20 15
ANNUAL
REPORT TO
SHARE HOLDER S
CONSOLIDATED FINANCIAL HIGHLIGHTS
2015
2014
PERCENT CHANGE*
FOR THE YEAR ENDED DECEMBER 31 ($ IN MILLIONS)
Revenues (Fully Taxable Equivalent Basis)
$ 4,727.9
$ 4,360.6
Net Income
Dividends Declared on Common Stock
Dividends Declared on Preferred Stock
973.8
333.0
23.4
811.8
311.7
9.5
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 BALANCES ($ 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
$ 4.03
$ 3.34
3.99
1.41
36.27
72.09
3.32
1.30
34.54
67.40
$ 106,848.9
$ 100,889.8
116,749.6
96,868.9
8,705.9
109,946.5
90,757.0
8,448.9
$ 102,249.8
$ 95,947.5
110,715.1
90,768.0
8,624.5
104,083.5
84,656.6
8,166.5
$ 6,072.1
$ 5,968.8
3,529.9
875.3
3,458.1
934.1
8 %
20
7
146
21 %
20
8
5
7
6 %
6
7
3
7 %
6
7
6
2 %
2
(6)
FINANCIAL RATIOS AND METRICS
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (Fully Taxable Equivalent Basis)
11.54 %
10.02 %
0.88
35.3
1.07
0.78
39.2
1.08
CAPITAL RATIOS
Common Equity Tier 1
Tier 1
Total
Tier 1 Leverage
Supplementary Leverage (c)
DECEMBER 31, 2015
DECEMBER 31, 2014
Advanced
Approach (a)
Standardized
Approach (b)
11.9 %
10.8 %
Advanced
Approach (a)
12.4 %
Standardized
Approach (b)
12.5 %
12.5
14.2
7.5
6.2
11.4
13.2
7.5
N/A
13.2
15.0
N/A
N/A
13.3
15.5
7.8
N/A
* Percentage change calculations are based on actual balances rather than the rounded amounts presented. (a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly,
the December 31, 2015, and 2014 capital balances and ratios are calculated in accordance with the Basel III Advanced Approach final rules released by the Federal Reserve Board on July 2, 2013. (b) In 2014,
Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated in accordance with the Basel III
Standardized Approach final rules. (c) Beginning with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective
January 1, 2018, the Corporation will be subject to a minimum supplementary leverage ratio of 3 percent.
LEADING PROVIDER
Wealth
Management
Asset
Management
FOR
CORPORATIONS,
INSTITUTIONS,
AFFLUENT FAMILIES &
INDIVIDUALS
Asset
Servicing
Banking
Northern Trust
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TO OUR SHAREHOLDERS
Northern Trust achieved solid growth in 2015, despite global economic
uncertainty and volatility. Our entry into new markets, development of new
and expanded client relationships and continued investments in technology
better positioned us to support today’s and tomorrow’s clients. We delivered
strong financial performance in 2015 while returning significant capital to
our shareholders.
We also were recognized for our technology, receiving three first-place
awards in mobile, private cloud and analytics. Finally, we culminated our yearlong
observance of our 125th anniversary, hosting numerous client and partner
appreciation events and committing an additional $1.25 million to charities
around the world.
FINANCIAL PERFORMANCE
Total revenues of $4.7 billion† were up 8 percent or $367 million, positioning
us favorably to our peers. Trust, investment and other servicing fees make up
63 percent of our revenues and are an important driver of our revenue growth.
In 2015, they grew by $148 million or 5 percent to $3.0 billion. Net interest
income, up $61 million or 6 percent to $1.1 billion†, also showed significant
growth both year over year and compared to our peers.
Throughout the year, we remained focused on expense management.
Total expenses grew 5 percent, resulting in positive operating leverage of
3.8 percentage points. As a result, net income grew 20 percent, reaching
$974 million. Earnings per share of $3.99 grew by 20 percent. Our return on
common equity (ROE), a key measure of profitability, reached 11.5 percent. To
put this in perspective, just four years ago our ROE was 8.6 percent. Our focus
on improving profitability in a low interest-rate environment served us well in
2015, and we remain committed to further improving our profitability in 2016.
During the year, the Federal Reserve did not object to our capital plan,
allowing us to increase our dividend and to repurchase stock. These actions
resulted in a return of capital to shareholders of $830 million, resulting in a
total payout ratio of 87 percent for the year.
FREDERICK H. WADDELL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Best Banks in America
FORBES, 2015
World’s Most
Admired Companies
FORTUNE MAGAZINE, 2015 –
NINTH CONSECUTIVE YEAR
A World’s Most
Ethical Company
ETHISPHERE INSTITUTE, 2015
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GLOBAL REACH
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.
NORTH AMERICA
EUROPE, MIDDLE EAST AND AFRICA
ASIA PACIFIC
65 cities
10 cities
9 cities
Northern Trust
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TO OUR SHAREHOLDERS
CORPORATE & INSTITUTIONAL SERVICES
Our Corporate & Institutional Services business continued growing globally,
launching new services to increase clients’ operational efficiency while expanding
long-standing client relationships and forging new ones. These efforts led to
strong financial results, profitable growth and attractive returns. Assets under
custody grew 2 percent, revenue grew 11 percent† and net income increased
26 percent.
We extended our geographic reach across the Americas, as demonstrated
by winning our first client in Latin America, where we will supply custody and
related services to a $4 billion investment portfolio that supports funding for
a local government entity. Our deep expertise, service-oriented culture and
streamlined technology enabled us to win a mandate to provide asset servicing
to the Wyoming Retirement System, highlighting our ongoing growth in the
public funds segment.
In the United Kingdom, our expertise helped London boroughs and the City
of London launch the first local government tax-transparent fund to achieve cost
savings and economies of scale. We collaborated with the $32 billion Railways
Pension Scheme to provide middle-office investment operations outsourcing
services to its newly established in-house asset manager. And we were appointed
by the $31 billion U.K. Pension Protection Fund to provide a broad range of
global custody and related services.
Our existing asset servicing relationships with asset owners and asset
managers in Europe deepened when we earned an appointment by Sweden’s
$35 billion AP2 Government Pension fund. And by collaborating with the Bank
of Taiwan, we now are able to offer Taiwanese institutional investors access to
a unique solution combining the Bank of Taiwan’s local expertise and Northern
Trust’s global custody and asset servicing capabilities.
We strengthened our client offerings in Australia and New Zealand by adding
additional asset management staff in Australia, where we saw a healthy increase
in our total assets under management (AUM). We continued our significant growth
with the addition of the Government Employees Superannuation Board – or
GESB – the largest superannuation provider in Western Australia, and Mercer
Super Trust. Both organizations appointed Northern Trust to provide global
custody, fund accounting and other value-added services.
We also launched our new CompleteFXTM service, a stand-alone foreign
exchange execution service for investment managers that will give our clients
the operational efficiency and flexible execution options they require.
Our business serving
sophisticated institutions
grew globally as we expanded
existing relationships and
established new ones with
some of the world’s most
influential investors.”
MICHAEL G. O’GRADY
President
Corporate & Institutional Services
Best Custody Specialist-
Institutional, Asia Pacific
THE ASSET, TRIPLE ASSET SERVICING
AWARDS, 2015
Pension Custodian of
the Year
CUSTODY RISK EUROPEAN AWARDS,
2015
Mutual Fund
Administrator of the Year
CUSTODY RISK AMERICAS AWARDS,
2015
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PRINCIPLES THAT ENDURE
SERVICE
For well over a century, we’ve built
our legacy of outstanding service,
expertise and integrity. These are the
principles by which we do business today,
serving our shareholders, clients, communities
and each other – laying a solid
foundation on which future
generations can grow.
EXPERTISE
INTEGRITY
Northern Trust
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TO OUR SHAREHOLDERS
WEALTH MANAGEMENT
Our Wealth Management business, where families for six generations have
entrusted us to steward their wealth, continued growing and innovating. As
a testament to our success in helping clients achieve their financial goals, our
financial performance improved across virtually all metrics – revenue, fees,
credit quality, net income, AUM, loans, deposits and ROE.
In particular, our revenue was notably stronger in 2015, growing 4 percent†
from 2014. Expenses increased 2 percent, well-managed in the context of our
revenues. Our performance positioned us favorably against our peers, especially
relative to growth.
We achieved meaningful success among existing clients with $10 million or
more in investable assets and progressed encouragingly in our ongoing efforts
to expand in markets such as New York and Texas. We substantially grew our
international business, adding staff to our international private banking centers
in Miami, Houston and New York.
Our innovations kept pace with the rapid change in the wealth management
industry. We enhanced our Goals Driven Investing™ capabilities, family education,
art lending, business owner initiatives and family office innovations. We also rolled
out our fee-based Meridian™ brokerage account for long-term investors and
various hedge fund and private equity products.
Providing market insights and ensuring our products perform as expected
are only part of the value we bring to clients, especially during volatile markets
and an uncertain global economy. We continued adapting and responding to
the unique needs of our clients across diverse areas such as environmental, social
and governance (ESG) investing, alternative investments, insurance-dedicated
funds, timber and more.
Our broad-based success in
2015 came from the insights
we provided clients to support
them in optimizing and
stewarding their wealth, on a
holistic basis, while navigating
the ever-shifting capital markets
and planning environment.”
STEVEN L. FRADKIN
President
Wealth Management
Best Private Bank for
Succession Planning
FINANCIAL TIMES GROUP, 2015
One of the World’s Best
Private Banks
GLOBAL FINANCE, 2015
Best Asset Management
Firm Serving Family
Offices and Private Banks
FAMILY WEALTH REPORT AWARD, 2015
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WHO WE ARE
WHO WE ARE
126+
years of
strength & stability
Disciplined,
client-centric approach
Product leadership
& innovation
Solutions-based
technology
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TO OUR SHAREHOLDERS
ASSET MANAGEMENT
Northern Trust continued to deliver consistent, high-quality investment solutions
and launch innovative products to help our clients navigate volatile markets in an
ongoing low-yield and challenging environment. With AUM of $875 billion as of
December 31, 2015, Asset Management is recognized for its breadth of expertise
and as a leading global investment manager.
We established 50 South Capital®, bringing boutique-type experience to
our multi-manager private equity and hedge fund solutions. We also grew our
customized alternatives solutions for our Global Family Office business and
large institutions.
In our factor-based Engineered EquityTM group, we won several sizeable
new clients, among them the U.K.’s Railways Pension Scheme, and launched
significant new products such as our Quality ESG strategy.
We expanded our outcome-oriented FlexShares® exchange traded funds
(ETFs) offering to 22, launching five new solutions in 2015 and reflecting our
continued dedication to offer investor-centric ETFs.
Our outsourced chief investment officer business continued its strong
momentum, with sizeable wins in Canada and Saudi Arabia and in the U.S.
retirement, family office and endowment markets. We also achieved significant
success with intermediary distribution and partnerships. These included ABN
AMRO and Rabobank in the Netherlands, which leverage our institutional product
innovation and expertise in quantitative asset management and asset servicing.
We showed broad corporate commitment to ESG investing, where we manage
$60 billion globally and increased our number of client investment mandates by
13 percent in 2015. And we demonstrated industry leadership with the Financial
Services Roundtable’s “Save 10” retirement savings initiative.
We continued providing
clients with innovative asset
management products,
successfully launched new
funds and forged or expanded
key businesses and partnerships
across the globe, all backed by
our deep pool of expertise.”
STEPHEN N. POTTER
President
Asset Management
Largest Cash Manager –
U.S. institutional, tax-exempt
assets managed internally
PENSIONS & INVESTMENTS 2015
LARGEST MONEY MANAGERS REPORT‡
13th Largest Money
Manager –
Total worldwide assets
under management
PENSIONS & INVESTMENTS 2015
LARGEST MONEY MANAGERS REPORT‡
Best Smart Beta Strategies
ASIA ASSET MANAGEMENT, 2015
‡ Pensions & Investments rankings based on worldwide assets under management of $934.1 billion as of December 21, 2014 and are not indicative of future performance. Pensions &
Investments 2015 Special Report on Money Managers appeared in the publication’s May 18, 2015 issue and online at www.pionline.com/managers. Ranking information reprinted with
permission, Pensions & Investments, copyright Crain Communications, Inc.
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BUSINESS HIGHLIGHTS
As of December 31, 2015, Northern Trust had
assets under custody of $6 trillion
and assets under management of $875 billion.
ASSETS UNDER
MANAGEMENT
ASSETS UNDER
CUSTODY
$6
Trillion
$4
Trillion
$875
Billion
$644
Billion
2010
2015
2010
2015
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TO OUR SHAREHOLDERS
ENTERPRISE ENABLEMENT
Helping our clients achieve even greater success is at the heart of our operations,
technology and product strategy – whether it’s continuing what we’ve always
done well, accelerating current developments or positioning for the future.
We advanced our multi-year investment in technology, tools and infrastructure
to refresh and improve the efficiency of our foundational processing, accounting
and online information access capabilities. Safeguarding our clients’ assets and
information, while providing easy mobile access, is paramount. We continued our
ongoing investment in cybersecurity by leveraging award-winning implementation
of emerging “big data” tools, mobile capabilities and cloud-based technology.
Our innovation lab was established to enhance further the client and partner
experience, called CPX. Founded on human-centered design principles, our
CPX team is developing and testing new opportunities and channels for client
and partner engagement, loyalty and actionable real-time feedback.
We created a specialized group to manage onboarding and change for large
complex client relationships and already have seen measurably increased client
satisfaction. Our global location strategies continue to help improve productivity
and client service. A new office in Manila, Philippines, the opening of our Tempe,
Arizona, office and the announcement of a new 2016 location in Pune, India, all
position Northern Trust to serve our growing businesses around the world
effectively and efficiently.
OUTLOOK
The Federal Reserve Bank, for the first time in nearly 10 years, increased its
short-term benchmark interest rate by 25 basis points in December 2015. While
this action is expected to benefit Northern Trust and the economy, the outlook
for additional increases in interest rates in 2016 will depend on a myriad of
economic factors, including further progress on unemployment, the level of
inflation and gross domestic product growth. Energy prices remain low, which
disrupted some businesses tied to this sector but should provide the consumer
with much-needed buying power. The strong U.S. dollar also is expected to
have an impact on growth as U.S. companies translate overseas earnings into
fewer dollars.
Globally, the picture is mixed, with continued economic headwinds in
Europe (where some short-term deposit rates remain negative) and China,
which continues seeking a new level of economic equilibrium. Against a
backdrop of slow global growth and volatility in emerging markets, the United
States – despite beginning 2016 with a near double-digit drop in our stock
markets – remains one of the stronger economies in which to invest. We will
continue monitoring economic events closely.
At Northern Trust, we remain cognizant of – and vigilant about – the
risks associated with all our businesses. Our additional investments related to
cybersecurity, anti-money laundering and compliance with evolving regulatory
expectations will assure our clients, partners and shareholders that our business
operates within our stated risk appetite.
Leveraging existing capabilities
while implementing new opera-
tional methods and emerging
technologies are central themes
as we continue providing the data,
tools and support our clients need
to achieve their goals.”
JANA R. SCHREUDER
Chief Operating Officer
Top Wealth Management
Mobile Application
BRAND NEW MEDIA, 2015
Best Cloud Initiative –
American Financial
Technology Awards
WATERS MAGAZINE, 2015
Best Analytics Initiative –
American Financial
Technology Awards
WATERS MAGAZINE, 2015
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We are proud of the efforts,
the expertise and the leadership
provided by our more than 16,000
employees worldwide who bring
their strengths together in support
of our clients, our communities
and our company.”
WILLIAM L. MORRISON
President
THANK YOU
During Northern Trust’s 126th year of solid growth and progress, our
Board of Directors continued providing valued oversight and guidance. In
April, we recognized the retirement from the board of Nicholas D. Chabraja and
Robert W. Lane. We also recognized the retirement of two advisory directors:
Sir John R. H. Bond and Edward J. Mooney. We are grateful for their service on
behalf of our shareholders and will miss their wisdom, insight and good humor.
We also welcomed three new board members: Dean M. Harrison,
Thomas E. Richards and Donald Thompson. Lord Charles D. Powell joined the
board as an advisory director. We are pleased with the wealth of experience these
directors bring to Northern Trust and are benefiting already from their diverse
backgrounds.
Northern Trust’s performance is a result of the collective efforts of more than
16,000 committed and driven employees around the globe. These employees
bring insight, expertise and dedication to serving our clients, partners and
communities every day. I thank all Northern Trust employees for their contributions
to the success of our company this past year and look forward to the opportunities
we have together in the years ahead.
We have a deep pool of leadership talent, including the 14 Management
Group members who collectively have nearly 400 years of industry experience.
We are fortunate to have these individuals leading Northern Trust.
Finally, Northern Trust’s business model is built upon serving the world’s most
prestigious clients. Thank you to our clients for the continued trust you place in
our relationship. We look forward to serving you with expertise and integrity in
the years ahead.
FREDERICK H. WADDELL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
FEBRUARY 29, 2016
† Revenues and net interest income are presented on a fully taxable equivalent basis, a non-generally accepted accounting principle financial measure that facilitates the analysis of
asset yields.
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MANAGEMENT GROUP
Frederick H. Waddell
William L. Morrison
Jana R. Schreuder
CHAIRMAN AND CHIEF
PRESIDENT
CHIEF OPERATING
EXECUTIVE OFFICER
OFFICER
S. Biff Bowman
Robert P. Browne
Peter B. Cherecwich
Jeff rey D. Cohodes
Steven L. Fradkin
Wilson Leech
EXECUTIVE
EXECUTIVE
EXECUTIVE
EXECUTIVE
PRESIDENT
EXECUTIVE
VICE PRESIDENT
VICE PRESIDENT
VICE PRESIDENT
VICE PRESIDENT
WEALTH MANAGEMENT
VICE PRESIDENT
CHIEF FINANCIAL OFFICER
CHIEF INVESTMENT
GLOBAL FUND SERVICES
CHIEF RISK OFFICER
OFFICER
CORPORATE &
INSTITUTIONAL SERVICES
CORPORATE &
INSTITUTIONAL SERVICES
EUROPE, MIDDLE EAST
AND AFRICA
Susan C. Levy
Michael G. O’Grady
S. Gillian Pembleton
Stephen N. Potter
Joyce M. St.Clair
EXECUTIVE
PRESIDENT
EXECUTIVE
PRESIDENT
EXECUTIVE
VICE PRESIDENT
CORPORATE &
VICE PRESIDENT
ASSET MANAGEMENT
VICE PRESIDENT
GENERAL COUNSEL
INSTITUTIONAL SERVICES
HUMAN RESOURCES
CHIEF CAPITAL
MANAGEMENT OFFICER
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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
Susan Crown
Chairman and Chief Executive Officer
Owl Creek Partners, LLC
Private equity firm
Chairman and Founder
Susan Crown Exchange Inc.
Social investment organization
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
Jose Luis Prado
Retired President
Quaker Oats North America, a division of PepsiCo, Inc.
Global food and beverage company
Thomas E. Richards
Chairman, President and Chief Executive Officer
CDW Corporation
Provider of integrated information technology solutions
in the United States, Canada and the United Kingdom
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
Donald Thompson
Retired President and Chief Executive Officer
McDonald’s Corporation
Global foodservice retailer
Charles A. Tribbett III
Managing Director
Russell Reynolds Associates
Global executive recruiting firm
ADVISORY DIRECTOR
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
_________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-36609
_________________________________________________
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
_________________________________________________
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Delaware
36-2723087
50 South La Salle Street
Chicago, Illinois
(Address of principal executive offices)
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
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
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
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
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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes
No
The aggregate market value of the registrant’s common stock as of June 30, 2015 (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, 2015 as reported by The NASDAQ Stock Market LLC, held by non-affiliates was
approximately $17.7 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.
At January 31, 2016, 228,984,161 shares of common stock, $1.66 2/3 par value, were outstanding.
Portions of the registrant’s Proxy Statement for its 2016 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
NORTHERN TRUST CORPORATION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Supplemental Item Executive Officers of the Registrant
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
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
Supplemental Item Selected Statistical and Supplemental Financial Data
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 and Financial Statement Schedules
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Signatures
Exhibit Index
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i
PART I
ITEM 1 – BUSINESS
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, 2015, the Corporation had consolidated total assets of
$116.7 billion and stockholders’ equity of $8.7 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, 2015, the Bank had consolidated assets of $116.4 billion and common bank equity
capital of $7.9 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.
In addition to the following information regarding Northern Trust’s business, the reporting segment and geographic
area information included in Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial
Statements and Supplementary Data,” of this Annual Report on Form 10-K is incorporated herein by reference.
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.
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 custody; fund administration; investment operations outsourcing; investment management; investment risk and
analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage
services; transition management services; banking; and cash management. 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, 2015, total C&IS assets under custody were $5.6 trillion and
assets under management were $648.0 billion.
WEALTH MANAGEMENT
Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals,
retirees, and established privately-held businesses in its target markets. The business 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. In supporting these targeted
segments, 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 is one of the largest providers of advisory services in the United States, with $506.3 billion in
assets under custody and $227.3 billion in assets under management at December 31, 2015. 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.
2015 Annual Report / Northern Trust Corporation
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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 fully allocated to C&IS and Wealth Management. As discussed above, Northern Trust managed $875.3
billion in assets as of December 31, 2015, including $648.0 billion for C&IS clients and $227.3 billion for Wealth
Management clients.
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
service companies, including other custodial banks, deposit-taking institutions, asset management firms, benefits
consultants, trust companies, investment banking firms, insurance companies, and investment counseling firms. As our
businesses grow and markets evolve, we may encounter increasing and new forms of competition around the world.
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.
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.
FINANCIAL HOLDING COMPANY REGULATION
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 nondepository creditors.
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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, the Bank, as the Corporation’s sole
insured depository institution subsidiary, 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.
SUBSIDIARY REGULATION
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 commodity trading advisors
or commodity pool operators 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 U.S. 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. The Corporation’s broker-dealer
subsidiary also is registered with the SEC and Municipal Securities Rulemaking Board as a municipal securities dealer.
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 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.
FUNCTIONAL REGULATION
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
2015 Annual Report / Northern Trust Corporation
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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.
THE DODD-FRANK ACT
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 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, 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.
Resolution Planning. As required by Section 165(d) of the Dodd-Frank Act, the Federal Reserve Board and FDIC
have jointly issued a final rule requiring each U.S. bank holding company with at least $50 billion in total consolidated
assets, including the Corporation, to submit periodically to regulators a resolution plan for such bank holding company’s
rapid and orderly resolution in the event of material financial distress or failure. In addition, the FDIC has issued a final
rule requiring insured depository institutions with more than $50 billion in total assets, including the Bank, to submit to the
FDIC periodic plans for resolution in the event of such institution’s failure. The Corporation and the Bank submitted
resolution plans pursuant to these rules in December 2015. If the Federal Reserve Board and the FDIC jointly determine
that the resolution plan submitted by the Corporation in December 2015 pursuant to Section 165(d) of the Dodd-Frank Act
is not credible and the Corporation fails to address the deficiencies in a timely manner, the Corporation could be subject to
more stringent capital, leverage or liquidity requirements, restrictions on growth, activities or operations, or be required to
divest certain assets or operations. The Corporation and the Bank have and will continue to focus management attention
and substantial resources to meet regulatory expectations with respect to resolution planning. A similar directive, the
European Union Bank Recovery and Resolution Directive (BRRD), was adopted for European Union credit institutions,
including certain of the Bank’s subsidiaries and branches, effective January 1, 2015. In accordance with applicable
Prudential Regulation Authority (PRA) guidance, a recovery plan for Northern Trust Global Services Limited (NTGSL), a
UK incorporated indirect subsidiary of the Bank, has been prepared and will be reviewed at least annually. Applicable
PRA guidance requires institutions to produce resolution planning information in two phases. In accordance with such
guidance, a phase 1 resolution plan for NTGSL and the Bank’s London branch has been prepared and such information will
be submitted to the PRA every two years.
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
2015 Annual Report / Northern Trust Corporation
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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 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
significant restrictions on sponsoring or investing in certain “covered funds,” such as hedge funds or private equity funds.
A banking entity may “organize and offer” certain private funds only if certain requirements are satisfied. Moreover, a
banking entity only may retain a limited ownership interest in such funds, and must monitor and track investments in such
covered funds carefully to ensure that the ownership interest in the fund does not exceed regulatory thresholds. A banking
entity that sponsors or invests in certain private funds is also restricted from providing credit or other support to the funds
or permitting the funds to use the name of the bank. The Volcker 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.
