T R U S T C O R P O R A T I O N
C e r t i f i c a t i o n o f C E O P u r s u a n t t o
S e c t i o n 3 0 2 o f t h e S a r b a n e s - O x l e y A c t o f 2 0 0 2
E X H I B I T 3 1 . 1
I, Frederick H. Waddell, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the year ended December 31, 2014 of Northern Trust Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 26, 2015
/s/ Frederick H. Waddell
Frederick H. Waddell
Chief Executive Officer
(Principal Executive Officer)
C e r t i f i c a t i o n o f C F O P u r s u a n t t o
S e c t i o n 3 0 2 o f t h e S a r b a n e s - O x l e y A c t o f 2 0 0 2
E X H I B I T 3 1 . 2
I, S. Biff Bowman, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the year ended December 31, 2014 of Northern Trust Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 26, 2015
/s/
S. Biff Bowman
S. Biff Bowman
Chief Financial Officer
(Principal Financial Officer)
E X H I B I T 3 2
C e r t i f i c a t i o n s o f C E O a n d C F O P u r s u a n t t o
1 8 U . S . C . S e c t i o n 1 3 5 0 , a s A d o p t e d P u r s u a n t t o
S e c t i o n 9 0 6 o f t h e S a r b a n e s - O x l e y A c t o f 2 0 0 2
In connection with the Annual Report of Northern Trust Corporation (the “Corporation”) on Form 10-K for the period ended
December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Frederick H.
Waddell, as Chief Executive Officer of the Corporation, and S. Biff Bowman, as Chief Financial Officer of the Corporation, each
hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to
the best of his knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Corporation.
/s/ Frederick H. Waddell
Frederick H. Waddell
Chief Executive Officer
(Principal Executive Officer)
February 26, 2015
/s/
S. Biff Bowman
S. Biff Bowman
Chief Financial Officer
(Principal Financial Officer)
February 26, 2015
This certification accompanies the Report pursuant to section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed
filed by Northern Trust Corporation for purposes of section 18 of the Securities Exchange Act of 1934, as amended.
board of directors
N O R T H E R N T R U S T C O R P O R A T I O N
Board of Directors
Frederick H. Waddell
Chairman and Chief Executive Officer
Northern Trust Corporation
Linda Walker Bynoe
President and Chief Executive Officer
Telemat Ltd.
Project management and consulting firm
Nicholas D. Chabraja
Retired Chairman and Chief Executive Officer
General Dynamics Corporation
Global defense, aerospace, and other technology
products manufacturer
Susan Crown
Vice President
Henry Crown and Company
Global company with diversified investments in banking,
transportation, manufacturing, real estate, and other industries;
Chief Executive Officer
Owl Creek Partners, LLC
Venture capital investment vehicle;
Chairman and Founder
Susan Crown Exchange Inc.
Social investment organization that connects talent and
innovations with market forces to drive social change
Dean M. Harrison
President and Chief Executive Officer
Northwestern Memorial HealthCare
Primary teaching affiliate of Northwestern University Feinberg
School of Medicine and parent corporation of Northwestern
Memorial Hospital
Dipak C. Jain
Director
Sasin Graduate Institute of Business Administration
International graduate business school
Robert W. Lane
Retired Chairman and Chief Executive Officer
Deere & Company
Global provider of agricultural, construction, and forestry
equipment, and financial services
Jose Luis Prado
Retired President
Quaker Oats North America, a division of PepsiCo, Inc.
Global food and beverage company
John W. Rowe
Chairman Emeritus
Exelon Corporation
Producer and wholesale marketer of energy
Martin P. Slark
Chief Executive Officer
Molex Incorporated
Manufacturer of electronic, electrical, and fiber optic
interconnection products and systems
David H.B. Smith Jr.