Compliance with the Volcker Rule generally has been required since July 21, 2015, but the Federal Reserve Board has
extended the conformance period for compliance with certain portions of the prohibition against sponsoring or investing in
certain legacy covered funds until July 21, 2017. Northern Trust has conducted an enterprise-wide review of affected
activities, taken steps to bring those activities into conformance, and has established an enterprise-wide compliance
program to comply with the Volcker Rule. The full impact of the Volcker Rule on Northern Trust ultimately will depend on
further interpretation and guidance by the regulatory agencies responsible for its enforcement. Northern Trust is monitoring
developments with respect to the Volcker Rule actively and will revise further its operations and compliance programs as
appropriate or required.
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 derivatives activities are required to be “pushed out” of insured depository institutions
and conducted in separately capitalized nonbank 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 also has 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 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, the scope of security-based swap dealer and major-
security-based swap participant 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, central clearing requirements, and exchange-traded requirements for security-based
swaps. Additionally, in the fall of 2015, the U.S. banking agencies separately finalized rules requiring the posting and
collection of margin by swap entities, including the Corporation and the Bank, for certain uncleared swaps. As noted
above, 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.
HOLDING COMPANY SUPPORT UNDER THE FEDERAL DEPOSIT INSURANCE ACT
The Dodd-Frank Act amended the Federal Deposit Insurance Act (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
2015 Annual Report / Northern Trust Corporation
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requirement, the Corporation in the future could be required to provide financial assistance to the Bank should the Bank
experience financial distress.
PAYMENT OF DIVIDENDS
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.
CAPITAL PLANNING AND STRESS TESTING
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 CCAR exercise is an intensive assessment of the capital adequacy of bank
holding companies as well as of the processes used by bank holding companies to assess their capital needs. Through
CCAR, the Federal Reserve Board assesses whether 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 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 for a number of
reasons, including if the capital 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 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. In evaluating a capital plan, the Federal
Reserve considers both quantitative and qualitative factors. Consistent with prior Federal Reserve Board guidance, CCAR
rules provide 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 35.3% in 2015.
The Corporation submitted its capital plan to the Federal Reserve Board in January 2015 as part of the Federal Reserve
Board’s 2015 CCAR exercise, and the Federal Reserve Board did not object to the Corporation’s plan. Due to a change in
the capital planning schedule, the Corporation will submit its 2016 capital plan to the Federal Reserve Board by April 5,
2016. The Federal Reserve Board has indicated that it expects to publish either its objection or non-objection to the 2016
capital plan and proposed capital actions, such as dividend payments and share repurchases, by June 30, 2016. The
Corporation anticipates announcing its proposed 2016 capital plan distributions shortly thereafter.
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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 5, 2015, and the results of its
company-run mid-cycle stress tests on July 29, 2015.
CAPITAL ADEQUACY REQUIREMENTS
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 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 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.
To implement Basel III for bank holding companies, including the Corporation, the Federal Reserve Board established
risk-based and leverage capital guidelines. The federal banking regulators also 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, 2015, 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 disclose publicly 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 complete satisfactorily a
parallel run, in which it calculates capital requirements under both the Basel III rules and previously effective regulations.
The Corporation and the Bank completed their parallel runs in 2014 and are required to use the advanced approaches
methodologies to calculate and disclose publicly their risk-based capital ratios.
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.
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.
TABLE 1: RISK-BASED AND LEVERAGE CAPITAL RATIOS AS OF DECEMBER 31, 2015
COMMON EQUITY
TIER 1 CAPITAL
TIER 1 CAPITAL
TOTAL CAPITAL
TIER 1 LEVERAGE
SUPPLEMENTARY
LEVERAGE
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
Northern Trust
Corporation
The Northern Trust
Company
Minimum required
ratio
“Well-capitalized”
minimum ratio
11.9%
10.8%
12.5%
11.4%
14.2%
13.2%
7.5%
11.6%
10.4%
11.6%
10.4%
13.1%
12.0%
6.7%
4.5%
6.5%
4.5%
6.0%
6.0%
8.0%
8.0%
4.0%
6.5%
8.0%
8.0%
10.0%
10.0%
5.0%
7.5%
6.7%
4.0%
5.0%
6.2%
5.6%
N/A
N/A
In addition to the above, beginning in 2018, advanced approaches institutions, such as the Corporation and the Bank, must
comply with a supplementary leverage ratio. Under the supplementary leverage ratio rule, advanced approaches institutions
2015 Annual Report / Northern Trust Corporation
7
will be subject to a minimum supplementary leverage ratio of 3.0%. Insured depository institutions that are advanced
approaches institutions, such as the Bank, also 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 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.
LIQUIDITY STANDARDS
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 is being phased in, with full implementation beginning on January 1, 2017. Currently,
Northern Trust is required to calculate its LCR on a monthly basis. Daily calculation of the LCR will be required beginning
in July 2016. Additionally, on November 24, 2015, the Federal Reserve Board proposed rules that would require large
banking organizations, such as the Corporation, to disclose publicly certain LCR information on a quarterly basis.
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, to be implemented by the Federal Reserve Board as a minimum standard by
January 1, 2018. The Federal Reserve Board has not yet issued a proposal to implement the NSFR.
The enhanced prudential standards (discussed above) 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. 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 Corporation’s Board of Directors (Board) 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.
PROMPT CORRECTIVE ACTION
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
2015 Annual Report / Northern Trust Corporation
8
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
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.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS
As an insured depository institution, the Bank is subject to restrictions which govern transactions between FDIC-insured
banks and any affiliated entity, whether that entity is the Corporation, as 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 secured fully with qualifying collateral and are limited, as to any
one of the Corporation or such nonbank affiliates, to 10% of the Bank’s capital stock and surplus, and, as to the
Corporation and all such nonbank affiliates in the aggregate, to 20% of the Bank’s capital stock and surplus. These
restrictions are also applied to transactions between the Bank and its 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 the 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, including the Bank. 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.
ANTI-MONEY LAUNDERING, ANTI-TERRORISM LEGISLATION, AND OFFICE OF FOREIGN ASSETS CONTROL
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.
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.
2015 Annual Report / Northern Trust Corporation
9
DEPOSIT INSURANCE AND ASSESSMENTS
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. Certain liquid assets are 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. In October 2015, the FDIC proposed a
surcharge assessment on insured depository institutions with total consolidated assets of $10 billion or more, such as the
Bank, in connection with the Dodd-Frank Act requirement to increase the Deposit Insurance Fund’s minimum reserve ratio
from 1.15% to 1.35% without increasing the assessments of small insured depository institutions.
MONEY MARKET MUTUAL FUNDS
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 through October 2016. Money market mutual fund
reforms also have been proposed by the European Union (EU). A legislative proposal for a regulation on money market
mutual funds was published by the EU on April 9, 2013, although the legislative process with respect to the proposed
regulation is continuing and the timing of its completion remains unclear. On November 25, 2015, the EU adopted a
regulation on securities financing transactions and reuse of collateral as part of its approach to addressing shadow banking.
The regulation includes provisions for enhanced transparency and reporting of securities financing transactions, and began
to be phased in beginning January 12, 2016. Further regulation containing the technical detail of the regulation has yet to
be published, which will delay the effective date of certain provisions.
COMMUNITY REINVESTMENT ACT
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. 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. Federal banking
agencies are required to make public the rating of a bank’s performance under the CRA. The Bank received an
“outstanding” CRA rating from the Federal Reserve Board in its most recent CRA examination.
PRIVACY AND SECURITY
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.
CONSUMER LAWS AND REGULATIONS
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.
2015 Annual Report / Northern Trust Corporation
10
NON-U.S. REGULATION
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.
They are authorized by the PRA or the Financial Conduct Authority (FCA) and regulated by the FCA and, in some
instances, also the PRA. 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.
On July 23, 2014, the EU 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 go into
effect on March 18, 2016, subject to certain grandfathering provisions. Although secondary legislation setting out technical
details and regulatory guidance with respect to UCITS V have yet to be adopted, UCITS V will introduce rules for a
depositary, rules on remuneration policies for certain staff and a sanctions regime for noncompliance.
A number of other regulations that may affect Northern Trust’s operations have been or currently are being
implemented in Europe, including the Alternative Investment Fund Managers Directive (AIFMD), the European Market
Infrastructure Regulation (EMIR), the Capital Requirements Directive IV (CRD IV), the FCA’s Client Assets Sourcebook
rules (CASS), revisions to the Markets in Financial Instruments Directive (MiFID II) and the BRRD. 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.
The legislative process is continuing and the timing and content of the final legislative act remains unclear. Northern Trust
works diligently to comply with applicable EU rules and regulations, and also monitors 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 United States are subject to
regulatory capital requirements in the jurisdictions in which they operate. As of December 31, 2015, each of our non-U.S.
banking subsidiaries had capital ratios above their specified minimum requirements.
Staff
Northern Trust employed approximately 16,200 full-time equivalent staff members as of December 31, 2015.
Available Information
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.
Statistical Disclosure by Bank Holding Companies
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 Sheets with Analysis of Net Interest Income for the years ended December 31, 2015,
2014 and 2013.
• Changes in Net Interest Income for the years ended December 31, 2015 and 2014.
• Remaining Maturity and Average Yield of Securities Held to Maturity and Available for Sale as of December 31, 2015.
• Remaining Maturity of Selected Loans and Leases as of December 31, 2015.
• Distribution of Non-U.S. Loans by Type as of December 31, 2015, 2014, 2013, 2012 and 2011.
• Allowance for Credit Losses Related to Non-U.S. Operations for the years ended December 31, 2015, 2014, 2013,
2012 and 2011.
• Analysis of Allowance for Credit Losses for the years ended December 31, 2015, 2014, 2013, 2012 and 2011.
• Average Deposits by Type as of December 31, 2015, 2014 and 2013.
• Distribution of Non-U.S. Deposits by Type as of December 31, 2015, 2014 and 2013.
• Remaining Maturity of Time Deposits $100,000 or More as of December 31, 2015.
2015 Annual Report / Northern Trust Corporation
11
• Average Rates Paid on Interest-Related Deposits by Type for the years ended December 31, 2015, 2014 and 2013.
•
Selected Average Assets and Liabilities Attributable to Non-U.S. Operations for the years ended December 31, 2015,
2014 and 2013.
Percent of Non-U.S.-Related Average Assets and Liabilities to Total Consolidated Average Assets for the three years
ended December 31, 2015, 2014 and 2013.
•
• Non-U.S. Outstandings as of December 31, 2015, 2014 and 2013.
Purchased Funds as of December 31, 2015, 2014 and 2013.
•
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, 2015, 2014 and 2013.
• 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 “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.
• 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.
•
• L. Other Real Estate Owned.
I. Allowance for Credit Losses.
• Note 6, “Loans and Leases.”
• Note 7, “Allowance for Credit Losses.”
• Note 8, “Concentrations of Credit Risk.”
• Note 27, “Off-Balance Sheet Financial Instruments.”
2015 Annual Report / Northern Trust Corporation
12
ITEM 1A – RISK FACTORS
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 affect us adversely. 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
Market volatility and/or a downturn in economic conditions may affect our earnings negatively.
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 market value of assets under management, custody or administration; the volume of
transactions processed; securities lending volume and spreads; and fees for other services rendered, all of which may be
impacted negatively by market volatility and/or a downturn in economic conditions. For example, downturns in equity
markets and decreases in the value of debt-related investments resulting from market disruption, illiquidity or other factors
have historically reduced the valuations of the assets we manage or service for others, which generally impacted our
earnings negatively. Market volatility and/or weak economic conditions also may affect wealth creation, investment
preferences, trading activities, and savings patterns, which impact demand for certain products and services that we
provide. Such conditions also may 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 affect our earnings negatively.
The direction and level of interest rates are important factors in our earnings. Although the Federal Reserve Board recently
raised the target Federal Funds rate range, interest rates generally remain near historical lows. The low interest rate
environment that has persisted since the 2007-2008 global financial crisis, and that may persist in 2016 and beyond, has
had, and may continue to have, a negative impact on 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 continued low interest rate
environment also may have a negative impact on our 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. Low
net interest margins and fee waivers each negatively impact our earnings.
A rise in interest rates also may affect us negatively if, for example, such a rise causes: our clients to transfer funds into
investments with higher rates of return, resulting in decreased deposit levels and higher fund or account redemptions; our
borrowers to experience difficulties in making higher interest payments, resulting in increased credit costs, provisions for
loan and lease losses and charge-offs; reduced bond and fixed income fund liquidity, resulting in lower performance, yield
and fees; a decline in the value of securities held in our portfolio of investment securities, resulting in decreased levels of
capital and liquidity; or higher funding costs.
Further, although we have policies and procedures in place to assess and mitigate potential impacts of interest rate
risks, if our assumptions about any number of variables are incorrect, these policies and procedures to mitigate risk may be
ineffective, which could impact earnings negatively.
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.
2015 Annual Report / Northern Trust Corporation
13
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 affect our growth prospects negatively.
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 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 various regions or countries across the globe, including the risk of defaults
on sovereign debt and related stresses on financial markets, could have a significant adverse effect on our earnings.
Risks and concerns about the financial stability of various regions or countries across the globe could have a detrimental
impact on economic and market conditions in these or other markets across the world. Foreign 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. Economic challenges faced in various foreign markets,
including negative interest rates in some jurisdictions or continuing declines in oil prices, and any disruptions related to
such challenges, may impact our earnings negatively.
Declines in the value of securities held in our investment portfolio can affect us negatively.
Our investment securities portfolio represents a greater proportion, and our loan and lease portfolios represent 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 affected negatively the liquidity and pricing of securities, generally, and asset-backed and auction rate
securities, in particular. Declines in the value of securities held in our investment portfolio negatively impact our levels of
capital and liquidity. Further, to the extent that we experience unrealized losses in our portfolio of investment securities
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. Although we have policies and procedures in place to assess and mitigate potential
impacts of market risks, including hedging-related strategies, those policies and procedures are inherently limited because
they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Accordingly, we
could suffer adverse effects as a result of our failure to anticipate and manage these risks properly.
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. 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 also are exposed to non-trading foreign currency risk as a result of our holdings of non-U.S. dollar
denominated assets and liabilities, investments in non-U.S. subsidiaries, and future non-U.S. dollar denominated revenue
and expense.
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 impact earnings negatively.
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 affect our earnings negatively.
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 affected our earnings from activities such as
foreign exchange trading and securities lending negatively. If these conditions occur in the future, our earnings from these
activities may be affected negatively. In a few of our businesses, such as securities lending, our fee is calculated as a
2015 Annual Report / Northern Trust Corporation
14
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 impact our earnings negatively.
Operational Risks
Many types of operational risks can affect our earnings negatively.
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:
•
failures of technological systems or breaches of security measures, including, but not limited to, those resulting from
cyber-attacks;
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 systems 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 third-party vendors;
negative developments in relationships with key counterparties, third-party 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.
•
•
•
•
•
•
•
•
•
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 or we may fail to identify or fully understand the
implications and risks associated with changes in the financial markets or our businesses—particularly as we expand our
geographic footprint, product pipeline and client types—and consequently fail to enhance our controls and business
continuity plans to address those changes in an adequate or timely fashion. If our controls and business continuity plans do
not address the factors noted above and operate to mitigate the associated risks successfully, 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 impacted adversely.
Failures of our technological systems or breaches of our security measures, including, but not limited to, those resulting
from cyber-attacks, 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
have a negative effect on our ability to 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 affected adversely, perhaps materially, by failures, terminations, errors or malfeasance by,
2015 Annual Report / Northern Trust Corporation
15
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 addition, our clients often use their own devices, such as
computers, smart phones and tablets, to manage their accounts, which may heighten the risk of system failures,
interruptions or security breaches.
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, we and our clients have been subject to
cyber-attacks, and it is possible that we could suffer a material 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. Our status as a global financial institution and the nature of our
client base may enhance the risk that we are targeted by such cyber-threats. If a breach of our security occurs, we could be
the subject of legal claims or proceedings, including regulatory investigations and actions, the market perception of the
effectiveness of our security measures could be harmed, our reputation could suffer and we could lose clients, each of
which could have a negative effect on our business, financial condition and results of operations. Further, even if not
directed at us, attacks on financial or other institutions important to the overall functioning of the financial system could
affect, directly or indirectly, aspects of our business.
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 quantify accurately 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 ultimately could 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, including material loss or
noncompliance with regulatory requirements or expectations.
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 have a negative effect on 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 ourselves that involve very large amounts of money. Failure to manage or mitigate
operational risks properly 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 record and process, among
other things, 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 and regulatory issues prior to and during the introduction and deployment of key technological systems or
failure to align operational capabilities adequately with evolving client commitments and expectations may have a negative
impact on our results of operations. The failure to respond properly to and invest in changes and advancements in
technology could limit our ability to attract and retain clients, prevent us from offering products and services comparable to
2015 Annual Report / Northern Trust Corporation
16
those offered by our competitors, inhibit our ability to meet regulatory requirements or otherwise have a material adverse
effect on our operations.
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 will be 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 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. Our use of third-party vendors exposes us to the
risk that such vendors may not comply with their servicing and other contractual obligations to us, including with respect to
indemnification and information security, and to the risk that we may not satisfy applicable regulatory responsibilities
regarding the management and oversight of third parties and outsourcing providers. 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 have a negative effect on 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 create
significant delay and expense.
We are subject to certain risks inherent in operating globally which may affect our business adversely.
In conducting our business, we are subject to risks of loss from various unfavorable political, economic, legal or other
developments, including social or political 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 29% of our revenue in 2015. 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 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 mitigate properly 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 affect our business and results of operations adversely.
We actively strive to optimize our geographic footprint. This optimization may occur by establishing operations in
lower-cost locations or by outsourcing to third-party 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, 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, and economic sanctions and embargo programs
administered by the U.S. Office of Foreign Assets Control and similar agencies worldwide. 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 with whom we deal, presents
2015 Annual Report / Northern Trust Corporation
17
the risk that we may be found in violation of such rules, regulations, laws or programs and any such violation could subject
us to significant penalties or affect our reputation adversely.
Failure to control our costs and expenses adequately could affect our earnings negatively.
Our success in controlling the costs and expenses of our business operations also impacts operating results. Through
various parts of our business strategy, 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 affect our earnings negatively and reduce our competitive position.
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 to or cause travel limitations on our employees, and have a similar impact on our clients, suppliers, third-party
vendors and counterparties. These events also could impact the purchase of our products and services negatively 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 impact economic growth negatively, 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 assessments 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 affect earnings negatively.
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 also can 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 impact our financial condition and results of earnings negatively.
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 have a material and adverse
effect on our business, our financial condition and our results of operations.
2015 Annual Report / Northern Trust Corporation
18
Liquidity Risks
If we do not effectively manage our liquidity, our business could suffer.
Liquidity is essential for the operation of our business. Market conditions, unforeseen outflows of funds or other events
could have a negative effect on our level or cost of funding, affecting our ongoing ability to accommodate liability
maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a
reasonable cost and in a timely manner. If our access to stable and low-cost sources of funding, such as customer deposits,
are reduced, we may need to use alternative funding, which could be more expensive or of limited availability. Recent
regulatory changes relating to liquidity and risk management also may impact us negatively. Various regulations recently
adopted or proposed, and additional regulations under consideration, impose or could impose more stringent liquidity
requirements for large financial institutions, including the Corporation and the Bank. Given the overlap and complex
interactions of these regulations with other regulatory changes, the full impact of the adopted and proposed regulations
remains uncertain until their full implementation. For more information on these regulations and other regulatory changes,
see “Supervision and Regulation—Liquidity Standards” in Item 1, “Business.” Any substantial, unexpected or prolonged
changes in the level or cost of liquidity could affect our business adversely.
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 affect our earnings negatively
or otherwise affect our business and our ability to implement our business plan, capital plan and strategic goals adversely.
Any downgrades in our credit ratings, or an actual or perceived reduction in our financial strength, could affect our
borrowing costs, capital costs and liquidity adversely.
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 rating 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 rating-
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 affect our borrowing costs, our capital costs and our ability to raise capital and,
in turn, our liquidity adversely. A failure to maintain an acceptable credit rating also may 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
2015 Annual Report / Northern Trust Corporation
19
clients, on our or our clients’ behalf, will be compromised materially. 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 manage successfully 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 regulated heavily 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 directed
specifically at protecting depositors, the federal deposit insurance fund and the banking system as a whole, not our
stockholders or other security holders. The Corporation and its subsidiaries also are regulated heavily 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 impact our reputation adversely. Failure to
obtain necessary approvals from regulatory agencies on a timely basis could affect proposed business opportunities and
results of operations adversely. Similarly, failure to comply with new requirements or with future changes in laws or
regulations may impact our results of operations and financial condition negatively.
The ongoing implementation of the Dodd-Frank Act may have a material effect on our operations.
The Dodd-Frank Act, which became law in July 2010, has had, and will continue to have, a significant impact on the
regulatory and compliance structure in which we operate. 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 these provisions
still require final rules to be promulgated. Further changes resulting from the Dodd-Frank Act may impact the profitability
of our business activities, require changes to certain of our business practices, or otherwise affect our business adversely.
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 ultimately could impact the profitability of certain of our business activities,
require changes to certain business practices or otherwise affect our business and earnings adversely. 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 investor demand for money market mutual funds, reduce the
profitability of our money market mutual fund products or otherwise affect our business, earnings, or financial condition
adversely. The implementation of these rules is occurring in phases 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 the past several years, various regulatory bodies have demonstrated heightened enforcement scrutiny through many
regulatory initiatives, including anti-money-laundering rules, anti-bribery laws, and loan-modification requirements. These
2015 Annual Report / Northern Trust Corporation
20
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 change
significantly 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 likely would 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.
We may be impacted adversely by claims or litigation, including claims or litigation relating to our fiduciary
responsibilities.
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 is heightened when we act as a fiduciary for our clients and may be
further 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. Claims made or actions brought against us, whether founded or unfounded, may result in
injunctions, settlements, 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 affecting our earnings negatively.
We may be impacted adversely by regulatory enforcement matters.
In the ordinary course of our business, we 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 directed specifically at us. In conjunction with enforcement matters, we may face claims for disgorgement, the
imposition of civil and criminal penalties or the imposition of other remedial sanctions, any of which could have an adverse
impact on us.
We may fail to set aside adequate reserves for, or otherwise underestimate our liability relating to, pending and
threatened claims, 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 affected adversely 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 affect
our earnings negatively.
Managing or servicing assets with reasonable prudence in accordance with the terms of governing documents and
applicable laws is important. Failure to comply with the terms of governing documents and applicable laws, manage
adequately risks or manage appropriately the differing interests often involved in the exercise of fiduciary responsibilities
may subject us to liability or cause client dissatisfaction, which may impact negatively our earnings and growth.
Strategic Risks
If we do not execute strategic plans successfully, we will not grow as we have planned and our earnings growth will be
impacted negatively.
Our growth depends upon successful, consistent execution of our business strategies. A failure to execute these strategies
will impact growth negatively. A failure to grow organically or to integrate successfully 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,
2015 Annual Report / Northern Trust Corporation
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delivering enhanced products and services, as well as combining accounting, data processing and internal control systems.
To the extent we enter into transactions to acquire complementary businesses and/or technologies, we may not achieve the
expected benefits of such transactions, which could result in increased costs, lowered revenues, ineffective deployment of
capital, regulatory concerns, exit costs or diminished competitive position or reputation. These risks may be increased if
the acquired company operates internationally or in a geographic location where we do not already have significant
business operations.
Execution of our business strategies also may require certain regulatory approvals or consents, which may include
approvals of the Federal Reserve Board and other domestic and non-U.S. regulatory authorities. These regulatory
authorities may impose conditions on the activities or transactions contemplated by our business strategies which may
impact negatively our ability to realize fully the expected benefits of certain opportunities. Further, acquisitions we
announce may not be completed if we do not receive the required regulatory approvals, if regulatory approvals are
significantly delayed or if other closing conditions are not satisfied.
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 affect our clients’ perception of our abilities adversely.
We are subject to intense competition in all aspects of our businesses, which could have a negative effect on 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,
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. The same may be said for competitors based in non-U.S. jurisdictions, where legal and regulatory environments
may be more favorable than those applicable to the Corporation and the Bank as U.S.-domiciled financial institutions.
These competitive pressures may have a negative effect on our earnings and 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 have a negative effect
on 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 affect our earnings negatively. 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 ultimately would have an adverse effect on our ability to manage our
balance sheet or grow our business. The global financial crisis of 2007-08 and resultant 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
also could impact our reputation negatively. Further, the proliferation of social media websites utilized by us and third
parties, as well as the personal use of social media by our employees and others, may increase the risk of negative
publicity, which could harm our reputation or have other negative consequences.
2015 Annual Report / Northern Trust Corporation
22
We need to invest in innovation constantly, and the inability or failure to do so may affect our businesses and earnings
negatively.
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 affect our business opportunities, growth and earnings adversely. 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 corresponding revenues take time to
develop or may not develop at all.
Failure to understand or appreciate fully the risks associated with development or delivery of new product and service
offerings will affect our businesses and earnings negatively.
The success of our innovation efforts depends, in part, on the 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 deliver them to clients effectively. 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 the success of our efforts at innovation and investment in
new product and service offerings.
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, address or comply with those standards appropriately could affect our growth prospects or affect our reputation
negatively. We identify and manage risk through our business strategies and plans and our risk management practices and
controls. If we fail to identify and manage significant risks successfully, 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 understand fully the implications of
changes in legal or regulatory requirements, our businesses or the financial markets or fail to enhance our risk framework
to address those changes in a timely fashion. If our risk framework is ineffective, either because it fails to keep pace with
changes in the financial markets, legal and 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 affect our earnings and growth prospects negatively.
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 affect our earnings negatively.
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.
2015 Annual Report / Northern Trust Corporation
23
Other Risks
Changes in tax laws and interpretations and tax challenges may affect our earnings negatively.
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 affect earnings negatively.
Changes in accounting standards may be difficult to predict and could have a material impact on our consolidated
financial statements.
New accounting standards, changes to existing accounting standards, or changes in the interpretation of existing accounting
standards by the Financial Accounting Standards Board, the International 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.
Our ability to return capital to stockholders is subject to the discretion of our Board of Directors and may be limited by
U.S. banking laws and regulations, applicable provisions of Delaware law, or our failure to pay full and timely
dividends on our preferred stock and the terms of our outstanding debt.
Holders of our common stock are entitled to receive only such dividends and other distributions of capital as our Board of
Directors may declare out of funds legally available for such payments under Delaware law. Although we have declared
cash dividends on shares of our common stock historically, we are not required to do so. In addition to the approval of our
Board of Directors, our ability to take certain actions, including our ability to pay dividends, repurchase stock, and make
other capital distributions, is dependent upon, among other things, their payment being made in accordance with a capital
plan that has been reviewed by the Federal Reserve Board through the CCAR exercise and as to which the Federal Reserve
Board has not objected. There can be no assurance that the Federal Reserve Board will respond favorably to our future
capital plans. In addition to imposing restrictions on our ability to return capital to stockholders, an objection by the
Federal Reserve Board to a future capital plan would negatively impact our reputation and investor perceptions of us.
A significant source of funds for the Corporation is dividends from the Bank. As a result, our ability to pay dividends
on the Corporation’s common stock will depend on the ability of the Bank to pay dividends to 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. If the
Bank is unable to pay dividends to the Corporation in the future, our ability to pay dividends on the Corporation’s common
stock would be affected adversely.
Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or
any of our shares that rank junior to our preferred stock as to the payment of dividends and/or the distribution of any assets
on any liquidation, dissolution or winding-up of the Corporation also generally will be prohibited in the event that we do
not declare and pay in full dividends for the then-current dividend period of our Series C preferred stock. Further, in the
future if we default on certain of our outstanding debts or elect to defer interest payments on our Floating Rate Capital
Debt we will be prohibited from making dividend payments on our common stock until such payments have been brought
current.
Any reduction or elimination of our common stock dividend, or even our failure to increase our common stock
dividend along with our competitors, likely would have a negative effect on the market price of our common stock.
For more information on dividend restrictions, see “Supervision and Regulation—Payment of Dividends” in Item 1,
“Business.”
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
2015 Annual Report / Northern Trust Corporation
24
ITEM 2 – PROPERTIES
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 six
facilities: a leased facility at 801 South Canal Street in Chicago; a subleased facility at 231 South La Salle Street in
Chicago; a leased facility at 181 West Madison Street in Chicago; a leased facility at 10 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 facilities in each of Bangalore and Limerick, as well as one facility in each of
Manila and Tempe, Arizona, all of which are leased. 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, “Financial Statements and Supplementary Data,” of this Annual Report
on Form 10-K and which information is incorporated herein by reference.
ITEM 3 – LEGAL PROCEEDINGS
The information presented under the caption “Legal Proceedings” in Note 24, “Contingent Liabilities,” included under
Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K is incorporated herein by
reference.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
2015 Annual Report / Northern Trust Corporation
25
SUPPLEMENTAL ITEM – EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with regard to each executive officer of the Corporation.
Frederick H. Waddell – Mr. Waddell, age 62, joined Northern Trust in 1975 and has served as Chairman of the Board
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.
S. Biff Bowman – Mr. Bowman, age 52, 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 for Corporate & Institutional
Services. From 2008 to 2010, he served as Executive Vice President, Corporate & Institutional Services for Europe,
Middle East and Africa.
Robert P. Browne – Mr. Browne, age 50, 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 51, joined Northern Trust in 2007 and has served as Executive Vice
President and President of Global Fund Services since 2010. Mr. Cherecwich also served as Chief Operating Officer of
Corporate & Institutional Services from 2008 to 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 55, 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 54, 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 53, 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 Europe, Middle East and Africa from 2007 to 2012.
Wilson Leech – Mr. Leech, age 54, joined Northern Trust in 2004 and has served as Executive Vice President,
Corporate & Institutional Services for Europe, Middle East and Africa since 2010. Prior to that, Mr. Leech served as Head
of Global Fund Services from 2005 to 2010. He served as Chief Financial Officer for Europe, Middle East and Africa and
Asia Pacific from 2004 to 2005. Before joining Northern Trust, Mr. Leech served in various operational and financial roles
at State Street Corporation and the Royal Bank of Scotland.
Susan C. Levy – Ms. Levy, age 58, joined Northern Trust in 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 65, 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 50, 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.
2015 Annual Report / Northern Trust Corporation
26
S. Gillian Pembleton – Ms. Pembleton, age 57, 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 Europe, Middle East and Africa from 2006 to 2014. From 2001 to 2006, she was the Global Head
of Staffing and Development.
Stephen N. Potter – Mr. Potter, age 59, 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 Executive Vice President, Corporate &
Institutional Services for Europe, Middle East and Africa from 2001 to 2008.
Joyce M. St. Clair – Ms. St. Clair, age 56, joined Northern Trust in 1992 and has served as Executive Vice President
and Chief Capital Management Officer since July 2015. Prior to that, Ms. St. Clair served as Executive Vice President and
President of Enterprise Operations from September 2014 to July 2015, as President of Operations & Technology from 2011
to 2014, and as Chief Risk Officer from 2007 to 2011.
Jana R. Schreuder – Ms. Schreuder, age 57, 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 President of Operations & Technology from 2006 to 2011, and as Chief
Risk Officer from 2005 to 2006.
All officers are appointed annually by the Board of Directors. Officers continue to hold office until their successors are
duly elected or until their death, resignation or removal by the Board.
2015 Annual Report / Northern Trust Corporation
27
PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on The NASDAQ Stock Market LLC under the symbol “NTRS.” There were 2,147
shareholders of record as of January 31, 2016. 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 applicable to the Corporation and its banking subsidiaries is incorporated
herein by reference to “Supervision and Regulation – Payment of Dividends,” “ – Capital Planning and Stress Testing” and
“ – Capital Adequacy Requirements” included under Item 1, “Business,” of this Annual Report on Form 10-K, and
Note 30, “Restrictions on Subsidiary Dividends and Loans or Advances,” to the “Notes to Consolidated Financial
Statements” included under Item 8, “Financial Statements and Supplementary Data,” 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, 2015.
TABLE 2: PURCHASES OF COMMON STOCK IN THE FOURTH QUARTER OF 2015
PERIOD
October 1-31, 2015
November 1-30, 2015
December 1-31, 2015
Total (Fourth Quarter)
TOTAL NUMBER
OF SHARES
PURCHASED (1)
AVERAGE PRICE
PAID PER SHARE
199,142 $
1,144,968
741,675
2,085,785 $
68.84
73.48
73.68
73.11
TOTAL NUMBER
OF SHARES
PURCHASED AS
PART OF A
PUBLICLY
ANNOUNCED
PLAN (2)
MAXIMUM
NUMBER OF
SHARES THAT MAY
YET BE
PURCHASED
UNDER THE PLAN
199,142
1,144,968
741,675
2,085,785
11,590,645
10,445,677
9,704,002
9,704,002
(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) Repurchases were made pursuant to the repurchase program announced by the Corporation on April 22, 2015, under which the Corporation's Board of Directors authorized
the Corporation to repurchase up to 15.0 million shares of the Corporation's common stock. The repurchase program has no expiration date.
2015 Annual Report / Northern Trust Corporation
28
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
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, 2015. The
cumulative total stockholder return assumes the investment of $100 in the Corporation’s common stock and in each index
on December 31, 2010 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.
Total Return Assumes $100 Invested on
December 31, 2010 with Reinvestment of Dividends
Northern Trust
S&P 500
KBW Bank Index
2010
100
100
100
2011
74
102
77
DECEMBER 31,
2012
95
118
102
2013
120
157
141
2014
133
178
154
2015
146
181
155
2015 Annual Report / Northern Trust Corporation
29
ITEM 6 – SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31,
CONDENSED STATEMENTS OF INCOME (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:
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (*)
Average Stockholders’ Equity to Average Assets
2015
2014
2013
2012
2011
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,632.5
1,070.1
4,702.6
(43.0)
3,280.6
1,465.0
491.2
973.8
23.4
950.4
4.03
3.99
1.41
36.27
72.09
106,848.9
116,749.6
96,868.9
1,497.4
1,371.3
8,705.9
102,249.8
110,715.1
90,768.0
1,497.2
1,426.4
8,624.5
$
$
$
$
$
$
$
$
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
6,072.1
875.3
$
$
5,968.8
934.1
$
5,575.7
884.5
$
4,804.9
758.9
4,262.8
662.9
11.54%
0.88
35.3
1.07
7.8
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
Capital Ratios:
DECEMBER 31,
2015
DECEMBER 31,
2014
December 31,
2013 (d)
December 31,
2012 (d)
December 31,
2011 (d)
ADVANCED
APPROACH(a)
STANDARDIZED
APPROACH(b)
ADVANCED
APPROACH(a)
STANDARDIZED
APPROACH(b)
Common Equity Tier 1
Tier 1
Total
Tier 1 Leverage
Supplementary Leverage (c)
11.9%
12.5
14.2
7.5
6.2
10.8%
11.4
13.2
7.5
N/A
12.4%
13.2
15.0
N/A
N/A
12.5%
13.3
15.5
7.8
N/A
12.9%
13.4
15.8
7.9
N/A
12.4%
12.8
14.3
8.2
N/A
12.1%
12.5
14.2
7.3
N/A
(*) 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 83.
(a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly, the December 31, 2015 and 2014 capital balances and ratios are calculated in accordance with the Basel
III Advanced Approach final rules released by the Federal Reserve Board on July 2, 2013.
(b) In 2014, Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated in accordance with the Basel
III Standardized Approach final rules.
(c) Beginning with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective January 1, 2018, the Corporation will be
subject to a minimum supplementary leverage ratio of 3 percent.
(d) The December 31, 2013, 2012 and 2011 ratios are calculated in accordance with Basel I requirements.
2015 Annual Report / Northern Trust Corporation
30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS OVERVIEW
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 Canada, 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.
FINANCIAL OVERVIEW
Net income in 2015 totaled $973.8 million, up 20% from $811.8 million in 2014. Earnings per diluted common share
totaled $3.99 in 2015 compared to $3.32 in 2014. Return on average common equity improved to 11.5% in 2015, from
10.0% in 2014. The current year includes a pre-tax gain on the sale of 1.0 million shares of Visa Inc. Class B common
stock (Visa Class B common shares) totaling $99.9 million, voluntary cash contributions to certain constant dollar net-
asset-value (NAV) funds of $45.8 million and the impairment of the residual value of certain aircraft under leveraged lease
agreements of $17.8 million. Excluding these current-year items, net income per diluted common share, net income and
return on average common equity were $3.90, $951.4 million and 11.3%, respectively. Net income in 2014 included pre-
tax charges and write-offs totaling $47.5 million. Excluding these prior-year charges and write-offs, net income per diluted
common share, net income and return on average common equity were $3.45, $843.0 million and 10.4%, respectively.
The 2015 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 9% to $4.70 billion in 2015 from $4.33 billion in the prior
year, driven by a 5% increase in trust, investment and other servicing fees and a 6% increase in net interest income.
Noninterest expense increased 5% to $3.28 billion in 2015 compared to $3.14 billion in 2014, attributable to increased
compensation, equipment and software, outside services and employee benefits expense.
Trust, investment and other servicing fees, which represent the largest component of total revenue, increased 5% to
$2.98 billion, from $2.83 billion in 2014, primarily due to new business, favorable equity markets and lower money market
mutual fund fee waivers, partially offset by the unfavorable impacts of movements in foreign exchange rates.
Foreign exchange trading income of $261.8 million increased 25% from $210.1 million in 2014, resulting from higher
currency market volatility.
Other operating income in 2015 includes the $99.9 million gain on the sale of a portion of the Visa Class B common
shares held by Northern Trust.
Client assets under custody and under management were up 2% and down 6%, respectively, as of December 31, 2015
as compared to December 31, 2014 levels. As of December 31, 2015, client assets under custody increased to $6.07 trillion
from $5.97 trillion, and included $3.53 trillion of global custody assets, up 2% from $3.46 trillion in 2014. As of
December 31, 2015, client assets under management decreased to $875.3 billion from $934.1 billion in 2014.
Reported net interest income of $1.07 billion increased 6%, reflecting higher levels of earnings assets.
The provision for credit losses was a credit of $43.0 million in 2015, reflecting continued improvement in credit
quality across the portfolio coupled with the adoption of a change in estimation methodology for inherent losses. The
provision for credit losses in 2014 was $6.0 million. Loans and leases as of December 31, 2015 totaled $33.2 billion, up
5% from $31.6 billion in 2014. Net charge-offs for the year ended December 31, 2015 and nonperforming assets as of
December 31, 2015, were $19.5 million and $188.3 million, respectively, compared to $18.0 million and $232.3 million in
2014.
Total noninterest expense equaled $3.28 billion, up 5% from 2014. The current year includes a $45.8 million charge
related to voluntary cash contributions to certain constant dollar NAV funds, while the prior year included pre-tax charges
and write-offs of $47.5 million. Excluding these charges and write-offs, noninterest expense increased $147.3 million, or
5%, attributable to increased compensation, equipment and software, outside services and employee benefits expense.
Northern Trust continued to maintain a strong capital position during 2015, with all capital ratios exceeding those
required for classification as “well-capitalized” under federal bank regulatory capital requirements. Total stockholders’
2015 Annual Report / Northern Trust Corporation
31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
equity equaled $8.7 billion at year-end, up 3% from $8.4 billion in 2014. During the year ended December 31, 2015,
Northern Trust increased its quarterly common stock dividend to $0.36 per share and repurchased 6.9 million shares of
common stock, returning $829.9 million in capital to common stockholders, compared to $792.4 million in 2014.
CONSOLIDATED RESULTS OF OPERATIONS
Revenue
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 2015 was $4.70 billion, an increase of 9% from $4.33 billion in 2014. Noninterest income, representing
77% of total revenue in both 2015 and 2014, totaled $3.63 billion and $3.33 billion in 2015 and 2014, respectively, up 9%
in 2015.
The current-year increase in noninterest income primarily reflected higher trust, investment and other servicing fees,
other operating income and foreign exchange trading income. Trust, investment and other servicing fees totaled $2.98
billion in 2015, up $147.7 million, or 5%, from $2.83 billion in 2014, primarily reflecting new business, favorable equity
markets and lower money market mutual fund fee waivers, partially offset by the unfavorable impacts of movements in
foreign exchange rates. Foreign exchange trading income in 2015 totaled $261.8 million, up $51.7 million, or 25%,
compared with $210.1 million in 2014, reflecting higher currency market volatility. Other operating income in 2015
includes a $99.9 million gain on the sale of a portion of the Visa Class B common shares held by Northern Trust.
Net interest income on a fully taxable equivalent (FTE) basis in 2015 was $1.10 billion, an increase of $60.5 million,
or 6%, from $1.03 billion in 2014, attributable to higher levels of earnings assets, partially offset by a decline in the net
interest margin. Average earning assets increased $6.3 billion, or 7% in 2015, reflecting higher levels of securities and
loans and leases. The net interest margin declined to 1.07% in 2015 from 1.08% in 2014. The net interest margin reflects
the impact of a $17.8 million impairment of the residual value of certain aircraft under leveraged lease agreements.
Excluding the impairment, the net interest margin was 1.09% in 2015.
Additional information regarding Northern Trust’s revenue by type is provided below.
2015 TOTAL REVENUE OF $4.70 BILLION
63% - Trust, Investment and Other Servicing Fees
23% - Net Interest Income
6% - Foreign Exchange Trading Income
8% - Other Noninterest Income
2015 Annual Report / Northern Trust Corporation
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
The components of noninterest income, and a discussion of significant changes during 2015 and 2014, are provided below.
TABLE 3: NONINTEREST INCOME
($ In Millions)
2015
2014
2013
2015 / 2014
2014 / 2013
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
Trust, Investment and Other Servicing Fees
$
2,980.5 $
2,832.8 $
Foreign Exchange Trading Income
Treasury Management Fees
Security Commissions and Trading Income
Other Operating Income
Investment Security Losses, net
Total Noninterest Income
261.8
64.7
78.7
247.1
(0.3)
210.1
66.0
67.6
153.5
(4.3)
2,609.8
244.4
69.0
68.0
166.5
(1.5)
5%
25
(2)
16
61
(94)
$
3,632.5 $
3,325.7 $
3,156.2
9%
9%
(14)
(4)
(1)
(8)
181
5%
Trust, Investment and Other Servicing Fees
Trust, investment and other servicing fees were $2.98 billion in 2015 compared with $2.83 billion in 2014. 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 2015 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.
TABLE 4: MARKET INDICES
S&P 500
MSCI EAFE (in U.S. dollars)
DAILY AVERAGES
YEAR-END
2015
2,061
1,048
2014
1,931
1,888
CHANGE
7%
(44)
2015
2,044
1,716
2014
2,059
1,775
CHANGE
(1)%
(3)
ASSETS UNDER CUSTODY/ADMINISTRATION AND ASSETS UNDER MANAGEMENT
Assets under custody/administration (AUC/A), and assets under management form the primary drivers of our trust,
investment and other servicing fees. For the purposes of disclosing AUC/A, to the extent that both custody and
administration services are provided, the value of the assets is included only once. At December 31, 2015, AUC/A were
$7.80 trillion. Assets under custody, a component of AUC/A, were $6.07 trillion at December 31, 2015, up 2% from $5.97
trillion at December 31, 2014, and included $3.53 trillion of global custody assets, compared to $3.46 trillion at
December 31, 2014. The increase in assets under custody primarily reflected net inflows partially offset by an unfavorable
impact from foreign currency translation. Assets under management totaled $875.3 billion, down 6% from $934.1 billion at
the end of 2014. The decrease primarily reflected net outflows, including equity outflows from certain sovereign wealth
fund clients and a significant outflow from one fixed income mandate, coupled with the unfavorable impact from equity
markets and foreign currency translation.
2015 Annual Report / Northern Trust Corporation
33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Assets under custody by reporting segment were as follows:
TABLE 5: ASSETS UNDER CUSTODY BY REPORTING SEGMENT
DECEMBER 31,
CHANGE
2015
2014
2013
2012
2011
2015 / 2014
2014 / 2013
FIVE-YEAR
COMPOUND
GROWTH
RATE
2%
(2)
2%
7%
4
7%
8%
6
8%
($ In Billions)
Corporate & Institutional
Wealth Management
$ 5,565.8 $ 5,453.1 $ 5,079.7 $ 4,358.6 $ 3,877.6
506.3
515.7
496.0
446.3
385.2
Total Assets Under Custody
$ 6,072.1 $ 5,968.8 $ 5,575.7 $ 4,804.9 $ 4,262.8
Assets under custody were invested as follows:
TABLE 6: ASSETS UNDER CUSTODY BY INVESTMENT TYPE
Equities
Fixed Income Securities
Cash and Other Assets
DECEMBER 31,
2015
44%
37
19
2014
45%
36
19
2013
47%
34
19
2012
44%
36
20
2011
43%
37
20
Assets under management by reporting segment were as follows:
TABLE 7: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT
DECEMBER 31,
CHANGE
($ In Billions)
Corporate & Institutional
Wealth Management
Total Assets Under Management
2015
2014
2013
2012
2011
2015 / 2014
2014 / 2013
$
$
648.0 $
709.6 $
662.7 $
561.2 $
227.3
224.5
221.8
197.7
489.2
173.7
875.3 $
934.1 $
884.5 $
758.9 $
662.9
(9)%
1
(6)%
7 %
1
6 %
Assets under management were invested and managed as follows:
TABLE 8: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
DECEMBER 31,
2015
51%
17
20
12
2014
52%
17
18
13
2013
54%
17
17
12
TABLE 9: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE
DECEMBER 31,
2015
47%
40
4
9
2014
49%
39
6
6
2013
51%
43
4
2
Index
Active
Multi-Manager
Other
2015 Annual Report / Northern Trust Corporation
2012
48%
19
21
12
2012
47%
46
5
2
FIVE-YEAR
COMPOUND
GROWTH
RATE
6%
8
6%
2011
44%
19
23
14
2011
49%
44
5
2
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Foreign Exchange Trading Income
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. Foreign exchange trading income totaled $261.8 million in 2015 compared with $210.1 million in the prior year.
The increase of $51.7 million, or 25%, is attributable to higher currency market volatility in 2015.
Treasury Management Fees
Treasury management fees, generated from cash and treasury management products and services provided to clients,
totaled $64.7 million, down 2% from $66.0 million in 2014.
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 $78.7 million in 2015, up 16%, or $11.1 million, from $67.6 million in 2014, primarily
due to higher income from interest rate protection products sold to clients.
Other Operating Income
The components of other operating income include:
TABLE 10: OTHER OPERATING INCOME
($ In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
$
$
2015
59.1 $
48.2
139.8
2014
62.7 $
49.6
41.2
2013
61.9
50.9
53.7
247.1 $
153.5 $
166.5
2015 / 2014
2014 / 2013
(6)%
(3)
N/M
61 %
1 %
(3)
(23)
(8)%
Other income in 2015 includes a $99.9 million net gain on the sale of 1.0 million Visa Class B common shares held by
Northern Trust. In addition, other income in 2015 includes a $25.9 million net gain on the sale of certain loans and leases,
offset by a $27.0 million fair value adjustment on leases classified as held for sale as of December 31, 2015, each of which
is related to the decision to exit a portion of a non-strategic loan and lease portfolio. Excluding these current-year items, the
“other” component of other operating income was relatively unchanged from 2014.
Investment Security Losses, Net
Net investment security losses totaled $0.3 million and $4.3 million in 2015 and 2014, respectively. There were no other-
than-temporary impairment (OTTI) losses in 2015. Losses in 2014 include $4.2 million of charges related to the OTTI of
certain Community Reinvestment Act (CRA) eligible held to maturity securities.
NONINTEREST INCOME – 2014 COMPARED WITH 2013
Trust, investment and other servicing fees were $2.83 billion in 2014, up 9% from $2.61 billion in 2013, primarily
attributable to new business and the favorable impact of equity markets and movements in foreign exchange rates, partially
offset by higher waived fees in money market mutual funds. Foreign exchange trading income decreased 14% in 2014 to
$210.1 million from $244.4 million in 2013, reflecting lower currency market volatility and client volumes as compared to
2013.
Other operating income totaled $153.5 million in 2014, a decrease of 8% from $166.5 million in 2013. 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 write-off of certain fee receivables. Excluding these items, other operating income in 2014 increased 5% from
2013, primarily attributable to increased income from currency-related hedging, lease-related and third party servicing
activities in 2014.
Net investment security losses totaled $4.3 million and $1.5 million in 2014 and 2013, respectively. Results for 2014
include $4.2 million of pre-tax charges for the credit-related OTTI of certain CRA eligible securities held within Northern
Trust's balance sheet investment securities portfolio. There were no OTTI losses in 2013.