Executive Vice President – Policy & Legal Affairs
and General Counsel
Mutual Fund Directors Forum
Nonprofit membership organization for investment
company directors
Charles A. Tribbett III
Managing Director
Russell Reynolds Associates
Global executive recruiting firm
A d v i s o r y D i r e c t o r s
Sir John R.H. Bond
Former Chairman
Xstrata plc
Global diversified mining group
Edward J. Mooney
Retired Délégué Général – North America
Suez Lyonnaise des Eaux
Global provider of energy, water, waste, and communications
services;
Retired Chairman and Chief Executive Officer
Nalco Chemical Company
Manufacturer of specialized service chemicals
Lord Charles D. Powell of Bayswater KCMG
Former private secretary and advisor on foreign affairs and
defense to Prime Ministers Margaret Thatcher and John Major
Sheryl K. Muniz
Executive Vice President
Enterprise Operations (Americas)
Scott S. Murray
Executive Vice President
Chief Technology Officer
Brian P. Ovaert
Executive Vice President
Enterprise Operations (Asia Pacific)
Teresa A. Parker
Executive Vice President
Chief Operating Officer – Corporate &
Institutional Services
Shundrawn A. Thomas
Executive Vice President
Asset Management – Funds and Managed
Accounts
Jason J. Tyler
Executive Vice President
Asset Management – Client Solutions
David C. Wicks
Executive Vice President
Enterprise Operations (Europe, Middle
East, and Africa)
senior officers
N O R T H E R N T R U S T C O R P O R A T I O N
T H E N O R T H E R N T R U S T C O M P A N Y
Management Group
Operating Group
Frederick H. Waddell
Chairman and Chief Executive Officer
Steven R. Bell
President – Wealth Management (West)
S. Biff Bowman
Executive Vice President
Chief Financial Officer
Robert P. Browne
Executive Vice President
Chief Investment Officer
Peter B. Cherecwich
Executive Vice President
Global Fund Services
Corporate & Institutional Services
Jeffrey D. Cohodes
Executive Vice President
Chief Risk Officer
Steven L. Fradkin
President – Wealth Management
Susan C. Levy
Executive Vice President
General Counsel
William L. Morrison
President
Michael G. O’Grady
President –
Corporate & Institutional Services
S. Gillian Pembleton
Executive Vice President
Human Resources
Stephen N. Potter
President – Asset Management
Jana R. Schreuder
Chief Operating Officer
Joyce M. St. Clair
President – Enterprise Operations
Aileen B. Blake
Executive Vice President
Enterprise Change
David C. Blowers
Executive Vice President
President – Wealth Management (East)
Wayne G. Bowers
Executive Vice President
Asset Management (Europe, Middle East,
Africa, and Asia Pacific)
Christopher W. Carlson
Executive Vice President
Chief Operating Officer – Asset
Management
Marianne G. Doan
Executive Vice President
Chief Operating Officer – Wealth
Management
David W. Fox, Jr.
Executive Vice President
Corporate & Institutional Services
(Americas)
J. Jeffery Kauffman
Executive Vice President
Global Family Office – Wealth
Management
Wilson Leech
Executive Vice President
Corporate & Institutional Services
(Europe, Middle East, and Africa)
Mac MacLellan
President – Wealth Management (Central)
William Mak
Executive Vice President
Corporate & Institutional Services (Asia
Pacific)
K. Kelly Mannard
Executive Vice President
Chief Strategy & Marketing Officer
corporate information
I N V E S T O R R E L A T I O N S
Please direct Investor Relations inquiries to:
Beverly J. Fleming, Director of Investor Relations, at
312-444-7811 or beverly_fleming@ntrs.com.
N O R T H E R N T R U S T . C O M
Information about the Corporation, including financial
performance and products and services, is available on
Northern Trust’s website at northerntrust.com.
A N N U A L M E E T I N G
The 2015 Annual Meeting of Stockholders will be held on
Tuesday, April 21, 2015, at 10:30 A.M. (Central Time) at
50 South La Salle Street, Chicago, Illinois. If you plan to
attend the Annual Meeting, please review the information
regarding attendance contained in the proxy statement
relating to the Annual Meeting.