Net Interest Income
Net interest income stated on an FTE basis is a non-generally-accepted-accounting-principle (GAAP) financial measure
that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net
interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially
2015 Annual Report / Northern Trust Corporation
35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of
net interest income on a GAAP basis to net interest income on an FTE basis is provided on page 83.
An analysis of net interest income on an FTE basis, major balance sheet components impacting net interest income and
related ratios are provided below.
TABLE 11: ANALYSIS OF NET INTEREST INCOME (FTE)
($ 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
2015
2014
2013
2015 / 2014
2014 / 2013
$
1,224.0
$
1,186.9
$
1,155.5
25.3
1,249.3
153.9
1,095.4
1,070.1
29.4
1,216.3
181.4
1,034.9
1,005.5
$
102,249.8
$
95,947.5
$
74,252.7
27,997.1
73,167.2
22,780.3
32.5
1,188.0
222.4
965.6
933.1
85,628.3
67,364.2
18,264.1
3%
(14)
3
(15)
6
6
7%
1
23
3%
(9)
2
(18)
7
8
12%
9
25
CHANGE IN PERCENTAGE
1.22%
1.27%
1.39%
0.21
1.01
0.15
0.25
1.02
0.19
0.33
1.06
0.26
1.07%
1.08%
1.13%
(0.05)
(0.04)
(0.01)
(0.04)
(0.01)
(0.12)
(0.08)
(0.04)
(0.07)
(0.05)
Refer to pages 161 and 162 for additional analysis of net interest income.
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 banks and interest-bearing 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 2015 was $1.07 billion, up $64.6 million, or 6%, from $1.01 billion in 2014. Net interest
income on an FTE basis for 2015 was $1.10 billion, an increase of $60.5 million, or 6%, from $1.03 billion in 2014. The
increase is primarily attributable to higher levels of average earning assets, partially offset by a decrease in the net interest
margin. Average earning assets increased $6.3 billion, or 7%, to $102.2 billion from $95.9 billion in 2014, reflecting higher
levels of securities and loans and leases. The net interest margin on an FTE basis in 2015 was 1.07%, down from 1.08% in
2014. The net interest margin in 2015 reflects the impact of a $17.8 million impairment of the residual value of certain
aircraft under leveraged lease agreements. Excluding the impairment, the net interest margin was 1.09% in 2015.
Growth in average earning assets primarily reflected increased securities and loans and leases, offset by a decrease in
interest-bearing due from and deposits with banks. 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
sheets, averaged $37.4 billion, an increase of $4.0 billion, or 12%, from $33.4 billion in 2014. Loans and leases averaged
$33.0 billion, an increase of $2.8 billion, or 9%, from $30.2 billion in 2014. Interest-bearing due from and deposits with
banks averaged $15.7 billion in 2015, down $1.1 billion from $16.8 billion in 2014.
The increase in average earning assets was primarily funded by higher levels of demand and interest-bearing deposits.
Average demand deposits increased $4.9 billion, or 25%, to $24.5 billion in 2015 from $19.6 billion in 2014, while non-
2015 Annual Report / Northern Trust Corporation
36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U.S.-office interest-bearing client deposits averaged $49.4 billion in 2015, up $1.1 billion, or 2%, from $48.3 billion in
2014.
Stockholders’ equity averaged $8.6 billion in 2015 compared with $8.2 billion in 2014. The increase of $458.0 million,
or 6%, primarily reflected current-year earnings, partially offset by dividend declarations and the repurchase of common
stock pursuant to the Corporation's share repurchase program. During the year ended December 31, 2015, the Corporation
increased its quarterly common stock dividend by 9% to $0.36 per share and repurchased 6.9 million shares, returning
$829.9 million in capital to common stockholders, compared to $792.4 million in 2014. On August 5, 2014, the
Corporation issued 16,000 shares of preferred stock for proceeds of $388.5 million, net of underwriting discounts,
commissions and other issuance costs.
Under the Corporation’s capital plan submitted in January 2015, which was reviewed without objection by the Federal
Reserve in March 2015, the Corporation may repurchase up to $285.3 million of common stock after December 31, 2015,
through June 2016.
For additional analysis of average balances and interest rate changes affecting net interest income, refer to the Average
Balance Sheets with Analysis of Net Interest Income included in “Supplemental Item – Selected Statistical and
Supplemental Financial Data.”
NET INTEREST INCOME – 2014 COMPARED WITH 2013
Net interest income on an FTE basis increased 7% to $1.03 billion in 2014 from $965.6 million in 2013, primarily
attributable to higher levels of average earning assets, partially offset by a decline in the net interest margin. 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.
Average earning assets increased $10.3 billion, or 12%, to $95.9 billion in 2014 from $85.6 billion in 2013. Growth in
average earning assets primarily reflected a $7.1 billion, or 94%, increase in Federal Reserve deposits from 2013.
Stockholders’ equity averaged $8.2 billion and $7.7 billion in 2014 and 2013, respectively. The increase in 2014
reflected the retention of earnings and the issuance of preferred stock, partially offset by dividend declarations and the
repurchase of common stock.
Provision for Credit Losses
The provision for credit losses was a credit of $43.0 million in 2015 compared with a provision of $6.0 million in 2014 and
$20.0 million in 2013. The current-year provision primarily reflected improved credit quality across the portfolio coupled
with the adoption of a change in estimation methodology for inherent losses. Nonperforming assets at December 31, 2015
decreased 19% from the prior year-end. Residential real estate and commercial loans accounted for 67% and 24%,
respectively, of nonperforming loans and leases at December 31, 2015. For further discussion of the allowance and
provision for credit losses for 2015, 2014, and 2013, refer to the “Asset Quality” section.
Noninterest Expense
Noninterest expense for 2015 totaled $3.28 billion, up $145.6 million, or 5%, from $3.14 billion in 2014. The current year
includes a $45.8 million charge related to voluntary cash contributions to certain constant dollar NAV funds, while results
for 2014 include $47.5 million of charges and write-offs.
The components of noninterest expense and a discussion of significant changes during 2015 and 2014 are provided
below.
TABLE 12: NONINTEREST EXPENSE
($ In Millions)
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Other Operating Expense
Total Noninterest Expense
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2015
2014
2013
2015 / 2014
2014 / 2013
$
1,443.3 $
1,417.9 $
1,306.6
2%
9%
285.3
595.7
454.8
173.5
328.0
268.7
574.6
421.4
180.3
272.1
257.5
564.1
377.6
173.8
314.2
6
4
8
(4)
21
$
3,280.6 $
3,135.0 $
2,993.8
5%
4
2
12
4
(13)
5%
Compensation
Compensation expense, the largest component of noninterest expense, totaled $1.44 billion and $1.42 billion in 2015 and
2014, respectively, an increase of $25.4 million, or 2%. Results for 2014 include severance-related charges totaling $29.4
2015 Annual Report / Northern Trust Corporation
37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million. Excluding these charges, compensation expense increased $54.8 million, or 4%, reflecting staff growth and base
pay adjustments. Staff on a full-time equivalent basis totaled approximately 16,200 at December 31, 2015, up 5% from
approximately 15,400 at December 31, 2014.
Employee Benefits
Employee benefits expense totaled $285.3 million in 2015, up $16.6 million, or 6%, from $268.7 million in 2014. Results
for 2014 included $2.7 million of severance-related charges. Excluding these charges, employee benefits expense increased
$19.3 million, or 7%, attributable to higher pension and employee medical expense.
Outside Services
Outside services expense totaled $595.7 million in 2015, up $21.1 million, or 4%, from $574.6 million in 2014. Outside
services expense in 2014 included $1.6 million of severance-related charges. Excluding these charges, outside services
expense increased $22.7 million, or 4%, from the prior year, primarily reflecting higher consulting expense due to
regulatory related spend and increased technical services expense.
Equipment and Software
Equipment and software expense, comprised of depreciation and amortization, rental, and maintenance costs, increased
$33.4 million, or 8%, to $454.8 million in 2015 compared to $421.4 million in 2014. Results for 2014 include $9.5 million
of write-offs of replaced or eliminated software. Excluding these write-offs, equipment and software expense increased
$42.9 million, or 10%, reflecting increased software amortization and related software support costs.
Occupancy
Occupancy expense totaled $173.5 million in 2015, down $6.8 million, or 4%, from $180.3 million in 2014. Occupancy
expense in 2014 included charges totaling $4.3 million in connection with reductions in office space. Excluding these
charges, occupancy expense decreased 1% compared to 2014.
Other Operating Expense
Other operating expense in 2015 totaled $328.0 million, up $55.9 million, or 21%, from $272.1 million in 2014. The
components of other operating expense are as follows:
TABLE 13: OTHER OPERATING EXPENSE
($ In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Other Expenses
Total Other Operating Expense
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
$
$
2015
93.2 $
25.2
40.5
10.9
158.2
2014
88.0 $
22.0
39.1
19.5
103.5
328.0 $
272.1 $
2013
91.6
23.5
39.1
21.1
138.9
314.2
2015 / 2014
2014 / 2013
6%
(4)%
14
4
(44)
53
(6)
—
(8)
(25)
21%
(13)%
Other expenses in 2015 includes a charge related to voluntary cash contributions to certain constant dollar NAV funds
totaling $45.8 million to bring the NAVs of these funds to $1.00. Other expenses in 2013 include a $19.2 million charge in
connection with an agreement to resolve certain litigation.
NONINTEREST EXPENSE – 2014 COMPARED WITH 2013
Noninterest expense in 2014 totaled $3.14 billion, up 5% from $2.99 billion in 2013. Results for 2014 include $47.5
million of charges and write-offs while 2013 included a $19.2 million legal settlement charge.
Compensation expense increased 9% to $1.42 billion in 2014 from $1.31 billion in 2013. Results for 2014 include
severance-related charges totaling $29.4 million. Excluding these charges, compensation expense increased $81.9 million,
primarily due to higher staff levels and performance-based compensation and base pay adjustments.
Employee benefits expense totaled $268.7 million in 2014, up 4% from $257.5 million in 2013, and included $2.7
million of severance-related charges. Excluding these charges, employee benefits expense increased $8.5 million,
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 expense totaled $574.6 million in 2014, up 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 increased $8.9
2015 Annual Report / Northern Trust Corporation
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million, primarily related to higher sub-custodian and investment management sub-advisor fees, partially offset by lower
technical services expense.
Equipment and software expense increased 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, reflecting increased software amortization and related software
support costs.
Occupancy expense for 2014 was $180.3 million, up 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 totaled $272.1 million in 2014, down 13% from $314.2 million in 2013. Other operating
expense in 2013 included a $19.2 million legal settlement charge. The decrease in the "other" component of other
operating expense primarily relates to lower charges associated with other account servicing activities in 2014.
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 United States, as well as nonrecurring
items such as the resolution of tax matters. The 2015 provision for income taxes was $491.2 million, representing an
effective rate of 33.5%. This compares with a provision for income taxes of $378.4 million and an effective rate of 31.8%
in 2014. The prior year includes a $9.5 million income tax benefit related to the decision to reinvest the pre-tax earnings of
a foreign subsidiary indefinitely outside the United States.
The income tax provisions for 2015 and 2014 reflect reductions totaling $43.6 million and $43.0 million, respectively,
related to certain non-U.S. subsidiaries whose earnings are being reinvested indefinitely outside of the United States. The
2013 income tax provision of $344.2 million represented an effective tax rate of 32.0%, and reflects reductions of $27.6
million related to non-U.S. subsidiaries whose earnings are being reinvested indefinitely outside the United States.
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 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 to the reporting segments based on a variety
of factors including, but not limited to, risk, regulatory considerations, and internal metrics. 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, “Summary
of Significant Accounting Policies,” 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.
2015 Annual Report / Northern Trust Corporation
39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 14: CONSOLIDATED FINANCIAL INFORMATION
($ In Millions)
Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2015
2014
2013
2015 / 2014
2014 / 2013
Trust, Investment and Other Servicing Fees
$
2,980.5 $
2,832.8 $
2,609.8
5%
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (Note)
Revenue (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
Average Assets
261.8
390.2
1,095.4
4,727.9
(43.0)
3,280.6
1,490.3
516.5
210.1
282.8
1,034.9
4,360.6
6.0
3,135.0
1,219.6
407.8
973.8 $
811.8 $
244.4
302.0
965.6
4,121.8
20.0
2,993.8
1,108.0
376.7
731.3
110,715.1 $
104,083.5 $
94,857.7
$
$
25
38
6
8
N/M
5
22
27
20%
6%
9 %
(14)
(6)
7
6
(70)
5
10
8
11 %
10 %
Note: Stated on an FTE basis. The consolidated figures include $25.3 million, $29.4 million, and $32.5 million of FTE adjustments for 2015, 2014, and 2013, respectively.
Corporate & Institutional Services
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds,
foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors
around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to:
global custody; fund administration; investment operations outsourcing; investment management; investment risk and
analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage
services; transition management services; banking and cash management. Client relationships are managed through the
Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe,
the Middle East, and the Asia-Pacific region.
The following table summarizes the results of operations of C&IS for the years ended December 31, 2015, 2014, and
2013 on a management-reporting basis.
TABLE 15: C&IS RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2015
2014
2013
2015 / 2014
2014 / 2013
Trust, Investment and Other Servicing Fees
$
1,696.9
$
1,584.0
$
1,443.8
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (Note)
Revenue (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.
249.4
170.5
414.4
2,531.2
(22.6)
1,856.4
697.4
212.8
484.6
50%
42,313.9
$
$
$
$
200.4
177.9
310.0
2,272.3
5.8
1,732.8
533.7
149.4
384.3
$
238.8
177.3
275.9
2,135.8
(3.4)
1,657.9
481.3
145.6
335.7
7 %
24
(4)
34
11
N/M
7
31
42
26 %
10 %
(16)
—
12
6
N/M
5
11
3
14 %
47%
46%
59,462.9
$
53,308.2
(29)%
12 %
The 26% increase in C&IS net income in 2015 primarily resulted from higher trust, investment and other servicing fees,
net interest income, foreign exchange trading income and lower provision for credit losses, partially offset by higher
noninterest expense. The 14% increase in C&IS net income in 2014 primarily reflected higher trust, investment and other
2015 Annual Report / Northern Trust Corporation
40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
servicing fees and net interest income, partially offset by lower foreign exchange trading income and higher noninterest
expense. In addition, 2015 and 2014 C&IS net income included the income tax benefit related to Northern Trust’s decision
to reinvest the pre-tax earnings of a foreign subsidiary indefinitely outside the United States of $5.5 million and $9.5
million, respectively.
C&IS Trust, Investment and Other Servicing Fees
C&IS trust, investment and other servicing fees are primarily attributable to services related to custody, fund
administration, investment management, and securities lending. Custody and fund administration fees are driven primarily
by values of client assets under custody/administration, transaction volumes, and number of accounts. The asset values
used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees
related to asset values are client specific and are priced based on quarter-end or month-end values, values at the beginning
of each quarter or average values for a month or quarter. The fund administration fees that are asset-value-related are priced
using month-end, quarter-end, or average daily balances. Investment management fees, which are based generally on client
assets under management, are based primarily on market values throughout a period.
Securities lending revenue is affected by market values; the demand for securities to be lent, which drives volumes;
and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they
have borrowed. The other services fee category in C&IS includes such products as benefit payments, investment risk and
analytical services and other services. Revenue from these products is based generally on the volume of services provided
or a fixed fee.
Provided below are the components of C&IS trust, investment and other servicing fees.
TABLE 16: C&IS TRUST, INVESTMENT AND OTHER SERVICING FEES
($ In Millions)
Custody and Fund Administration
Investment Management
Securities Lending
Other
Total Trust, Investment and Other Servicing Fees
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2015
2014
1,150.8 $
1,069.9 $
325.2
90.5
130.4
305.7
96.5
111.9
2013
948.9
295.6
97.9
101.4
1,696.9 $
1,584.0 $
1,443.8
$
$
2015 / 2014
2014 / 2013
8%
6
(6)
17
7%
13%
3
(1)
10
10%
2015 C&IS TRUST, INVESTMENT, AND OTHER SERVICING FEES
68% Custody and Fund Administration
19% Investment Management
8% Other Services
5% Securities Lending
Custody and fund administration fees, the largest component of trust, investment and other servicing fees, increased $80.9
million, or 8%, primarily reflecting new business and favorable equity markets, partially offset by the unfavorable impact
of movements in foreign exchange rates. Fees from investment management increased $19.5 million, or 6%, primarily due
to lower money market mutual fund fee waivers. Money market mutual fund fee waivers in C&IS totaled $48.8 million and
$63.2 million in 2015 and 2014, respectively. Securities lending revenue decreased 6% due to changes in fee arrangements.
C&IS other trust, investment and servicing fees increased $18.5 million, or 17%, primarily related to higher sub-advisory
fees. C&IS trust, investment, and other servicing fees totaled $1.58 billion in 2014, an increase of $140.2 million or 10%,
from $1.44 billion in 2013, primarily due to increases in custody and fund administration fees driven by new business and
the favorable impacts of equity markets and movements in foreign exchange rates.
2015 Annual Report / Northern Trust Corporation
41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provided below is a breakdown of the C&IS assets under custody and under management.
TABLE 17: C&IS ASSETS UNDER CUSTODY
($ In Billions)
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
Total Assets Under Custody
2015 C&IS ASSETS UNDER CUSTODY
DECEMBER 31,
CHANGE
2015
2014
2013
2015 / 2014
2014 / 2013
$
$
2,999.0 $
2,920.3 $
1,971.1
492.0
103.7
1,939.3
477.3
116.2
2,705.4
1,823.4
448.6
102.3
5,565.8 $
5,453.1 $
5,079.7
3%
2
3
(11)
2%
8%
6
6
14
7%
54% North America
35% Europe, Middle East, and Africa
9% Asia Pacific
2% Securities Lending
TABLE 18: C&IS ASSETS UNDER MANAGEMENT
($ In Billions)
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
Total Assets Under Management
2015 C&IS ASSETS UNDER MANAGEMENT
DECEMBER 31,
CHANGE
$
$
2015
410.4 $
102.0
31.9
103.7
2014
415.5 $
115.6
62.3
116.2
648.0 $
709.6 $
2013
382.2
114.0
64.2
102.3
662.7
2015 / 2014
2014 / 2013
(1)%
(12)
(49)
(11)
(9)%
9%
1
(3)
14
7%
63% North America
16% Europe, Middle East, and Africa
5% Asia Pacific
16% Securities Lending
2015 Annual Report / Northern Trust Corporation
42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2015 C&IS ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
53% Equities
13% Fixed Income Securities
18% Cash and Other Assets
16% Securities Lending Collateral
C&IS assets under custody were $5.57 trillion at December 31, 2015, 2% higher than $5.45 trillion at December 31, 2014.
Assets under management decreased 9% to $648.0 billion at December 31, 2015, from $709.6 billion at December 31,
2014. 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 $103.7 billion and $116.2 billion at December 31, 2015 and 2014, respectively.
C&IS Foreign Exchange Trading Income
Foreign exchange trading income totaled $249.4 million in 2015, a $49.0 million, or 24%, increase from $200.4 million in
2014. The increase is attributable to higher currency market volatility and trading volumes in the current year. Foreign
exchange trading income in 2014 of $200.4 million decreased $38.4 million, or 16%, from $238.8 million in 2013, due to
lower currency market volatility and trading volumes as compared to 2013.
C&IS Other Noninterest Income
Other noninterest income for 2015 totaled $170.5 million, down $7.4 million, or 4%, from $177.9 million in 2014,
primarily due to decreases within various categories of other operating income, partially offset by higher security
commissions and trading income. Other income in 2015 includes a $25.9 million net gain on the sale of certain loans and
leases, offset by a $27.0 million fair value adjustment on leases classified as held for sale as of December 31, 2015, each of
which is related to the decision to exit a portion of a non-strategic loan and lease portfolio. 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.
C&IS Net Interest Income
Net interest income increased $104.4 million, or 34%, in 2015 to $414.4 million from $310.0 million in 2014. The increase
in net interest income was attributable to an increase in the net interest margin, partially offset by lower levels of average
earning assets. The changes to both the net interest margin and average earning assets compared to the prior-year period
were partially due to a change in presentation, as certain assets were transferred to the Treasury and Other segment in the
first quarter of 2015 and the related internal funds pricing method was updated. Also impacting the net interest income in
2015 was a $17.8 million impairment of the residual value of certain aircraft under leveraged lease agreements. As a result,
the net interest margin increased to 1.16% from 0.58% in the prior year, while average earning assets totaled $35.7 billion,
a decrease of $17.3 billion, or 33%, from $53.0 billion in the prior year. The earning assets that remain consist primarily of
loans and leases and intercompany assets. Funding sources were primarily comprised of non-U.S. custody-related interest-
bearing deposits, which averaged $46.0 billion in 2015, up from $45.5 billion in 2014. 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.
2015 Annual Report / Northern Trust Corporation
43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
C&IS Provision for Credit Losses
The provision for credit losses in 2015 was a credit of $22.6 million, primarily reflecting improved credit quality across the
portfolio coupled with the adoption of a change in estimation methodology for inherent losses. The change in methodology
resulted in a decrease in the estimate for the allowance for credit losses for the commercial and institutional loan portfolio,
partially offset by an increase in the allowance for undrawn loan commitments and standby letters of credit. 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 in 2013 was a credit of $3.4 million, reflecting improvement in loan portfolio credit
quality as compared to the preceding year. For further discussion of the allowance and provision for credit losses refer to
the “Asset Quality” section.
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 $1.86
billion in 2015, an increase of $123.6 million, or 7%, from $1.73 billion in 2014. The increase was due to higher indirect
expense allocations, primarily attributable to $36.6 million of the charge related to voluntary cash contributions to certain
constant dollar NAV funds allocated to C&IS, as well as higher outside services and compensation expense in 2015.
Noninterest expense for 2014 increased $74.9 million, or 5%, from $1.66 billion in 2013. Results for 2014 included $24.8
million of charges relating to severance activities and reductions in office space and write-offs of replaced or eliminated
software, while the 2013 results included a $19.2 million legal settlement charge.
Wealth Management
Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals,
retirees, and established privately-held businesses in its target markets. The business 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. In supporting these targeted
segments, 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 is one of the largest providers of advisory services in the
United States with $506.3 billion of assets under custody and $227.3 billion of assets under management at December 31,
2015. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 18 U.S. states
and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.
The following table summarizes the results of operations of Wealth Management for the years ended December 31,
2015, 2014, and 2013 on a management-reporting basis.
TABLE 19: WEALTH MANAGEMENT RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2015
2014
2013
2015 / 2014
2014 / 2013
Trust, Investment and Other Servicing Fees
$
1,283.6
$
1,248.8
$
1,166.0
3%
12.4
111.8
568.1
1,975.9
(20.4)
1,291.9
704.4
264.7
439.7
45%
25,048.7
$
$
9.7
98.3
536.1
1,892.9
0.2
1,268.7
624.0
234.8
389.2
48%
23,629.3
$
$
5.6
116.7
557.7
1,846.0
23.4
1,215.0
607.6
229.2
378.4
52%
22,887.6
$
$
28
14
6
4
N/M
2
13
13
13%
6%
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (Note)
Revenue (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.
2015 Annual Report / Northern Trust Corporation
7%
73
(16)
(4)
3
(99)
4
3
2
3%
3%
44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wealth Management net income increased 13% in 2015, primarily reflecting higher trust, investment and other servicing
fees, net interest income and lower provision for credit losses, partially offset higher noninterest expense. The 3% increase
in Wealth Management net income in 2014 from 2013 is primarily attributable to increased trust, investment and other
servicing fees, partially offset by lower other noninterest and net interest income and 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.
TABLE 20: WEALTH MANAGEMENT TRUST, INVESTMENT AND OTHER SERVICING FEES
($ In Millions)
Central
East
West
Global Family Office
Total Trust, Investment and Other Servicing Fees
2015 WEALTH MANAGEMENT FEES
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2015
514.3 $
332.7
267.7
168.9
2014
509.1 $
325.3
262.5
151.9
2013
470.0
303.4
241.5
151.1
1,283.6 $
1,248.8 $
1,166.0
$
$
2015 / 2014
2014 / 2013
1%
2
2
11
3%
8%
7
9
1
7%
40% Central
26% East
21% West
13% Global Family Office
2015 Annual Report / Northern Trust Corporation
45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 21: WEALTH MANAGEMENT ASSETS UNDER CUSTODY
($ In Billions)
Global Family Office
Central
East
West
Total Assets Under Custody
DECEMBER 31,
CHANGE
$
$
2015
321.4 $
79.5
58.5
46.9
2014
324.0 $
85.7
58.5
47.5
506.3 $
515.7 $
2013
314.9
79.4
57.3
44.4
496.0
2015 / 2014
2014 / 2013
(1)%
(7)
—
(1)
(2)%
3%
8
2
7
4%
2015 WEALTH MANAGEMENT ASSETS UNDER CUSTODY
63% Global Family Office
16% Central
12% East
9% West
TABLE 22: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
($ In Billions)
Central
Global Family Office
East
West
Total Assets Under Management
DECEMBER 31,
CHANGE
2015
81.8 $
61.9
47.4
36.2
2014
83.4 $
57.0
47.4
36.7
2013
86.2
53.9
47.2
34.5
2015 / 2014
2014 / 2013
(2)%
(3)%
9
—
(1)
6
—
6
227.3 $
224.5 $
221.8
1 %
1 %
$
$
2015 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
36% Central
27% Global Family Office
21% East
16% West
2015 Annual Report / Northern Trust Corporation
46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2015 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
46% Equities
28% Fixed Income Securities
26% Cash and Other Assets
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 $1.28 billion in 2015, up $34.8 million, or 3%, from $1.25 billion in 2014, which in turn was
up $82.8 million, or 7%, from $1.17 billion in 2013. The results in 2015 benefited from new business, higher equity
markets and lower money market mutual fund fee waivers. Wealth Management money market mutual fund fee waivers
totaled $60.4 million and $66.6 million in 2015 and 2014, respectively. The 7% increase in trust, investment and other
servicing fees in 2014 compared to 2013 was attributable to higher equity markets and new business, partially offset by
higher money market mutual fund fee waivers.
At December 31, 2015, assets under custody in Wealth Management were $506.3 billion compared with $515.7 billion
at December 31, 2014. Assets under management were $227.3 billion at December 31, 2015 compared to $224.5 billion at
the previous year end.
Wealth Management Foreign Exchange Trading Income
Foreign exchange trading income totaled $12.4 million in 2015, $9.7 million in 2014 and $5.6 million in 2013, primarily
reflecting increased client activity.
Wealth Management Other Noninterest Income
Other noninterest income for 2015 totaled $111.8 million, an increase of $13.5 million, or 14%, from $98.3 million in
2014, primarily reflecting higher security commissions and trading income and increases within various categories of other
operating income. Other noninterest income in 2014 increased $18.4 million, or 16%, as compared to 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.
Wealth Management Net Interest Income
Net interest income was $568.1 million for 2015, up $32.0 million, or 6%, from $536.1 million in 2014, primarily
reflecting higher levels of average earning assets, partially offset by a decline in the net interest margin. The Wealth
Management net interest margin in 2015 decreased to 2.29% from 2.32% in 2014, resulting from lower yields on earning
assets, partially offset by a lower cost of interest-related funds. Average earning assets totaled $24.8 billion in the current
year, a 7% increase from $23.1 billion in the prior year. Net interest income in 2014 declined $21.6 million, or 4%, from
2013 and the net interest margin in 2014 of 2.32% was down from the 2013 margin of 2.46%. The lower net interest
margin in 2014 as compared to 2013 was attributable to lower yields on earning assets, partially offset by lower deposit
rates. Earning assets and funding sources in 2015, 2014 and 2013 were primarily comprised of loans and domestic interest-
bearing deposits.
2015 Annual Report / Northern Trust Corporation
47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wealth Management Provision for Credit Losses
The provision for credit losses was a credit of $20.4 million for 2015, compared with a provision of $0.2 million in 2014,
and $23.4 million in 2013. The 2015 provision primarily reflected improved credit quality of commercial real estate and
residential real estate loan classes coupled with the adoption of a change in estimation methodology for inherent losses.
The 2014 provision reflected improvement in the credit quality of the commercial and institutional and commercial real
estate loan classes as compared to 2013. 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 $1.29 billion
in 2015, an increase of $23.2 million, or 2%, from $1.27 billion in the prior year. The increase primarily reflected higher
indirect allocations, primarily attributable to $9.2 million of the charge related to voluntary cash contributions to certain
constant dollar NAV funds allocated to Wealth Management, as well as increased employee benefits expense, partially
offset by lower expense for outside services. Noninterest expense in 2014 included $18.1 million of charges relating to
severance activities and reductions in office space and write-offs of replaced or eliminated software.
Treasury and Other
Treasury and Other includes income and expense associated with the wholesale funding activities and the investment
portfolios of the Corporation and the Bank. Treasury and Other also includes certain corporate-based expense, executive
level compensation and nonrecurring items not allocated to the reporting segments.
The following table summarizes the results of operations of Treasury and Other for the years ended December 31,
2015, 2014, and 2013 on a management-reporting basis.
TABLE 23: TREASURY AND OTHER RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
Net Interest Income (Note)
Revenue (Note)
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.
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2015
$
107.9
$
2014
6.6
$
112.9
220.8
132.3
88.5
39.0
49.5
5%
43,352.5
$
$
188.8
195.4
133.5
61.9
23.6
38.3
5%
20,991.3
$
$
$
$
2013
8.0
132.0
140.0
120.9
19.1
1.9
17.2
2%
2015 / 2014
2014 / 2013
N/M
(40)
13
(1)
43
65
29%
(17)%
43
40
10
224
N/M
123 %
18,661.9
107%
12 %
Treasury and Other noninterest income in 2015 was $107.9 million compared to $6.6 million in 2014. The increase reflects
the $99.9 million gain on the sale of 1.0 million Visa Class B common shares recognized by the Corporation during 2015.
Excluding the gain, Treasury and Other noninterest income increased slightly compared to 2014. Noninterest income in
2014 decreased 17% from 2013, and included $4.2 million of OTTI charges related to certain CRA-eligible securities.
Treasury and Other net interest income in 2015 was $112.9 million, down $75.9 million, or 40%, from $188.8 million
in 2014. The decrease reflected a decline in the net interest margin, partially offset by higher levels of earning assets. The
changes to both the net interest margin and average earning assets versus prior year are partially due to a change in
presentation, as certain assets were transferred to Treasury and Other from C&IS in the first quarter of 2015 and the related
internal funds pricing method was updated. Average earning assets in 2015 increased $22.0 billion to $41.8 billion from
$19.8 billion in the prior year. Net interest income in 2014 increased 43% from 2013, reflecting higher internal yields on
funds provided to reporting segments in 2014.
Treasury and Other noninterest expense in 2015 equaled $132.3 million, down slightly from $133.5 million in 2014.
The 2014 expense included $4.6 million of severance-related charges. Excluding these charges, the $3.4 million, or 3%,
increase is primarily attributable to higher general overhead costs, partially offset by higher indirect expense allocations to
C&IS and Wealth Management.
2015 Annual Report / Northern Trust Corporation
48
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 December 31, 2015, Northern Trust managed $875.3 billion in assets for personal and institutional clients,
including $648.0 billion for C&IS clients and $227.3 billion for Wealth Management clients. The following table presents
consolidated assets under management as of December 31, 2015, 2014 and 2013 by investment type.
TABLE 24: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
($ In Billions)
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
Total Assets under Management
DECEMBER 31,
CHANGE
$
$
2015
446.6 $
147.1
177.7
103.9
2014
485.7 $
162.2
169.9
116.3
875.3 $
934.1 $
2013
477.2
146.7
158.2
102.4
884.5
2015 / 2014
2014 / 2013
(8)%
(9)
5
(11)
(6)%
2%
11
7
14
6%
Assets under management decreased $58.8 billion, or 6%, from $934.1 billion at year-end 2014. The decrease primarily
reflected net outflows, including equity outflows from certain sovereign wealth fund clients and a significant outflow from
one fixed income mandate, coupled with the unfavorable impact from equity markets and foreign currency translation. The
following table presents activity in consolidated assets under management by investment type during the year-ended
December 31, 2015.
TABLE 25: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
($ In Billions)
Balance as of December 31, 2014
Inflows by Investment Type
Equity
Fixed Income
Cash & Other Assets
Securities Lending Collateral
Total Inflows
Outflows by Investment Type
Equity
Fixed Income
Cash & Other Assets
Securities Lending Collateral
Total Outflows
Net Outflows
Market Performance, Currency & Other
Balance as of December 31, 2015
2015 Annual Report / Northern Trust Corporation
$
934.1
116.2
41.7
281.0
28.8
467.7
(143.0)
(54.6)
(273.3)
(41.2)
(512.1)
(44.4)
(14.4)
875.3
49
$
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSET QUALITY
Securities Portfolio
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, 2015, 2014 and 2013.
TABLE 26: SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE
($ In Millions)
Securities Held to Maturity
U.S. Government
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
DECEMBER 31,
2015
2014
2013
26.0 $
89.2
9.9
5,123.2
— $
121.9
18.4
4,030.5
5,248.3 $
4,170.8 $
—
225.2
35.9
2,064.7
2,325.8
6,178.3 $
4,506.9 $
1,917.9
36.4
16,366.8
2,500.1
17.1
7,219.2
4.6
16,389.2
2,327.7
18.1
6,312.0
32,317.9 $
29,558.5 $
37,407.9 $
33,445.9 $
37,567.4 $
33,734.0 $
4.6
17,528.0
2,439.9
98.9
6,403.5
28,392.8
30,819.9
30,720.3
$
$
$
$
$
$
Northern Trust maintains a high quality securities portfolio, with 88% of the combined available for sale, held to maturity,
and trading account portfolios at December 31, 2015 composed of U.S. Treasury and government sponsored agency
securities and triple-A rated corporate notes, covered bonds, asset-backed securities, sub-sovereign, supranational,
sovereign & non-U.S. agency bonds, auction rate securities, commercial mortgage-backed and obligations of states and
political subdivisions. The remainder of the portfolio was composed of corporate notes, asset-backed securities, negotiable
certificates of deposit, obligations of states and political subdivisions, auction rate securities and other securities, of which
as a percentage of the total securities portfolio, 7% were rated double-A, 3% were rated below double-A, and 2% 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, 2015, 36% of corporate debt was rated triple-A, 29% was rated double-A, and 35% was rated below
double-A. Securities classified as “other asset-backed” at December 31, 2015 had average lives of less than 5 years, and
100% were rated triple-A.
Unrealized losses within the investment securities portfolio at December 31, 2015 were $140.5 million as compared to
$87.6 million at December 31, 2014, primarily reflecting widened credit spreads and higher market rates since purchase;
35% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. There
were $4.2 million of losses recognized in 2014 in connection with the write-down of securities determined to be OTTI.
There were no OTTI losses recognized in 2015 or 2013.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for
as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest.
To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is
monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly
assessed. It is Northern Trust’s policy to take possession, either directly or via third party custodians, of securities
purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the
repurchase.
2015 Annual Report / Northern Trust Corporation
50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and Leases
The following table presents the amounts outstanding of loans and leases by segment and class as of December 31, 2015
and the preceding four year-ends.
TABLE 27: COMPOSITION OF LOAN PORTFOLIO
($ 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
DECEMBER 31,
2015
2014
2013
2012
2011
$
9,431.5 $
8,381.9
$
7,375.8 $
7,468.5 $
3,848.8
544.4
1,137.7
194.1
3,333.3
916.3
1,530.6
191.5
15,156.5 $
14,353.6
8,850.7 $
9,136.4
37.3
18,024.4 $
33,180.9 $
9,782.6
7,466.9
37.1
17,286.6
31,640.2
$
$
$
$
$
$
$
$
2,955.8
975.1
954.7
358.6
2,859.8
1,035.0
1,192.3
341.6
6,918.7
2,981.7
978.8
1,057.5
417.6
12,620.0 $
12,897.2 $
12,354.3
10,271.3 $
10,375.2 $
10,708.9
6,445.6
48.6
6,130.1
102.0
16,765.5 $
16,607.3 $
29,385.5 $
29,504.5 $
5,651.4
349.3
16,709.6
29,063.9
Residential Real Estate
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 $8.9 billion at December 31, 2015, or 28% of total U.S.
loans, compared with $9.8 billion, or 32% of total U.S. loans, at December 31, 2014. 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 require a loan-to-collateral value of no more than 65% to 75% 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 $8.9 billion in residential real estate loans at December 31, 2015, $2.3 billion were in Florida, $2.0 billion
were in the greater Chicago area, and $1.5 billion were in California, with the remainder distributed throughout the other
geographic regions within the United States served by Northern Trust. Legally binding commitments to extend residential
real estate credit, which are primarily equity credit lines, totaled $1.4 billion and $1.6 billion at December 31, 2015 and
2014, 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 also is 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.
2015 Annual Report / Northern Trust Corporation
51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The table below provides additional detail regarding commercial real estate loan types:
TABLE 28: COMMERCIAL REAL ESTATE LOANS
($ 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,
2015
2014
$
770.1 $
830.4
683.3
310.5
442.3
728.7
735.5
854.1
323.7
125.7
3,036.6
2,767.7
392.8
147.4
272.0
256.8
121.3
187.5
$
3,848.8 $
3,333.3
At December 31, 2015, legally binding commitments to extend credit and standby letters of credit to commercial real estate
borrowers totaled $750.9 million and $26.6 million, respectively. At December 31, 2014, legally binding commitments and
standby letters of credit totaled $556.1 million and $110.7 million, respectively.
Nonperforming Assets and 90 Days Past Due Loans
Nonperforming assets consist of nonperforming loans and leases and other real estate owned (OREO). OREO is comprised
of commercial and residential properties acquired in partial or total satisfaction of loans. Loans that are delinquent 90 days
or more and still accruing interest can fluctuate widely at any reporting period based on the timing of cash collections,
renegotiations and renewals. The following table presents nonperforming assets and loans that were delinquent 90 days or
more and still accruing at December 31, 2015 and each of the prior four year-ends.
TABLE 29: NONPERFORMING ASSETS
($ 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
DECEMBER 31,
2015
2014
2013
2012
2011
$
$
42.9
16.7
59.6
$
15.0
37.1
52.1
$
23.1
49.2
72.3
$
21.6
56.4
78.0
31.3
79.5
110.8
$
120.1
$
162.4
$
189.1
$
174.6
$
177.6
0.4
120.5
180.1
8.2
188.3
7.1
$
$
1.2
163.6
215.7
16.6
232.3
22.7
$
$
1.4
190.5
262.8
11.9
274.7
16.4
$
$
2.2
176.8
254.8
20.3
275.1
19.0
$
$
5.3
182.9
293.7
21.2
314.9
13.1
$
$
Nonperforming Loans and Leases to Total Loans and Leases
0.54%
0.68%
0.89%
0.86%
1.01%
Allowance for Credit Losses Assigned to Loans and Leases to
Nonperforming Loans and Leases
1.1x
1.2x
1.1x
1.2x
1.0x
Nonperforming assets of $188.3 million as of December 31, 2015, decreased $44.0 million, or 19%, reflecting improved
credit quality across the portfolio. The December 31, 2015 loan portfolio reflected a reclassification of a non-performing
loan from the residential real estate loan class to the commercial and institutional loan class due to a change in the obligor
as a result of restructuring the loan. In addition to the negative impact on net interest income and the risk of credit losses,
nonperforming assets also increase operating costs due to the expense associated with collection efforts. Changes in the
level of nonperforming assets may be indicative of changes in the credit quality of one or more loan classes. Changes in
2015 Annual Report / Northern Trust Corporation
52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
credit quality impact the allowance for credit losses through the resultant adjustment of the specific allowance and of the
qualitative factors used in the determination of the inherent allowance levels within the allowance for credit losses.
Allowance and Provision for Credit Losses
TABLE 30: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
($ In Millions)
Balance at January 1
Charge-Offs
Recoveries
Net Charge-Offs
Provision for Credit Losses
Effects of Foreign Exchange Rates
Balance at December 31
$
$
2015
295.9 $
(30.7)
11.2
(19.5)
(43.0)
(0.1)
2014
307.9 $
(36.1)
18.1
(18.0)
6.0
—
233.3 $
295.9 $
2013
327.6
(59.3)
19.6
(39.7)
20.0
—
307.9
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).
2015 Annual Report / Northern Trust Corporation
53
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, 2015, and at each of the prior four year-ends.
TABLE 31: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
2015
2014
DECEMBER 31,
2013
2012
2011
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
PERCENT
OF
LOANS
TO
TOTAL
LOANS
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
ALLOWANCE
AMOUNT
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
$
3.1
—% $
21.1
—% $
24.9
—% $
32.5
—% $
47.3
—%
Total Commercial
111.8
Personal
($ In Millions)
Specific Allowance
Allocated Inherent
Allowance
Commercial
Commercial and
Institutional
Commercial Real
Estate
Lease Financing,
net
Non-U.S.
Other
Residential Real
Estate
Private Client
Other
Total Personal
Total Allocated Inherent
Allowance
Total Allowance for
Credit Losses
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
40.4
69.5
1.9
—
—
96.2
19.7
2.5
118.4
28
12
2
3
1
46
27
27
—
54
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
$
$
$
230.2
100% $
274.8
100% $
283.0
100% $
295.1
100% $
281.6
100%
233.3
100% $
295.9
100% $
307.9
100% $
327.6
100% $
328.9
100%
193.8
$
267.0
$
278.1
$
297.9
$
294.8
39.5
28.9
29.8
29.7
34.1
$
233.3
$
295.9
$
307.9
$
327.6
$
328.9
0.58%
0.84%
0.95%
1.01%
1.01%
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, 2015, the specific allowance component amounted to $3.1 million compared with $21.1 million at
the end of 2014. The $18.0 million decrease is primarily attributable to charge-offs and restructurings and pay-offs as a
result of improvement in commercial and institutional, commercial real estate and residential real estate loans.
The decrease in the specific component of the allowance from $24.9 million in 2013 to $21.1 million in 2014 was
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.
Inherent Component of the Allowance: The inherent component of the allowance addresses exposure relating to
probable but unidentified credit-related losses. The inherent component of the allowance also covers the credit exposure
associated with undrawn loan commitments and standby letters of credit. To estimate the allowance for credit losses on
2015 Annual Report / Northern Trust Corporation
54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $44.6 million to $230.2 million at December 31, 2015, compared with
$274.8 million at December 31, 2014, which decreased $8.2 million from $283.0 million at December 31, 2013.
The decrease in 2015 was driven by improved credit quality across the loan and lease portfolio. In addition, Northern
Trust changed the estimation methodology for the calculation of the inherent component of the allowance as of
December 31, 2015. See Allowance for Credit Losses in Critical Accounting Estimates on page 56 for a description of the
change in estimation methodology. The adoption of this methodology resulted in a reduction in the Commercial and
Institutional allowance requirement, which was partially offset by an increase to the allowance assigned to undrawn
commitments and standby letters of credit. The adoption of the new estimation methodology did not have a material
impact on the estimated reserve for any other presented loan categories. The decrease in 2014 was 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.
Overall Allowance: The evaluation of the specific component and the inherent component above resulted in a total
allowance for credit losses of $233.3 million at December 31, 2015, compared with $295.9 million at the end of 2014. The
allowance of $193.8 million assigned to loans and leases, as a percentage of total loans and leases, was 0.58% at
December 31, 2015, down from a $267.0 million allowance, representing 0.84% of total loans and leases, at December 31,
2014. Allowances assigned to undrawn loan commitments and standby letters of credit totaled $39.5 million and $28.9
million at December 31, 2015, and December 31, 2014, respectively, and are included in other liabilities in the
consolidated balance sheets.
Provision: The provision for credit losses was a credit of $43.0 million and net charge-offs totaled $19.5 million in
2015. This compares with a $6.0 million provision for credit losses and net charge-offs of $18.0 million in 2014, and a
$20.0 million provision for credit losses and net charge-offs of $39.7 million in 2013.
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, 2015, impaired loans totaled $157.3 million and included $117.1 million of loans deemed troubled debt
restructurings as compared to total impaired loans of $242.2 million at December 31, 2014, which included $151.3 million
of loans deemed troubled debt restructurings. Impaired loans had $3.1 million and $6.6 million of the allowance for credit
losses allocated to them at December 31, 2015, and December 31, 2014, 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 $1 million as of December 31, 2015) homogeneous
loans are collectively evaluated for impairment and excluded from impaired loan disclosures as allowed under applicable
accounting standards.
CRITICAL ACCOUNTING ESTIMATES
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 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 of Directors (Audit Committee).
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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: As of December 31, 2015, Northern Trust changed the estimation methodology for inherent
losses that have been incurred in the loan and lease portfolio. The new estimation methodology is more quantitatively
focused than the previous methodology as it is based on internally developed loss data specific to the Northern Trust loan
and lease portfolio. The change in methodology is accounted for as a change in estimate applicable to current period and
future periods. The new estimation methodology and the related qualitative adjustment framework segregate the loan and
lease portfolio into homogeneous segments. For each segment, the probability of default and the loss given default are
applied to the total exposure at default to determine a quantitative inherent allowance. The estimated allowance is reviewed
by the Loan Loss Reserve Committee within a qualitative adjustment framework to determine an appropriate adjustment to
the quantitative inherent allowance for each segment of the loan portfolio. In determining the appropriate adjustment,
management applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology and
environmental factors that are not contemplated in the quantitative methodology. The Loan Loss Reserve Committee is
comprised of representatives from Credit Risk Management, the reporting segments and Corporate Finance.
For periods prior to the methodology change, the amount of inherent allowance was based on factors that incorporated
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 were
applied to loan and lease credit exposures aggregated by shared risk characteristics and were reviewed quarterly by the
Loan Loss Reserve Committee.
The quarterly analysis of the specific and inherent allowance components and the control process maintained by Credit
Risk Management and the lending staff 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 2015 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 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.
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2015, Northern Trust utilized a discount rate of 4.25% 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 7.25%.
In evaluating possible revisions to pension-related assumptions for the U.S. plans as of Northern Trust’s December 31,
2015 measurement date, the following were considered:
• Discount Rate: Effective December 31, 2015, Northern Trust estimates the discount rate for its U.S. pension plans by
applying the projected cash flows for future benefit payments to the Aon Hewitt AA Above Median yield curve as of
the measurement date. This yield curve is composed of individual zero-coupon interest rates for 198 different time
periods over a 99-year time horizon. Zero-coupon rates utilized by the yield curve are mathematically derived from
observable market yields for AA-rated corporate bonds. This yield curve model referenced by Northern Trust in
establishing the discount rate resulted in a rate of 4.71% at December 31, 2015 for the Qualified and Nonqualified
plans, an increase from 4.25% at 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 7.25% for
2015 to 7.00% for 2016.
• 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.
Effective December 31, 2015, Northern Trust changed from the RP-2014 mortality table with improvement scale
MP-2014 to the aggregate RP-2014 mortality table with adjustment from 2006 to 2014 to reflect improvement scale
MP-2015, and with future improvement under scale MP-2015 released by the Society of Actuaries in October 2015.
The updated mortality table and improvement scale apply to annuity payments only and result in generally lower
projected mortality improvements than estimated by the 2014 tables. Mortality assumptions on lump sum payments
remain static and continue to be in line with the IRS prescribed table for minimum lump sums in 2016.
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In order to illustrate the sensitivity of these assumptions on the expected Qualified Plan periodic pension expense in 2016
and the projected benefit obligation as of December 31, 2015, the following table is presented to show the effect of
increasing or decreasing each of these assumptions by 25 basis points.
TABLE 32: SENSITIVITY OF QUALIFIED PENSION PLAN ASSUMPTIONS
($ In Millions)
Increase (Decrease) in 2016 Pension Expense
Discount Rate Change
Compensation Level Change
Rate of Return on Plan Assets Change
Increase (Decrease) in 2015 Projected Benefit Obligation
Discount Rate Change
Compensation Level Change
25 BASIS
POINT INCREASE
25 BASIS
POINT DECREASE
$
(3.7) $
1.4
(3.4)
(39.8)
4.8
3.8
(1.4)
3.4
42.0
(4.7)
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 2015 and 2014 due to strong asset performance over the past few years. The
minimum required contribution to the Qualified Plan is expected to be zero in 2016. The maximum deductible contribution
is estimated at $250 million for 2016.
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 statements of income reflect 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 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.
There were no credit-related losses recognized in 2015 or 2013. Credit-related losses recognized in 2014 in
connection with the write-down of securities totaled $4.2 million. Additional OTTI may occur in future periods as a result
of market and economic conditions.
FAIR VALUE MEASUREMENTS
The preparation of financial statements in conformity with GAAP requires certain assets and liabilities to be reported at fair
value. As of December 31, 2015, approximately 29% of Northern Trust’s total assets and approximately 1% of its total
liabilities were carried on the consolidated balance sheets at fair value. As discussed more fully in Note 3, “Fair Value
Measurements,” 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
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 18% of Northern
Trust’s assets carried at fair value are classified as Level 1; Northern Trust typically does not hold equity securities or other
instruments that are actively traded on an exchange.