S T O C K L I S T I N G
The common stock of Northern Trust Corporation is
traded on the NASDAQ Global Select Market under the
symbol “NTRS”.
S T O C K T R A N S F E R A G E N T , R E G I S T R A R ,
A N D D I V I D E N D D I S B U R S I N G A G E N T
Wells Fargo Bank, N.A.
Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
General Phone Number: 1-800-468-9716
Internet Site: shareowneronline.com
A V A I L A B L E I N F O R M A T I O N
Through our website at northerntrust.com, we make
available free of charge our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and all other reports and all amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, as soon
as reasonably practicable after we file such material with, or
furnish such material to, the SEC. The contents of our
website, the website of the SEC or any other website
referenced herein are not a part of this document.
C O N S O L I D A T E D F I N A N C I A L H I G H L I G H T S
2014
2013
PERCENT CHANGE
FOR THE YEAR ENDED DECEMBER 31 ($ IN MILLIONS)
Revenues (Fully Taxable Equivalent Basis)
$ 4,360.6
$ 4,121.8
Net Income
Dividends Declared on Common Stock
Dividends Declared on Preferred Stock
PER COMMON SHARE
Net Income — Basic
Net Income — Diluted
Cash Dividends Declared per Common Share
Book Value — End of Period
Market Price — End of Period
AT YEAR-END ($ IN MILLIONS)
Earning Assets
Total Assets
Deposits
Stockholders’ Equity
AVERAGE BAL ANCES ($ IN MILLIONS)
Earning Assets
Total Assets
Deposits
Stockholders’ Equity
CLIENT ASSETS AT YEAR-END ($ IN BILLIONS)
Assets Under Custody
Global Custody Assets
Assets Under Management
811.8
311.7
9.5
731.3
299.2
—
$ 3.34
$ 3.01
3.32
1.30
34.54
67.40
2.99
1.23
33.34
61.89
$ 100,889.8
$ 93,367.2
109,946.5
90,757.0
8,448.9
102,947.3
84,098.1
7,912.0
$ 95,947.5
$ 85,628.5
104,083.5
84,656.6
8,166.5
94,857.7
75,596.3
7,667.7
$ 5,968.8
$ 5,575.7
3,458.1
934.1
3,248.9
884.5
6 %
11
4
—
11 %
11
6
4
9
8 %
7
8
7
12 %
10
12
7
7 %
6
6
FINANCIAL RATIOS AND METRICS
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (Fully Taxable Equivalent Basis)
10.02 %
0.78
39.2
1.08
9.54 %
0.77
41.1
1.13
CAPITAL RATIOS
Common Equity Tier 1 Capital to Risk-Weighted Assets —
End of Period
Tier 1 Capital to Risk-Weighted Assets — End of Period
Total Capital to Risk-Weighted Assets — End of Period
Tier 1 Leverage Ratio
DECEMBER 31, 2014
DECEMBER 31, 2013 (c)
Advanced
Approach (a)
Standardized
Approach (b)
12.4 %
13.2
15.0
N/A
12.5 %
12.9 %
13.3
15.5
7.8
13.4
15.8
7.9
(a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the December 31, 2014, ratios are calculated in compliance with the Basel III Advanced Approach final rules released by
the Board of Governors of the Federal Reserve System on July 2, 2013. (b) Standardized Approach capital components in 2014 are determined by Basel III phased-in requirements and risk-weighted assets are determined
by Basel I requirements. The December 31, 2014, ratios calculated under the Standardized Approach comply with the final rules released by the Board of Governors of the Federal Reserve System on July 2, 2013.
(c) The December 31, 2013, ratios are calculated in accordance with Basel I requirements.
The 2014 Northern Trust Corporation Annual Report is printed on 20% recycled paper
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© Northern Trust Corporation
ANN UAL REPORT TO S HAREHOL D ER S
Northern Trust Corporation
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N ORT HER N TRUS T COR POR AT IO N
50 SOUTH L A SALLE S TR EET | C H IC AGO, IL L IN OIS 60 603
N OR THE RNTRUS T. C OM
2014