Approximately 82% of Northern Trust’s assets and 99% 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 95% of Level 2 assets with the remaining 5% 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, “Fair Value Measurements,” to the consolidated financial
statements provided in Item 8, “Financial Statements and Supplementary Data.”
As of December 31, 2015, all derivative assets and liabilities, excluding the swap related to the sale of certain Visa
Class B common shares described below, 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, 2015, the fair value of Northern Trust’s Level 3 assets were $17.1 million. 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, 2015, Northern Trust’s Level 3 liabilities consisted of a swap that Northern Trust entered into with
the purchaser of 1.0 million shares of Visa Class B common shares previously held by Northern Trust. Pursuant to the
swap, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into
shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be compensated
for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-dilutive
adjustments to the ratio. The swap also requires periodic payments from Northern Trust to the counterparty calculated by
reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swap is
determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value
measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B
common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the
estimated growth rate of the Visa Class A common share price. See “Visa Class B Common Shares” under Note 24,
“Contingent Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on
Form 10-K for further information.
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.
IMPLEMENTATION OF ACCOUNTING STANDARDS
Information related to recent accounting pronouncements is contained in Note 2, “Recent Accounting Pronouncements,” to
the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.”
CAPITAL EXPENDITURES.
Capital expenditures in 2015 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 2015 totaled
$433.5 million, of which $335.0 million was for software, $59.2 million was for computer hardware, $34.2 million was for
building and leasehold improvements, and $5.1 million was for furnishings. These capital expenditures principally support
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 $8.1 million was for furnishings.
OFF-BALANCE-SHEET ARRANGEMENTS
Assets Under Custody/Administration and Assets Under Management
Northern Trust, in the normal course of business, holds assets under custody/administration and management in a fiduciary
or agency capacity for its clients. In accordance with GAAP, these assets are not assets of Northern Trust and are not
included in its consolidated balance sheets.
Commitments, Letters of Credit and Securities Lent with Indemnification
Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to
meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the
potential credit exposure should the instrument be drawn fully upon and the client default. To control the credit risk
associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same
credit quality and monitoring controls as its lending activities. The following table provides details of Northern Trust’s off-
balance-sheet financial instruments as of December 31, 2015 and 2014.
TABLE 33: SUMMARY OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS
($ 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,
2015
2014
$
$
$
12,530.3 $
24,716.7
10,660.1
24,467.5
37,247.0 $
35,127.6
4,305.4 $
17.2
94,514.0
4,468.1
20.8
98,113.9
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2015.
TABLE 34: UNDRAWN COMMITMENTS TO EXTEND CREDIT BY INDUSTRY SECTOR
AS OF DECEMBER 31, 2015
($ 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
YEAR
OUTSTANDING
LOANS
$
4,148.5 $
2,019.6 $
2,128.9 $
9.4
8,005.0
718.2
172.5
999.9
7,094.8
398.8
1,401.4
821.3
397.4
24,167.2
750.9
—
1,924.2
172.3
27,014.6
1,366.1
8,832.9
33.4
10,232.4
37,247.0
7.3
764.1
236.6
8.8
152.9
2,220.5
52.0
13.3
130.1
228.4
5,833.6
147.0
—
1,255.0
172.3
7,407.9
284.4
4,804.6
33.4
5,122.4
2.1
7,240.9
481.6
163.7
847.0
4,874.3
346.8
1,388.1
691.2
169.0
18,333.6
603.9
—
669.2
—
1,081.7
4,028.3
—
5,110.0
1,153.6
107.4
2,270.0
149.8
89.9
269.5
4,295.4
266.3
68.3
578.3
183.0
9,431.5
3,848.8
544.4
1,137.7
194.1
8,850.7
9,136.4
37.3
18,024.4
33,180.9
19,606.7
15,156.5
12,530.3
24,716.7
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 $4.3 billion and $4.5 billion at December 31, 2015 and 2014, respectively, include $147.1 million and $221.4
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 24 and 27 months at December 31, 2015 and 2014, 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
$94.5 billion and $98.1 billion at December 31, 2015 and 2014, respectively. Because of the credit quality of the borrowers
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2015, or 2014 related to these
indemnifications.
Additional information about Northern Trust’s off-balance-sheet financial instruments is included in Note 27, “Off-
Balance-Sheet Financial Instruments,” to the consolidated financial statements provided in Item 8, “Financial Statements
and Supplementary Data.”
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.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
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 act on business opportunities in a timely and cost
effective manner. Liquidity risk is the risk of not being able to raise sufficient funds or maintain collateral to meet on- and
off-balance sheet and contingent liability cash flow obligations when due 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. The Corporate Liquidity Management Policy, as well as corporate liquidity procedures,
limits and risk appetite, are reviewed and approved annually by the Board of Directors. The Board receives a semiannual
update on the Corporation’s operations in accordance with established liquidity limits. The Business Risk Committee
receives reports at least quarterly on the Corporation’s liquidity risk profile and liquidity risk tolerance. Additionally, the
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset & Liability Management 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. The Risk Management function independently reviews and challenges the liquidity management
process.
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, anticipating future funding requirements given both
internal and external events, and management of the liquidity coverage ratio. 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
the 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, 2015, the Bank had over $35.4 billion of securities and loans readily available as collateral to support
discount window borrowings. The Bank is also active in the U.S. interbank funding market, providing an important source
of additional liquidity and low-cost funds. Liquidity supports 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 65% of total assets as of December 31, 2015. The market value
of unencumbered securities at the Bank, which include those placed at the Federal Reserve discount window, totaled $33.3
billion at December 31, 2015. The Corporation believes that it and the Bank each satisfied the fully phased-in monthly
U.S. liquidity coverage ratio requirements during 2015.
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 and management
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.
Another important area of Northern Trust’s liquidity risk management is the development and maintenance of
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 actual liquidity crisis, details organizational responsibilities and defines specific actions designed to ensure the proper
maintenance of liquidity during periods of stress. In conjunction with Northern Trust’s global contingent funding plan,
international banking subsidiaries also have individual contingent liquidity plans.
Northern Trust 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 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 respond better to potential liquidity stresses.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2015, the Corporation received $600.0 million of dividends from the Bank. Dividends from
the Bank are subject to certain restrictions, as discussed in further detail in Note 30, “Restrictions on Subsidiary Dividends
and Loans or Advances,” 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 2015 were $496.9 million of common
stock repurchases and $321.4 million of common stock dividends.
The Corporation’s liquidity, defined as the amount of cash and highly marketable assets, was $757.5 million and
$869.4 million at December 31, 2015 and 2014, respectively. During, and at year-end, 2015 and 2014, 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 subsidiaries, as
needed. Average liquidity during 2015 and 2014 was $846.2 million and $1.1 billion, respectively. The cash flows of the
Corporation are shown in Note 33, “Northern Trust Corporation (Corporation only),” to the consolidated financial
statements provided in Item 8, “Financial Statements and Supplementary Data.”
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, 2015, provided below, allow
Northern Trust to access capital markets on favorable terms.
TABLE 35: NORTHERN TRUST CREDIT RATINGS AS OF DECEMBER 31, 2015
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
A2
Baa1
A3
Stable
P-1
Aa2
A2
F1+
AA-
A+
BBB
BBB+
Stable
F1+
AA
A+
Stable
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, “Derivative Financial Instruments,” 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 net maximum amount of these termination payments that
Northern Trust could have been required to pay at December 31, 2015, was $390.2 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, 2015, that would be triggered by a significant downgrade in its debt ratings.
Statements of Cash Flows
For the year ended December 31, 2015, net cash provided by operating activities was $1.8 billion, primarily the result
of period earnings, decreased net collateral deposited with counterparties and the impact of non-cash charges such as
amortization of computer software, partially offset by other operating activities.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash provided by operating activities for the year ended December 31, 2014, was $936.0 million and was primarily
the result of period earnings and the impact of non-cash charges such as amortization of computer software, partially offset
by increased net collateral deposited with derivative counterparties.
Net cash used in investing activities of $6.9 billion for the year ended December 31, 2015, primarily reflects the
strategic net purchases of securities available for sale and held to maturity to increase the yield on earning assets and
increased loans and leases net of $585.2 million in gross cash proceeds received related to the decision to exit a non-
strategic loan and lease portfolio, partially offset by decreased levels of Federal Reserve deposits.
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.
For the year ended December 31, 2015, net cash provided by financing activities totaled $8.5 billion, primarily
attributable to higher levels of total deposits and strategic increases in short-term other borrowings with the Federal Home
Loan Bank, partially offset by federal funds purchased, the repurchase of common stock pursuant to the Corporation’s
share repurchase program, dividends paid on common and preferred stock, securities sold under agreements to repurchase
and the repayment of sterling denominated notes. The increase in total deposits is primarily attributable to higher levels of
non-U.S. office deposits.
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 was attributable
to higher levels of demand and other noninterest-bearing client deposits. The decrease in senior notes and other long-term
debt reflect the maturity of $500.0 million of fixed-rate senior notes and $135.0 million of repayments of borrowing from
the Federal Home Loan Bank, respectively.
Regulatory Environment
Northern Trust actively follows regulatory developments and regularly evaluates its liquidity risk management framework
against proposed rulemaking and industry best practices in order to comply with applicable regulations and further enhance
its liquidity policies. Please refer to “Liquidity Standards” under “Supervision and Regulation” in Item 1, “Business,” of
this Annual Report on Form 10-K for a discussion of applicable liquidity standards.
Contractual Obligations
The following table shows Northern Trust’s contractual obligations as of December 31, 2015.
TABLE 36: CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2015
($ 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
TOTAL
ONE YEAR
AND LESS
1-3
YEARS
3-5 YEARS
OVER 5
YEARS
$
1,497.4 $
— $
— $
499.7 $
1,341.6
277.3
34.8
536.0
322.0
—
—
9.1
85.1
160.3
541.2
—
18.7
157.1
130.1
—
—
7.0
121.0
21.4
997.7
800.4
277.3
—
172.8
10.2
$
4,009.1 $
254.5 $
847.1 $
649.1 $
2,258.4
Note: Obligations as shown do not include deposit liabilities or interest requirements on funding sources.
(1) Refer to Note 12, “Senior Notes and Long-Term Debt,” and Note 13, “Floating Rate Capital Debt,” to the consolidated financial statements provided in Item 8, “Financial
Statements and Supplementary Data,” for further details.
(2) Refer to Note 10, “Lease Commitments,” 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, 2015 activity was used as a
base to project future obligations.
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Management
One of Northern Trust’s primary objectives is to maintain a strong capital position to merit the confidence of clients,
counterparties, creditors, regulators and stockholders. A strong capital position helps Northern Trust execute its strategies
and withstand unforeseen adverse developments.
Senior management, with oversight from the Capital Governance Committee and the full Board of Directors, is
responsible for capital management and planning. Northern Trust manages its capital on a total Corporation basis and on a
legal entity basis. The Capital Committee is responsible for measuring and managing capital levels against levels set forth
within the Capital Policy approved by the Board of Directors. In establishing the goals and targets for capital, a variety of
factors are taken into consideration, including the unique risk profiles of Northern Trust’s businesses, regulatory
requirements, capital levels relative to peers, and the impact on credit ratings.
Capital levels were strengthened in 2015 as average stockholders’ equity increased $458.0 million, or 6%, reaching
$8.6 billion. Total stockholders’ equity was $8.7 billion at December 31, 2015, as compared to $8.4 billion at December 31,
2014. In April 2015, the Board increased the quarterly common stock dividend by 9% to $0.36 per common share.
Common dividends totaling $333.0 million were declared in 2015. The Corporation purchased 6.9 million shares of its
common stock in 2015 at an average price per share of $72.52, and is authorized by the Board to purchase up to 9.7 million
additional shares of stock after December 31, 2015. Preferred dividends totaling $23.4 million were declared in 2015.
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced
approaches. For each ratio, the lower of the result calculated under the standardized approach and the advanced approach
serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of
the Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios, under the
applicable U.S. regulatory rules as of December 31, 2015 and 2014.
TABLE 37: CAPITAL ADEQUACY
($ In Millions)
Common Equity Tier 1 Capital
Common Stockholders’ Equity
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
(1)
Risk-Weighted Assets
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
Common Equity Tier 1
Tier 1
Total (Tier 1 and Tier 2)
Leverage
Supplementary Leverage
(5)
December 31, 2015
December 31, 2014
Advanced
Approach(3)
Standardized
Approach(4)
Advanced
Approach(3)
Standardized
Approach(4)
$
8,317.3
$
8,317.3
$
8,060.4
$
8,060.4
18.6
1.8
(494.0)
192.7
(23.8)
18.6
1.8
(494.0)
192.7
(23.8)
(22.1)
3.8
(497.0)
272.8
(4.6)
(22.1)
3.8
(497.0)
272.8
(4.6)
8,012.6
8,012.6
7,813.3
7,813.3
388.5
67.2
(37.0)
418.7
388.5
67.2
(37.0)
418.7
388.5
134.5
(18.3)
504.7
388.5
134.5
(18.7)
504.3
8,431.3
8,431.3
8,318.0
8,317.6
—
909.2
201.7
(12.5)
233.3
909.2
201.7
(7.8)
—
1,009.1
134.5
(12.4)
274.7
1,009.1
134.5
(12.9)
1,098.4
1,336.4
1,131.2
1,405.4
$
$
9,529.7
67,334.6
$
$
9,767.7
73,962.5
$
$
9,449.2
62,896.9
$
$
116,749.6
113,099.9
33,180.9
116,749.6
113,099.9
33,180.9
109,946.5
106,814.0
31,640.2
9,723.0
62,651.2
109,946.5
106,814.0
31,640.2
25.07%
7.12
25.07%
7.12
11.9%
10.8%
12.5
14.2
7.5
6.2
11.4
13.2
7.5
N/A
25.48%
7.33
12.4%
13.2
15.0
N/A
N/A
25.48%
7.33
12.5%
13.3
15.5
7.8
N/A
(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, 2015 and 2014 capital balances and ratios are calculated in
accordance with the Basel III Advanced Approach final rules released by the Federal Reserve Board on July 2, 2013.
(4) In 2014, Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated
in accordance with the Basel III Standardized Approach final rules.
(5) Beginning with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective January 1,
2018, the Corporation will be subject to a minimum supplementary leverage ratio of 3 percent.
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of December 31, 2015 and 2014, 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, “Regulatory Capital Requirements,” to the
consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.”
As of December 31, 2015, the Corporation’s common equity Tier 1 capital ratio as calculated under the advanced
approaches methodologies would have been 11.5% 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 implementation of Basel III in the United States 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.
RISK MANAGEMENT
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 culture of risk awareness across the organization. Northern Trust’s risk culture
encompasses the general awareness, attitude and behavior of employees to risk and the management of risk across all lines
of defense 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 of Directors and key risk-related committees.
TABLE 38: RISK GOVERNANCE STRUCTURE
Audit
Committee
Business Risk
Committee
Capital Governance
Committee
Compensation and Benefit
Committee
Northern Trust Corporation Board of Directors
Global Enterprise Risk Committee (GERC)
Global Enterprise Risk Management Committee (GERM)
Credit Risk Committee
Operational Risk
Committee
Fiduciary Risk
Committee
Compliance & Ethics
Oversight Committee
Asset & Liability
Management
Committee
Model Risk Oversight
Committee
The Board of Directors provides oversight of risk management directly and through certain of its committees: the Audit
Committee, the Business Risk Committee, the Capital Governance Committee and the Compensation and Benefits
Committee. The Board of Directors annually approves Northern Trust’s enterprise risk management framework, risk
universe and Corporate Risk Appetite Statement. The Business Risk Committee assumes primary responsibility and
oversight with respect to credit risk, operational risk, fiduciary risk, compliance risk, market risk, liquidity risk, and
strategic risk. 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 Northern Trust’s incentive
compensation program. The Compensation and Benefits Committee annually reviews management’s assessment of the
effectiveness of the design and performance of Northern Trust’s incentive compensation arrangements and practices in
providing 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
behavior by participants. The Capital Governance Committee of the Board was established in November 2015 to assist the
Board in discharging its oversight duties with respect to capital management and planning activities. Among other
responsibilities, the Capital Governance Committee oversees Northern Trust’s capital adequacy assessments, forecasting,
and stress testing processes and activities, including the annual CCAR exercise. Accordingly, the Capital Governance
Committee provides oversight with respect to Northern Trust’s risk identification for the capital adequacy assessment
process.
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, meets 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. 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 Global Enterprise Risk Management Committee (GERM) provides senior management oversight and guidance to
the management of all categories of risk within Northern Trust. GERM is chaired by the CRO, and members include
risk practice leads, business unit and regional chief risk officers, and various functional risk leaders.
The Credit Risk Committee establishes and monitors credit-related policies and practices throughout Northern Trust
and promotes their uniform application. The Credit Risk 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 also may 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 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 sensitivity of earnings (SOE), sensitivity of economic value of equity
(SEVE), value-at-risk (VaR) and notional position sizes.
The Model Risk Oversight Committee (MROC) is responsible for providing management attention, direction, and
oversight of the model risk management framework and model risk within Northern Trust. MROC reviews and,
where applicable, provides guidance and approval as to the direction of the Northern Trust Model Risk Program and
Policy. MROC tracks and provides oversight, advice, approval and direction on risk mitigation activities and the
acceptance of significant risks, where appropriate.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the aforementioned committees, Northern Trust deploys business and regional risk committees that also
report into GERC.
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.
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
methodology 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 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 and is comprised of the following 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 the implementation and management of the enterprise-wide model risk
framework and 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 model
controls. Oversight of Model Risk Management is provided by the MROC.
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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 and Independent Verification
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 an
Independent Verification program that promotes rigor and accuracy in Northern Trust’s ongoing compliance with Basel
III requirements and adherence to Enhanced Prudential Standards, including Liquidity Stress Testing. The program
independently verifies Northern Trust’s advanced systems in order to comply with the qualification requirements
related to the Advanced Internal Ratings Based and Advanced Measurement Approaches. In addition, Independent
Verification performs conceptual soundness evaluations of proposed changes to the Bank’s advanced systems prior to
notification to regulatory authorities as required in Basel Coordination Committee Bulletin 14-2. The Independent
Verification program assesses the effectiveness of the Credit Risk, Operational Risk, and Market Risk frameworks.
The Independent Verification team presents an annual assessment report of its findings to the Business Risk
Committee, which is required to review and approve the effectiveness of Northern Trust’s advanced systems on an
annual basis.
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 loans, leases,
securities, and counterparty-related exposures. Northern Trust’s loan portfolio differs significantly from those of other large
U.S. financial institutions as it is generally more conservative in terms of credit risk. In particular, Northern Trust is
generally:
•
•
not an originator of loan products to be sold into a secondary market or to be bundled into asset securitizations;
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 framework and, while independent of the
businesses, it works closely with them to achieve the goal of assuring proactive management of credit risk. To monitor and
control credit risk, the Credit Risk Management function maintains a framework that consists of policies, standards, and
practices designed to promote a conservative credit culture. This function also monitors adherence to corporate policies,
standards, and external regulations.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Credit requests 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.
The Chief Credit Officer reports directly to the CRO. Independent oversight and review of the credit risk framework is
provided by Risk Control.
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 oversight includes the development, monitoring and maintenance of the models, as well as
providing information to the Credit Risk 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, “Off-Balance-Sheet Financial Instruments,” to the consolidated financial statements
provided in Item 8, “Financial Statements and Supplementary Data,” and in the “Off-Balance-Sheet Arrangements” section
of Item 7, “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 capital calculations. Borrower risk ratings are discussed further in Note 6, “Loans and
Leases,” 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 undertakes both on-site and off-site file
reviews that evaluate effectiveness of management’s implementation of the Credit Risk Management’s requirements.
Northern Trust maintains a loan portfolio watch list for adversely classified credit exposures. 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 $328.3 million at December 31, 2015. 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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, human factors 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, potential legal actions, or
catastrophes to result in losses. Operational risk includes:
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.
•
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
•
•
•
•
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 of the operational risk framework.
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.
The ORC is responsible for setting the Corporate Operational Risk Management Policy and approving the operational
risk framework and programs that support the coordination of operational risk activities to identify, monitor, measure,
manage and report on operational risk. In addition, the ORC serves as an escalation point for significant issues raised by its
programs.
Operational risk is identified, monitored, measured, managed and reported 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:
• 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 the Operational Risk Management function.
• Risk and Control Self-Assessment – a structured risk management process used by Northern Trust’s 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.
• 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 process 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.
• Outsourcing Risk Management Program – a program that provides processes for appropriate risk assessment,
measurement, 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.
•
•
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•
Scalability & Capacity Assessment Review – a program that provides a mechanism for identifying scalability and/or
capacity constraints within Northern Trust’s business areas and their ability to take on change, whether driven by new
business, strategic projects, market volatility or regulatory change.
• Operational Concentration Risk Management – a program that provides an assessment of process concentrations
within the 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.
• Physical Security – a program that provides for the safety of Northern Trust partners, clients, and visitors worldwide
by setting and enforcing standards, providing training, establishing partnerships, and encouraging continual
improvement in workplace security.
Insurance Management Program – a program designed to 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.
Information Security
Northern Trust’s approach to information security begins at a governance level with an organizational structure which
reflects support from executive management and includes risk committees comprised of members from across Northern
Trust’s businesses. 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.
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 security program
maturity assessments, penetration tests, security assessments and reviews of Northern Trust’s susceptibility to social
engineering attacks such as spear phishing. Northern Trust operates a global security operations center for threat
identification and response. This center aggregates security threat information from systems and platforms across the
business, and alerts the organization in accordance with its documented Cyber Incident Response Plan.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 global network, robust network
security, resiliency centers that offer alternative workstations, and 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, vendor relationships and other assets), arrangements for
obtaining these resources and prioritizing the resumption of each function in compliance with corporate standards. The
strength of the business continuity programs of all critical third-party vendors to Northern Trust are reviewed on a regular
basis. All of Northern Trust’s businesses test their plans at least annually.
The 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 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 and for establishing specific procedures, standards and guidelines to manage
fiduciary risk within the desired risk appetite level. Each business also is expected to establish procedures for enhanced
review in the event a product or relationship involves 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 meetings, senior management reviews and discusses fiduciary risks including existing
and emerging issues. In addition, the FRC serves as an escalation point for significant issues raised by its subcommittees or
elsewhere in the organization.
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:
• 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.
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 employees’
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 and its subcommittee, the
Market and Liquidity Risk Committee (MLRC), provide independent oversight and are 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 and MLRC meetings, senior management reviews and discusses
Northern Trust’s market risk profile as well as various scenario analyses. ALCO and MLRC establish and monitor
guidelines based on measures such as SOE, SEVE, VaR and notional position sizes.
Interest Rate Risk Overview
Interest rate risk is the risk to earnings, associated with the balance sheet, or value of equity 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 related to the balance sheet. Changes in interest rates also can impact the values of
assets, liabilities and off-balance-sheet positions, which indirectly impact the value of equity. 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.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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;
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, excluding fee waivers, 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.
TABLE 39: INTEREST RATE RISK SIMULATION OF PRE-TAX EARNINGS EXCLUDING FEE WAIVERS
($ 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:
$
(2)
(31)
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, including money market mutual fund fee waivers. 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, 2015, Northern Trust did not exceed its SOE limits.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
•
•
•
•
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.
TABLE 40: INTEREST RATE RISK SIMULATION OF ECONOMIC VALUE OF EQUITY AS OF DECEMBER 31, 2015
($ 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
$
(133)
(427)
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, 2015, 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.
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Foreign Currency Risk Overview
Northern Trust's balance sheet 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. Both activities are considered trading activities. 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.
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 from Northern
Trust’s trading systems each day. Data vendors provide foreign exchange rates and interest rates for all currencies. The
Corporate Market Risk function 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
corroborating metrics and alternative perspectives on Northern Trust’s market risks.
Automated daily reports are produced and distributed to business managers and risk managers. The Corporate Market
Risk function also reviews and reports several variations of the VaR measures in historical time series format to provide
management with a historical perspective on risk.
The table below presents the levels of total regulatory VaR and its subcomponents for global foreign currency in the
years 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.
TABLE 41: FOREIGN CURRENCY VALUE-AT-RISK
($ In Millions)
As of December 31
High
Low
Average
Year-End
TOTAL VaR
(SPOT AND FORWARD)
FOREIGN EXCHANGE
SPOT VaR
FOREIGN EXCHANGE
FORWARD VaR
$
2015
0.6 $
0.1
0.3
0.3
2014
0.5 $
—
0.2
0.2
2015
0.5 $
—
0.2
0.1
2014
0.5 $
—
0.1
0.3
2015
0.5 $
0.1
0.3
0.3
2014
0.1
—
0.1
0.1
During 2015 and 2014, 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 $4.0
million for the year ended December 31, 2015.
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
2015 Annual Report / Northern Trust Corporation
80
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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.
GERC and the Business Risk Committee are responsible for reviewing the general methods, guidelines and policies by
which Northern Trust monitors and controls strategic risk.
FORWARD-LOOKING STATEMENTS
This report may include statements which constitute “forward-looking statements” within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified typically by
words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “likely,” “plan,” “goal,”
“target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and
“could.” Forward-looking statements include statements, other than those related to historical facts, that relate to Northern
Trust’s financial results and outlook, capital adequacy, dividend policy, accounting estimates and assumptions, credit
quality including allowance levels, future pension plan contributions, anticipated tax benefits, anticipated expense levels,
spending related to technology and regulatory initiatives, risk management policies, contingent liabilities, strategic
initiatives, industry trends, and expectations regarding the impact of recent legislation and accounting
pronouncements. These statements are based on Northern Trust’s current beliefs and expectations of future events or future
results, and involve risks and uncertainties that are difficult to predict and subject to change. These statements are also
based on assumptions about many important factors, including:
•
•
•
•
•
•
financial market disruptions or economic recession, whether in the United States, Europe, the Middle East, Asia or
other regions;
volatility or 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 held 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 equity markets on fee revenue;
the downgrade of U.S. government-issued and other securities;
changes in foreign exchange trading client volumes and volatility in foreign currency exchange rates, changes in the
valuation of the U.S. dollar relative to other currencies in which Northern Trust records revenue or accrues expenses,
and Northern Trust’s success in assessing and mitigating the risks arising from all 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;
• Northern Trust’s ability to address operating risks, including cyber-security or data security breach risks, human errors
or omissions, pricing or valuation of securities, fraud, systems performance or defects, systems interruptions, and
breakdowns in processes or internal controls;
• Northern Trust's success in responding to and investing in changes and advancements in technology;
•
•
a significant downgrade of any of Northern Trust’s debt ratings;
the health and soundness of the financial institutions and other counterparties with which Northern Trust
conducts business;
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
•
•
•
•
•
•
•
uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate
allowances therefor;
the pace and extent of continued globalization of investment activity and growth in worldwide financial assets;
changes in interest rates or in the monetary or other policies of various regulatory authorities or central banks;
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, or restrict or increase the regulation of certain activities carried on by financial institutions, including
Northern Trust;
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 United States and other countries, such
as anti-money laundering, anti-bribery, and client privacy;
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 United States or other
countries that could affect Northern Trust or its clients;
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;
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;
• 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 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;
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, including Northern Trust’s dependence on dividends from its
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.
•
•
•
•
Actual results may differ materially from those expressed or implied by 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.
2015 Annual Report / Northern Trust Corporation
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT
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 FTE basis, which are non-GAAP financial measures. Management believes
this presentation provides a clearer indication of net interest margins for comparative purposes.
TABLE 42: RECONCILIATION OF REPORTED NET INTEREST INCOME TO FULLY TAXABLE EQUIVALENT
2015
2014
2013
FOR THE YEAR ENDED DECEMBER 31,
($ In Millions)
Interest Income
Interest Expense
Net Interest Income
Net Interest Margin
REPORTED
FTE ADJ.
FTE REPORTED
FTE ADJ.
FTE REPORTED
FTE ADJ.
FTE
$ 1,224.0
153.9
$ 1,070.1
$
$
1.05%
25.3 $ 1,249.3
$ 1,186.9
—
153.9
181.4
25.3 $ 1,095.4
$ 1,005.5
$
$
29.4 $ 1,216.3
$ 1,155.5
—
181.4
29.4 $ 1,034.9
$
222.4
933.1
$
$
32.5 $ 1,188.0
—
32.5 $
222.4
965.6
1.07%
1.05%
1.08%
1.09%
1.13%
2015 Annual Report / Northern Trust Corporation
83
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is incorporated herein by reference to the “Risk Management” section of Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on
Form 10-K.
2015 Annual Report / Northern Trust Corporation
84
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF NORTHERN TRUST CORPORATION:
We have audited the accompanying consolidated balance sheets of Northern Trust Corporation and subsidiaries (Northern
Trust) as of December 31, 2015 and 2014, 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, 2015.
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, 2015 and 2014, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, 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, 2015, 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 29, 2016 expressed an unqualified opinion on the effectiveness of
Northern Trust Corporation’s internal control over financial reporting.
CHICAGO, ILLINOIS
FEBRUARY 29, 2016
2015 Annual Report / Northern Trust Corporation
85
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(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 $5,227.5 and $4,176.1)
Trading Account
Total Securities
Loans and Leases
Commercial
Personal
Total Loans and Leases (Net of unearned income of $103.6 and $287.7)
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 16,000
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 229,293,783 and 233,390,705
Additional Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock (15,877,741 and 11,780,819 shares, at cost)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements on pages 90-159.
DECEMBER 31,
2015
2014
$
6,444.6 $
3,050.6
1,614.2
1,062.7
14,143.1
14,928.3
16,398.5
17,386.3
32,317.9
29,558.5
5,248.3
4,170.8
1.2
4.7
37,567.4
33,734.0
15,156.5
14,353.6
18,024.4
17,286.6
33,180.9
31,640.2
(193.8)
446.9
2,157.0
526.4
4,464.4
(267.0)
444.3
1,568.8
533.2
5,865.1
$ 116,749.6 $ 109,946.5
$ 23,435.5 $ 22,815.0
15,035.9
15,916.4
1,455.8
6,719.9
1,757.4
2,723.2
50,221.8
47,545.0
96,868.9
90,757.0
351.5
546.6
4,055.1
1,497.4
1,371.3
277.3
3,075.6
932.9
885.1
1,685.2
1,497.0
1,615.1
277.2
3,848.1
108,043.7
101,497.6
388.5
408.6
1,072.3
8,242.8
(372.7)
(1,033.6)
388.5
408.6
1,050.9
7,625.4
(319.7)
(704.8)
8,705.9
8,448.9
$ 116,749.6 $ 109,946.5
2015 Annual Report / Northern Trust Corporation
86
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(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 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
Average Number of Common Shares Outstanding – Basic
– Diluted
Note: Changes in Other-Than-Temporary-Impairment (OTTI) Losses
Noncredit-related OTTI Losses Recorded in (Reclassified from) OCI
Other Security Losses, net
Investment Security Losses, net
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(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
See accompanying notes to consolidated financial statements on pages 90-159.
2015 Annual Report / Northern Trust Corporation
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
2,980.5 $
2,832.8 $
261.8
64.7
78.7
247.1
(0.3)
210.1
66.0
67.6
153.5
(4.3)
2,609.8
244.4
69.0
68.0
166.5
(1.5)
3,632.5
3,325.7
3,156.2
1,224.0
153.9
1,070.1
(43.0)
1,113.1
1,186.9
181.4
1,005.5
6.0
999.5
1,155.5
222.4
933.1
20.0
913.1
1,443.3
1,417.9
1,306.6
285.3
595.7
454.8
173.5
328.0
3,280.6
1,465.0
491.2
973.8 $
23.4
950.4 $
4.03 $
3.99
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
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
232,279,849
235,829,790
239,265,313
234,221,729
237,720,255
240,554,840
— $
—
(0.3)
(0.3) $
(4.9) $
0.7
(0.1)
(4.3) $
—
—
(1.5)
(1.5)
FOR THE YEAR ENDED DECEMBER 31,
$
$
$
$
$
$
2015
973.8 $
2014
811.8 $
(58.6)
1.7
(15.9)
19.8
(53.0)
21.6
(7.6)
(8.8)
(80.6)
(75.4)
$
920.8 $
736.4 $
2013
731.3
(95.0)
4.3
(3.4)
132.8
38.7
770.0
87
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS 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,
2015
2014
2013
$
388.5 $
— $
—
388.5
388.5
388.5
—
—
—
408.6
408.6
408.6
1,050.9
1,035.7
1,012.7
(74.0)
77.7
17.7
(71.1)
77.5
8.8
(55.0)
75.0
3.0
1,072.3
1,050.9
1,035.7
7,625.4
973.8
(333.0)
(23.4)
8,242.8
(319.7)
(58.6)
1.7
(15.9)
19.8
(372.7)
(704.8)
168.1
(496.9)
(1,033.6)
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)
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)
Total Stockholders’ Equity at December 31
$
8,705.9 $
8,448.9 $
7,912.0
See accompanying notes to consolidated financial statements on pages 90-159.
2015 Annual Report / Northern Trust Corporation
88
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
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 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
Cash Dividends Paid on Preferred Stock
Other Financing Activities, net
Net Cash Provided by Financing Activities
Effect of Foreign Currency Exchange Rates on Cash
Increase (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 90-159.
2015 Annual Report / Northern Trust Corporation
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
973.8 $
811.8 $
731.3
0.3
53.3
(43.0)
90.4
250.3
10.9
206.8
(21.1)
(146.2)
(16.2)
(8.2)
801.4
(318.1)
1,834.4
(549.8)
(144.9)
987.8
(8,075.5)
6,628.3
(11,490.3)
8,576.1
(1,581.0)
(98.5)
(335.0)
(605.0)
(212.9)
(6,900.7)
8,105.7
(581.4)
(338.5)
2,312.8
—
(231.0)
—
—
(496.9)
94.0
(321.4)
(27.0)
17.8
8,534.1
(73.8)
3,394.0
3,050.6
6,444.6 $
161.6 $
390.0
13.0
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
3,050.6 $
186.5 $
279.2
21.4
$
$
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
3,162.4
231.9
262.6
24.7
89
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. The consolidated statements of
income include results of acquired subsidiaries from the dates of acquisition. 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 custody; fund administration; investment operations outsourcing; investment management; investment risk and
analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage
services; transition management services; banking and cash management. 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 focuses on high-net-worth individuals and families, business owners, executives, professionals,
retirees, and established privately-held businesses in its target markets. The business 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. In supporting these targeted
segments, 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 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.
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 statements of
2015 Annual Report / Northern Trust Corporation
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 statements 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 sheets. 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, total return
swaps and credit default swap contracts. Derivative financial instruments are recorded on the consolidated balance sheets 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 sheets 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
statements 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 statements of cash flows within
the line item, ‘other operating activities, net,’ except for net investment hedges which are recorded within ‘other investing
activities, net’.
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
2015 Annual Report / Northern Trust Corporation
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 has 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, net, 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.
2015 Annual Report / Northern Trust Corporation
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 payment periods) 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 payment periods) 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 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 payment periods. A loan that has been modified at a below market rate will
return to performing status if it satisfies the six payment periods performance requirement; however, it will remain reported
as impaired. Impairment is measured based upon the present value of expected future cash flows, discounted at the loan's
original effective interest rate, the fair value of the collateral if the loan is collateral dependent, or the loan's observable
market value. 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
$1,000,000) 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 material 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.
2015 Annual Report / Northern Trust Corporation
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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. As of December 31, 2015, Northern Trust changed the estimation methodology for inherent
losses that have been incurred in the loan and lease portfolio. The new estimation methodology is more quantitatively
focused than the previous methodology as it is based on internally developed loss data specific to the Northern Trust loan
and lease portfolio. The change in methodology is accounted for as a change in estimate applicable to current period and
future periods. The new estimation methodology and the related qualitative adjustment framework segregate the loan and
lease portfolio into homogeneous segments. For each segment, the probability of default and the loss given default are
applied to the total exposure at default to determine a quantitative inherent allowance. The quantitative inherent allowance
is then reviewed within the qualitative adjustment framework, where management applies judgment by assessing internal
risk factors, potential limitations in the quantitative methodology and environmental factors that are not contemplated in
the quantitative methodology to compute an adjustment to the quantitative inherent allowance for each segment of the loan
portfolio.
As of December 31, 2014, the amount of inherent allowance was based on factors which incorporated 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 were applied to loan and lease
credit exposures aggregated by shared risk characteristics.
Results under both methods were reviewed quarterly by Northern Trust’s Loan Loss Reserve Committee which
includes representatives from Credit Risk Management, reporting segment management and Corporate Finance.
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 processes. Actual losses may vary from current estimates and the amount of the provision
for credit losses may be either greater of 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.
As of December 31, 2015, for purposes of estimating the allowance for credit losses for undrawn loan commitments
and standby letters, the exposure at default includes an estimated drawdown of unused credit based on a credit conversion
factor. The proportionate amount of the quantitative methodology calculation after any required adjustment in the
qualitative framework results in the required allowance for undrawn commitments and standby letters of credit as of the
reporting date.
As of December 31, 2014, for purposes of estimating the allowance for credit losses for undrawn loan commitments
and standby letters of credit, management used conversion rates to determine the estimated amount that would be funded.
Factors based on historical loss experience and specific risk characteristics of the loan product were 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 sheets. The portion of the allowance assigned to undrawn loan commitments and
standby letters of credit is reported in other liabilities in the consolidated balance sheets.
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
2015 Annual Report / Northern Trust Corporation
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on the consolidated balance sheets. 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. 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.
O. Client Security Settlement Receivables. These receivables result from custody client withdrawals from short-term
investment funds that settle on the following business day as well as custody client security sales executed under
contractual settlement date accounting that have not yet settled. Northern Trust advances cash to the client on the date of
either client withdrawal or trade execution and awaits collection from either the short-term investment funds or via the
settled trade.
P. 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.
Q. Cash Flow Statements. Cash and cash equivalents have been defined as “Cash and Due from Banks”.
R. Pension and Other Postretirement Benefits. Northern Trust records the funded status of its defined benefit
pension and other postretirement plans on the consolidated balance sheets. Funded 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. Plan assets are determined based on fair value generally
representing observable market prices. The projected benefit obligations are determined based on the present value of
projected benefit distributions at an assumed discount rate. Pension costs are recognized ratably over the estimated working
lifetime of eligible participants.
2015 Annual Report / Northern Trust Corporation
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
S. 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 statements
of income. The fair values of stock and stock unit awards, including performance stock unit awards and director
awards, are based on the closing 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.
T. 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.
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)” (ASU 2014-09). ASU 2014-09 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 ASU 2014-09 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. ASU 2014-09 is effective
for interim and annual reporting periods beginning after December 15, 2017. Northern Trust is currently assessing the
impact of adoption of ASU 2014-09.
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation
Analysis” (ASU 2015-02) which changes the guidance with respect to the analysis that a reporting entity must perform to
determine whether it should consolidate certain types of legal entities. The amendments include: (1) modifying the
evaluation of limited partnerships and similar legal entities, (2) amending when fees paid to a decision maker should be
included in the variable interest entity analysis, (3) amending the related party relationship guidance, and (4) providing a
scope exception from the consolidation guidance for reporting entities with interests in certain investment funds. ASU
2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015, although early adoption
is permitted. The adoption of ASU 2015-02 by Northern Trust, effective January 1, 2016, will result in additional
disclosures, but will not significantly impact Northern Trust’s consolidated financial position or results of operations.
In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs” (ASU 2015-03) which requires that debt issuance costs be presented in the
balance sheet as a direct deduction to the carrying amount of the associated debt liability. ASU 2015-03 is effective for
interim and annual periods beginning after December 15, 2015, although early adoption is permitted. The adoption of ASU
2015-03 by Northern Trust, effective January 1, 2016, will not significantly impact Northern Trust’s consolidated financial
position or results of operations.
2015 Annual Report / Northern Trust Corporation
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (ASU 2015-05) which
clarifies whether fees paid by a customer in a cloud computing arrangement pertain to the acquisition of a software license,
services, or both. ASU 2015-05 is effective for interim and annual periods beginning after December 15, 2015, although
early adoption is permitted. The adoption of ASU 2015-05 by Northern Trust, effective January 1, 2016, will not
significantly impact Northern Trust’s consolidated financial position or results of operations.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the
Accounting for Measurement-Period Adjustments” (ASU 2015-16) which requires that the acquirer recognize adjustments
to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment
amount is determined. Further, the effect on earnings of changes in depreciation, amortization, or other income effects, if
any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the
acquisition date, are to be recorded in the same period's financial statements. ASU 2015-16 is effective for interim and
annual periods beginning after December 15, 2015, although earlier application is permitted for financial statements that
have not been issued. The adoption of ASU 2015-16 by Northern Trust, effective January 1, 2016, will not significantly
impact Northern Trust's consolidated financial position or results of operations.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). ASU 2016-01 requires equity investments
(except those accounted for under the equity method or those that result in consolidation) to be measured at fair value with
changes in fair value recognized in net income unless a policy election is made for investments without readily
determinable fair values. Additionally, ASU 2016-01 requires public entities to use the exit price notion when measuring
the fair value of financial instruments for measurement purposes, and eliminates the requirement to disclose the method(s)
and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the
balance sheet. Furthermore, it requires separate presentation of financial assets and financial liabilities by measurement
category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. ASU
2016-01 is effective for interim and annual periods beginning after December 15, 2017. Northern Trust is currently
assessing the impact of adoption of ASU 2016-01.
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.
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, 2015, or 2014.
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, 2015, Northern Trust’s available for sale securities portfolio
included 1,044 Level 2 securities with an aggregate market value of $26.1 billion. All 1,044 securities were valued by
external pricing vendors. 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. Trading account securities, which totaled $1.2 million and $4.7 million as of December 31, 2015, and
December 31, 2014, respectively, were all valued using external pricing vendors.
2015 Annual Report / Northern Trust Corporation
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 slightly lower (higher) fair value
measurement.
Northern Trust’s Level 3 liabilities consisted of a swap that Northern Trust entered into with the purchaser of 1.0
million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern Trust.
Pursuant to the swap, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common
shares into shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be
compensated for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-
dilutive adjustments to the ratio. The swap also requires periodic payments from Northern Trust to the counterparty
calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the
swap is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value
measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B
common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the
estimated growth rate of the Visa Class A common share price. See “Visa Class B Common Shares” under Note 24,
“Contingent Liabilities,” for further information.
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 Finance, C&IS and Wealth Management) reviews valuation methods and models for Level 3
assets and liabilities. Fair value measurements are performed upon acquisitions of an asset or liability. Management of the
appropriate business or department reviews assumed inputs, especially when unobservable in the marketplace, in order to
substantiate their use 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.
2015 Annual Report / Northern Trust Corporation
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015.
TABLE 43: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT RANGE OF LIVES AND RATES
Auction Rate Securities
Swap Related to Sale of Certain
Visa Class B Common Shares
$
$
17.1 million
Discounted Cash Flow
Remaining lives
Discount rates
10.8 million
Discounted Cash Flow
Visa Class A Appreciation
0.42 – 8.64 years
0.3% – 4.4%
9.5% – 15.0%
Conversion Rate
1.61x – 1.65x
Expected Duration
1.50
– 4.50 years
2015 Annual Report / Northern Trust Corporation
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and
2014, segregated by fair value hierarchy level.
TABLE 44: RECURRING BASIS HIERARCHY LEVELING
DECEMBER 31, 2015
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
ASSETS/
LIABILITIES
AT FAIR
VALUE
— $
— $
6,178.3
(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
Sub-Sovereign, Supranational and Non-U.S. Agency
Bonds
Other Asset-Backed
Auction Rate
Commercial Mortgage-Backed
Other
Total Available for Sale
Trading Account
Total Available for Sale and Trading Securities
Other Assets
Derivative Assets
Foreign Exchange Contracts
Interest Rate Contracts
Total Derivative Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Swaps
Other Financial Derivatives (1)
$
6,178.3 $
—
—
—
—
—
—
—
—
—
—
— $
36.4
16,366.8
309.5
3,712.2
1,870.2
859.4
2,500.1
—
374.4
93.5
6,178.3
26,122.5
—
1.2
6,178.3
26,123.7
—
—
—
—
—
—
2,623.4
228.5
2,851.9
2,519.4
131.2
0.1
—
—
—
—
—
—
—
17.1
—
—
17.1
—
17.1
—
—
—
—
—
10.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
36.4
16,366.8
309.5
3,712.2
1,870.2
859.4
2,500.1
17.1
374.4
93.5
32,317.9
1.2
32,319.1
2,623.4
228.5
(1,600.2)
1,251.7
—
—
—
2,519.4
131.2
10.9
943.9
Total Derivative Liabilities
$
— $
2,650.7 $
10.8 $
(1,717.6) $
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, 2015, derivative assets and liabilities shown above also include reductions of $322.8 million and $440.3 million, respectively, as
a result of cash collateral received from and deposited with derivative counterparties.
(1) This line consists of a swap related to the sale of certain Visa Class B common shares and total return swaps.
2015 Annual Report / Northern Trust Corporation
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
Total Available for Sale
Trading Account
Total Available for Sale and Trading Securities
Other Assets
Derivative Assets
Foreign Exchange Contracts
Interest Rate Swaps
Total Derivatives Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Swaps
Total Derivative Liabilities
DECEMBER 31, 2014
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
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
—
155.8
4,506.9
25,033.5
—
4.7
4,506.9
25,038.2
—
—
—
—
—
—
4,275.2
232.3
4,507.5
4,095.5
131.8
4,227.3
— $
— $
4,506.9
—
—
—
—
—
—
—
—
18.1
—
18.1
—
18.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,257.1)
—
—
(3,173.3)
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
4,095.5
131.8
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.
2015 Annual Report / Northern Trust Corporation
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the changes in Level 3 assets and liabilities for the years ended December 31, 2015 and
2014.
TABLE 45: CHANGES IN LEVEL 3 ASSETS AND LIABILITIES
LEVEL 3 ASSETS
(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
$
2015
18.1 $
—
0.7
(1.2)
(0.5)
$
17.1 $
2014
98.9
4.4
(1.7)
(55.7)
(27.8)
18.1
(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.
Gains on sales are recorded in investment security gains (losses) and gains on redemptions are recorded in interest income within the consolidated statements of income.
(2) Unrealized gains (losses) are included in net unrealized gains (losses) on securities available for sale, within the consolidated statements of comprehensive income.
LEVEL 3 LIABILITIES
(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)
CONTINGENT CONSIDERATION
SWAP RELATED TO SALE OF
CERTAIN VISA CLASS B
COMMON SHARES
$
$
$
2015
— $
2014
55.4 $
2015
— $
—
—
— $
— $
(0.1)
12.1
(55.3)
— $
— $
(1.3)
10.8 $
12.0 $
2014
—
—
—
—
—
(1) Gains (losses) are recorded in other operating income (expense) within the consolidated statements of income.
For the years ended December 31, 2015 and 2014 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, 2015 and 2014, 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 $10.4 million and $3.6
million, respectively, at December 31, 2015, and $14.2 million and $4.1 million, respectively, at December 31, 2014.
Assets measured at fair value on a nonrecurring basis reflect management’s judgment as to realizable value.
2015 Annual Report / Northern Trust Corporation
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015.
TABLE 46: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF DISCOUNTS APPLIED
Loans
OREO
$10.4 million
Market Approach
Discount to reflect realizable value
15.0% – 25.0%
$3.6 million
Market Approach
Discount to reflect realizable value
15.0% – 20.0%
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 sheets 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, excluding U.S. treasury securities, were
obtained from external pricing vendors, or in limited cases internally, using widely accepted methods which are based on
an income approach that incorporates current market yield curves. The fair values of U.S. treasury securities were
determined using quoted, active market prices for identical securities.
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. Loans
held for sale are recorded at the lower of cost or fair value.
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; federal
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.
2015 Annual Report / Northern Trust Corporation
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the fair values of all financial instruments.
TABLE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS
(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)
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
Other Financial Derivatives
Liabilities (1)
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
DECEMBER 31, 2015
FAIR VALUE
BOOK VALUE
TOTAL
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
$
6,444.6 $
1,614.2
14,143.1
16,398.5
6,444.6 $
1,614.2
14,143.1
16,398.5
32,317.9
5,248.3
1.2
32,432.7
12.0
2,157.0
253.1
173.5
155.3
32,317.9
5,227.5
1.2
32,596.5
12.0
2,157.0
253.1
177.1
153.4
45,191.3 $
1,455.8
50,221.8
351.5
546.6
4,055.1
1,497.4
45,191.3 $
1,463.5
50,221.8
351.5
546.6
4,055.7
1,531.8
1,341.6
277.3
46.6
48.9
1,332.2
236.6
46.6
48.9
6,444.6 $
—
—
—
6,178.3
26.0
—
—
—
—
—
—
104.2
— $
1,614.2
14,143.1
16,398.5
26,122.5
5,201.5
1.2
—
—
2,157.0
253.1
177.1
49.2
45,191.3 $
— $
1,463.5
50,221.8
351.5
546.6
4,055.7
1,531.8
1,332.2
236.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17.1
—
—
32,596.5
12.0
—
—
—
—
—
—
—
—
—
—
—
—
—
$
81.6 $
19.0
81.6 $
19.0
— $
—
81.6 $
19.0
117.4
22.7
10.9
2,541.8
2,500.4
111.1
108.5
117.4
22.7
10.9
2,541.8
2,500.4
111.1
108.5
—
—
—
—
—
—
—
—
—
46.6
48.9
—
—
—
—
117.4
22.7
0.1
10.8
2,541.8
2,500.4
111.1
108.5
—
—
—
—
104
Note: Refer to the table located on page 100 for the disaggregation of available for sale securities.
(1) This line consists of a swap related to the sale of certain Visa Class B common shares and total return swaps.
2015 Annual Report / Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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)
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
Note: Refer to the table located on page 101 for the disaggregation of available for sale securities.
2015 Annual Report / Northern Trust Corporation
DECEMBER 31, 2014
FAIR VALUE
BOOK VALUE
TOTAL
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
$
3,050.6 $
1,062.7
14,928.3
17,386.3
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
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 $
1,757.4
47,545.0
932.9
885.1
1,685.2
1,497.0
41,454.6 $
1,757.0
47,545.0
932.9
885.1
1,686.2
1,541.8
1,583.3
277.2
60.1
28.3
1,583.4
242.8
60.1
28.3
3,050.6 $
—
—
—
4,506.9
—
—
—
—
—
—
—
96.7
— $
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
41,454.6 $
— $
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
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
—
—
—
—
—
—
126.8
30.5
4,149.5
4,072.0
105.5
101.3
—
—
—
—
—
—
—
—
105
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.
TABLE 48: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF SECURITIES AVAILABLE FOR SALE
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds
Other Asset-Backed
Auction Rate
Commercial Mortgage-Backed
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
DECEMBER 31, 2015
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
6,180.4 $
3.4 $
5.5 $
36.4
16,370.5
309.5
3,744.4
1,873.3
860.9
2,504.2
16.7
378.1
93.4
0.1
42.8
0.1
0.9
1.8
0.5
0.1
0.5
—
0.1
0.1
46.5
0.1
33.1
4.9
2.0
4.2
0.1
3.7
—
FAIR
VALUE
6,178.3
36.4
16,366.8
309.5
3,712.2
1,870.2
859.4
2,500.1
17.1
374.4
93.5
$
32,367.8 $
50.3 $
100.2 $
32,317.9
DECEMBER 31, 2014
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
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
15.1 $
0.1
82.3
0.9
1.8
7.9
1.5
—
0.5
0.5
0.3
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
1.7 $
—
19.5
—
41.6
0.3
0.9
0.5
1.0
0.8
0.2
66.5 $
Total
$
29,514.1 $
110.9 $
TABLE 49: REMAINING MATURITY OF SECURITIES AVAILABLE FOR SALE
(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, 2015
DECEMBER 31, 2014
AMORTIZED
COST
FAIR
VALUE
AMORTIZED
COST
$
9,335.0 $
9,332.6 $
7,467.4 $
17,808.8
4,036.5
1,187.5
17,777.0
4,023.1
1,185.2
17,132.7
3,394.2
1,519.8
FAIR
VALUE
7,487.9
17,157.6
3,418.0
1,495.0
$
32,367.8 $
32,317.9 $
29,514.1 $
29,558.5
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
2015 Annual Report / Northern Trust Corporation
106
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.
TABLE 50: RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF SECURITIES HELD TO MATURITY
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Covered Bonds
Non-U.S. Government
Certificates of Deposit
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds
Other
Total
(In Millions)
DECEMBER 31, 2015
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
— $
— $
$
26.0 $
89.2
9.9
892.4
1,118.0
691.6
2,326.2
95.0
5.2
0.7
0.4
4.8
0.1
8.3
—
—
—
1.9
0.5
0.1
0.9
36.9
40.3 $
$
5,248.3 $
19.5 $
DECEMBER 31, 2014
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
Obligations of States and Political Subdivisions
$
121.9 $
7.4 $
— $
Government Sponsored Agency
Non-U.S. Government
Certificates of Deposit
Supranational and Non-U.S. Agency Bonds
Other
Total
18.4
1,281.6
924.3
1,745.8
78.8
1.1
6.6
0.1
10.9
0.3
—
0.4
0.1
0.5
20.1
$
4,170.8 $
26.4 $
21.1 $
TABLE 51: REMAINING MATURITY OF SECURITIES HELD TO MATURITY
FAIR
VALUE
26.0
94.4
10.6
890.9
1,122.3
691.6
2,333.6
58.1
5,227.5
FAIR
VALUE
129.3
19.5
1,287.8
924.3
1,756.2
59.0
4,176.1
(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, 2015
DECEMBER 31, 2014
AMORTIZED
COST
FAIR
VALUE
AMORTIZED
COST
1,908.8 $
1,913.2 $
1,503.5 $
3,271.1
3,278.3
2,602.8
14.9
53.5
11.7
24.3
23.5
41.0
FAIR
VALUE
1,504.7
2,622.3
21.5
27.6
5,248.3 $
5,227.5 $
4,170.8 $
4,176.1
$
$
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 $0.3 million were recognized in 2015. Net
investment security losses of $4.3 million, and $1.5 million were recognized in 2014, and 2013, respectively. There were
no OTTI losses in 2015 or 2013. Losses in 2014 include $4.2 million of charges related to the OTTI of certain Community
Reinvestment Act (CRA) eligible held to maturity securities. Proceeds of $262.1 million from the sale of securities in 2015
resulted in gross realized gains and losses of $0.2 million and $0.5 million, respectively. 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 $506.3 million from the sale of securities in 2013 resulted in gross realized gains and losses of $0.8 million
and $2.3 million, respectively.
2015 Annual Report / Northern Trust Corporation
107
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, 2015 and
2014.
TABLE 52: SECURITIES WITH UNREALIZED LOSSES
AS OF DECEMBER 31, 2015
LESS THAN 12 MONTHS 12 MONTHS OR LONGER
TOTAL
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
Sub-Sovereign, Supranational and Non-U.S. Agency
Bonds
Other Asset-Backed
Certificates of Deposit
Auction Rate
Commercial Mortgage-Backed
Other
Total
FAIR
VALUE
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
$
3,888.0 $
5.5 $
15.1
9,208.5
314.3
2,067.6
1,598.4
1,132.9
2,122.7
180.3
—
374.4
28.7
0.1
38.7
0.6
10.3
6.7
2.3
4.0
0.1
—
3.7
13.3
— $
—
1,213.6
—
1,057.1
10.0
109.3
170.6
—
6.4
—
50.7
— $
3,888.0 $
—
7.8
—
22.8
0.1
0.6
0.2
—
0.1
—
23.6
15.1
10,422.1
314.3
3,124.7
1,608.4
1,242.2
2,293.3
180.3
6.4
374.4
79.4
$
20,930.9 $
85.3 $
2,617.7 $
55.2 $
23,548.6 $
5.5
0.1
46.5
0.6
33.1
6.8
2.9
4.2
0.1
0.1
3.7
36.9
140.5
AS OF DECEMBER 31, 2014
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
Total
FAIR
VALUE
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
$
998.2 $
1.7 $
— $
— $
998.2 $
2,344.9
292.9
1,244.5
142.3
313.2
—
1,297.6
438.6
2.4
27.1
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
4,074.9
292.9
2,583.3
152.3
488.7
4.5
1,297.6
438.6
7.1
72.7
$
7,101.7 $
26.5 $
3,309.1 $
61.1 $
10,410.8 $
1.7
19.5
0.4
41.6
0.3
1.4
0.5
1.0
0.1
0.8
20.3
87.6
As of December 31, 2015, 897 securities with a combined fair value of $23.5 billion were in an unrealized loss
position, with their unrealized losses totaling $140.5 million. Unrealized losses of $46.5 million related to government
sponsored agency securities are primarily attributable to changes in market rates since their purchase. Unrealized losses of
$33.1 million within corporate debt securities primarily reflect widened credit spreads and higher market rates since
purchase; 35% of the corporate debt portfolio is backed by guarantees provided by U.S. and non-U.S. governmental
entities.
The majority of the $36.9 million of unrealized losses in securities classified as “other” at December 31, 2015, relate
to securities primarily purchased at a premium or par by Northern Trust for compliance with the 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. The
remaining unrealized losses on Northern Trust’s securities portfolio as of December 31, 2015, are attributable to changes in
overall market interest rates, increased credit spreads, or reduced market liquidity. As of December 31, 2015, 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.
2015 Annual Report / Northern Trust Corporation
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
There were no OTTI losses recognized in 2015 or 2013. There were $4.2 million of OTTI losses recognized during
the year ended December 31, 2014.
Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily
impaired securities, including noncredit-related amounts recognized in other comprehensive income and net impairment
losses recognized in earnings, for the years ended December 31, 2015, 2014, and 2013.
TABLE 53: NET IMPAIRMENT LOSSES RECOGNIZED IN EARNINGS
(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,
2015
— $
—
— $
2014
(4.9) $
0.7
(4.2) $
2013
—
—
—
$
$
(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.
TABLE 54: CUMULATIVE CREDIT-RELATED LOSSES ON SECURITIES HELD
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
2015 Annual Report / Northern Trust Corporation
$
$
2015
5.2 $
—
—
—
5.2 $
2014
8.8
1.8
2.4
(7.8)
5.2
109
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.
TABLE 55: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
($ 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
TABLE 56: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
($ 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.
TABLE 57: LOANS AND LEASES
(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
2015
2014
$
1,600.0
$
1,000.0
1,144.7
0.54%
742.1
0.45%
1,600.0
1,000.0
$
$
2015
546.6
649.5
0.05%
802.4
2014
885.1
989.6
0.04%
1,038.1
DECEMBER 31,
2015
2014
$
9,431.5 $
3,848.8
544.4
1,137.7
194.1
8,381.9
3,333.3
916.3
1,530.6
191.5
15,156.5
14,353.6
8,850.7
9,136.4
37.3
9,782.6
7,466.9
37.1
18,024.4
17,286.6
33,180.9 $
31,640.2
(193.8)
(267.0)
32,987.1 $
31,373.2
$
$
Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan to
collateral value ratio of no more than 65% to 75% 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, 2015 and 2014, equity credit lines totaled $1.5
2015 Annual Report / Northern Trust Corporation
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
billion and $1.8 billion, respectively, and equity credit lines for which first liens were held by Northern Trust represented
89% of the total equity credit lines as of both 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 $719.5 million and $1.5 billion at December 31, 2015
and 2014, respectively. Demand deposits reclassified as loan balances totaled $75.4 million and $92.1 million at
December 31, 2015 and 2014, respectively. Loans and leases classified as held for sale totaled $12.0 million and $112.3
million, respectively, at December 31, 2015 related to the decision to exit a non-strategic loan and lease portfolio. Loans
classified as held for sale totaled $2.5 million at December 31, 2014.
The components of the net investment in direct finance and leveraged leases are as follows:
TABLE 58: DIRECT FINANCE AND LEVERAGED LEASES
(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,
2015
2014
$
53.8 $
109.3
1.3
(9.4)
155.0
260.2
215.4
(86.2)
389.4
$
544.4 $
195.4
208.8
3.6
(39.1)
368.7
413.6
285.6
(151.6)
547.6
916.3
The following schedule reflects the future minimum lease payments to be received over the next five years under direct
finance leases:
TABLE 59: FUTURE MINIMUM LEASE PAYMENTS
(In Millions)
2016
2017
2018
2019
2020
$
FUTURE MINIMUM
LEASE PAYMENTS
14.8
11.5
11.2
9.0
4.2
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.
2015 Annual Report / Northern Trust Corporation
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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;
• 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, 2015 and 2014 are provided below, segregated by
borrower ratings into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.
TABLE 60: BORROWER RATINGS
(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
DECEMBER 31, 2015
DECEMBER 31, 2014
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
$
6,360.6 $
2,897.2 $
173.7 $ 9,431.5 $
5,340.9 $
2,947.3 $
93.7 $ 8,381.9
1,822.6
1,992.7
377.0
313.8
94.9
133.1
823.3
99.2
33.5
34.3
0.6
—
3,848.8
544.4
1,137.7
194.1
1,371.7
1,861.8
99.8
3,333.3
552.5
636.8
108.1
360.3
892.9
83.4
3.5
0.9
—
916.3
1,530.6
191.5
8,968.9
5,945.5
242.1
15,156.5
8,010.0
6,145.7
197.9
14,353.6
3,014.9
5,908.3
18.3
8,941.5
5,516.7
3,207.1
19.0
8,742.8
319.1
8,850.7
21.0
9,136.4
—
37.3
3,148.0
5,143.8
21.1
6,207.0
2,311.7
16.0
427.6
9,782.6
11.4
7,466.9
—
37.1
340.1
18,024.4
8,312.9
8,534.7
439.0
17,286.6
Total Loans and Leases
$
17,910.4 $
14,688.3 $
582.2 $33,180.9 $
16,322.9 $
14,680.4 $
636.9 $31,640.2
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.
2015 Annual Report / Northern Trust Corporation
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
2015 Annual Report / Northern Trust Corporation
113
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, 2015
and 2014.
TABLE 61: DELINQUENCY STATUS
(In Millions)
December 31, 2015
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
$
9,377.6 $
7.8 $
0.9 $
2.3 $
9,388.6 $
42.9 $
9,431.5
3,823.3
544.4
1,137.7
194.1
15,077.1
8,679.3
9,104.8
37.3
17,821.4
2.4
—
—
—
10.2
35.2
17.5
—
52.7
4.9
—
—
—
5.8
14.5
12.0
—
26.5
1.5 $
— $
— $
— $
3.8
1.6
1.7
—
3.3
3,832.1
544.4
1,137.7
194.1
15,096.9
8,730.6
9,136.0
37.3
17,903.9
16.7
—
—
—
59.6
120.1
0.4
—
120.5
3,848.8
544.4
1,137.7
194.1
15,156.5
8,850.7
9,136.4
37.3
18,024.4
Total Loans and Leases
$
32,898.5 $
62.9 $
32.3 $
7.1 $
33,000.8 $
180.1 $
33,180.9
Other Real Estate Owned $
Total Nonperforming Assets $
8.2
188.3
(In Millions)
December 31, 2014
Commercial
Commercial and
Institutional
Commercial Real
Estate
Lease Financing, net
Non-U.S.
Other
3,274.3
916.3
1,530.6
191.5
Total Commercial
14,253.2
Personal
Residential Real
Estate
Private Client
Other
9,556.3
7,396.0
37.1
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 $
14.5 $
4.0 $
7.9 $
8,366.9 $
15.0 $
8,381.9
9.6
—
—
—
24.1
49.5
56.0
—
9.8
—
—
—
2.5
—
—
—
3,296.2
916.3
1,530.6
191.5
13.8
10.4
14,301.5
9.9
5.9
—
4.5
7.8
—
9,620.2
7,465.7
37.1
37.1
—
—
—
52.1
162.4
1.2
—
163.6
3,333.3
916.3
1,530.6
191.5
14,353.6
9,782.6
7,466.9
37.1
17,286.6
Total Personal
16,989.4
105.5
15.8
12.3
17,123.0
Total Loans and Leases
$
31,242.6 $
129.6 $
29.6 $
22.7 $
31,424.5 $
215.7 $
31,640.2
Other Real Estate Owned $
Total Nonperforming Assets $
16.6
232.3
2015 Annual Report / Northern Trust Corporation
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide information related to impaired loans by segment and class.
TABLE 62: IMPAIRED LOANS
(In Millions)
With no related specific allowance
AS OF DECEMBER 31, 2015
AS OF DECEMBER 31, 2014
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
SPECIFIC
ALLOWANCE
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
SPECIFIC
ALLOWANCE
Commercial and Institutional
$
27.1 $
30.7 $
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
(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
17.2
—
99.3
0.2
9.3
—
2.7
1.5
—
56.3
101.0
21.2
—
140.7
0.2
11.4
1.4
2.7
1.5
—
67.4
142.4
— $
—
—
—
—
1.6
—
1.4
0.1
—
3.0
0.1
9.0 $
12.0 $
47.0
4.2
160.9
0.2
6.5
12.2
—
1.4
0.8
78.9
163.3
52.4
4.2
204.8
0.5
6.6
18.3
—
1.4
0.8
93.5
207.5
—
—
—
—
—
2.9
2.9
—
0.4
0.4
5.8
0.8
6.6
$
157.3 $
209.8 $
3.1 $
242.2 $
301.0 $
YEAR ENDED DECEMBER 31, 2015
YEAR ENDED DECEMBER 31, 2014
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
$
14.4 $
— $
11.3 $
31.9
0.9
142.9
0.3
8.5
6.9
2.2
4.4
0.4
64.8
148.0
0.5
0.1
1.7
—
—
—
—
—
—
0.6
1.7
46.1
4.3
176.7
0.5
9.6
18.8
—
3.3
0.6
90.1
181.1
$
212.8 $
2.3 $
271.2 $
0.1
1.0
0.2
2.6
—
—
—
—
—
—
1.3
2.6
3.9
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 $8.1 million in 2015, $9.1 million in 2014, and $10.6 million in 2013.
There were $3.1 million and $2.4 million of aggregate undrawn loan commitments and standby letters of credit at
December 31, 2015 and 2014, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.
Troubled Debt Restructurings (TDRs). Included within impaired loans were $79.2 million and $82.7 million of
nonperforming TDRs and $37.9 million and $68.6 million of performing TDRs as of December 31, 2015 and 2014,
respectively.
2015 Annual Report / Northern Trust Corporation
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide, by segment and class, the number of loans and leases modified in TDRs during the years
ended December 31, 2015, and 2014, and the recorded investments and unpaid principal balances as of December 31, 2015
and 2014.
TABLE 63: TROUBLED DEBT RESTRUCTURINGS
($ In Millions)
December 31, 2015
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, 2014
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
3 $
4
7
128
1
129
24.6 $
1.8
26.4
27.9
0.6
28.5
136 $
54.9 $
26.1
2.0
28.1
34.2
0.6
34.8
62.9
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
2 $
8
10
124
4
128
0.7 $
3.9
4.6
15.0
0.2
15.2
138 $
19.8 $
0.8
4.8
5.6
17.9
0.5
18.4
24.0
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, 2015, the majority of TDR modifications of loans within
commercial and institutional, commercial real estate, and private client classes were primarily interest rate concession,
deferred principal, or extensions of term. During the year ended December 31, 2015 TDR modifications of loans within
residential real estate were primarily extensions of term, deferrals of principal, interest rate concessions, and other
modifications. During the year ended December 31, 2014, 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 10 loans or leases modified in troubled debt restructurings during the previous twelve-month periods
which subsequently became nonperforming during the year ended December 31, 2015. 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.
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.
Northern Trust may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via
foreclosure on an in-substance repossession. As of December 31, 2015, Northern Trust held foreclosed residential real
2015 Annual Report / Northern Trust Corporation
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estate properties with a carrying value of $7.9 million as a result of obtaining physical possession. In addition, as of
December 31, 2015, Northern Trust had consumer loans with a carrying value of $24.5 million collateralized by residential
real estate property for which formal foreclosure proceedings were in process.
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.
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.
As of December 31, 2015, Northern Trust changed the estimation methodology for inherent losses that have been
incurred in the loan and lease portfolio. The adoption of the new estimation methodology resulted in a reduction in the
allowance related to the commercial and institutional loan portfolio, partially offset by an increase in the allowance for
undrawn loan commitments and standby letters of credit.
Changes in the allowance for credit losses by segment were as follows:
TABLE 64: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
(In Millions)
COMMERCIAL PERSONAL TOTAL COMMERCIAL
PERSONAL TOTAL COMMERCIAL
PERSONAL TOTAL
Balance at Beginning of Year
$
169.7 $
126.2 $ 295.9 $
168.0 $
139.9 $ 307.9 $
194.2 $
133.4 $ 327.6
2015
2014
2013
Charge-Offs
Recoveries
Net (Charge-Offs) Recoveries
Provision for Credit Losses
Effects of Foreign Exchange
Rates
Balance at End of Year
Allowance for Credit Losses
Assigned to:
Loans and Leases
Undrawn Commitments
and Standby Letters of
Credit
Total Allowance for Credit
Losses
$
$
$
(13.1)
5.5
(7.6)
(47.2)
(0.1)
(17.6)
(30.7)
5.7
11.2
(11.9)
(19.5)
4.2
(43.0)
—
(0.1)
(12.9)
11.1
(23.2)
(36.1)
7.0
18.1
(1.8)
(16.2)
(18.0)
3.5
—
2.5
—
6.0
—
(16.7)
8.6
(8.1)
(18.1)
—
(42.6)
(59.3)
11.0
19.6
(31.6)
(39.7)
38.1
20.0
—
—
114.8 $
118.5 $ 233.3 $
169.7 $
126.2 $ 295.9 $
168.0 $
139.9 $ 307.9
86.3 $
107.5 $ 193.8 $
143.8 $
123.2 $ 267.0 $
140.9 $
137.2 $ 278.1
28.5
11.0
39.5
25.9
3.0
28.9
27.1
2.7
29.8
114.8 $
118.5 $ 233.3 $
169.7 $
126.2 $ 295.9 $
168.0 $
139.9 $ 307.9
2015 Annual Report / Northern Trust Corporation
117
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, 2015 and 2014.
TABLE 65: RECORDED INVESTMENTS IN LOANS AND LEASES
(In Millions)
December 31, 2015
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, 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
COMMERCIAL
PERSONAL
TOTAL
$
56.3 $
101.0 $
15,100.2
15,156.5
17,923.4
18,024.4
3.0
83.3
86.3
28.5
0.1
107.4
107.5
11.0
114.8 $
118.5 $
$
$
COMMERCIAL
PERSONAL
TOTAL
78.9 $
163.3 $
14,274.7
14,353.6
17,123.3
17,286.6
242.2
31,398.0
31,640.2
157.3
33,023.6
33,180.9
3.1
190.7
193.8
39.5
233.3
6.6
260.4
267.0
28.9
295.9
5.8
138.0
143.8
25.9
0.8
122.4
123.2
3.0
Total Allowance for Credit Losses
$
169.7 $
126.2 $
Note 8 – Concentrations of Credit Risk
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 $15.8 billion and $16.0 billion at December 31, 2015 and 2014, respectively, and
noninterest-bearing demand balances maintained at correspondent banks, which totaled $2.7 billion and $1.1 billion at
December 31, 2015 and 2014, 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.
2015 Annual Report / Northern Trust Corporation
118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential Real Estate. At December 31, 2015, residential real estate loans totaled $8.9 billion, or 28% of total U.S.
loans at December 31, 2015, compared with $9.8 billion, or 32% of total U.S. loans at December 31, 2014. 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 75% 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 $8.9 billion in residential real estate loans, $2.3 billion were in Florida, $2.0 billion were in the
greater Chicago area, and $1.5 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 $1.4 billion and $1.6 billion at December 31, 2015 and 2014,
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:
TABLE 66: COMMERCIAL REAL ESTATE LOANS
(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.
TABLE 67: BUILDINGS AND EQUIPMENT
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Buildings Leased under Capital Leases
Total Buildings and Equipment
$
DECEMBER 31,
2015
770.1 $
830.4
683.3
310.5
442.3
3,036.6
392.8
147.4
272.0
2014
728.7
735.5
854.1
323.7
125.7
2,767.7
256.8
121.3
187.5
$
3,848.8 $
3,333.3
DECEMBER 31, 2015
ORIGINAL
COST
ACCUMULATED
DEPRECIATION
NET BOOK
VALUE
$
26.5 $
0.7 $
239.2
450.7
341.5
80.0
126.3
289.3
222.9
51.8
$
1,137.9 $
691.0 $
25.8
112.9
161.4
118.6
28.2
446.9
The charge for depreciation, which includes depreciation of assets recorded under capital leases and is included within
occupancy expense in the consolidated statements of income, amounted to $90.4 million in 2015, $90.6 million in 2014,
and $92.3 million in 2013.
2015 Annual Report / Northern Trust Corporation
119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – Lease Commitments
At December 31, 2015, 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, 2015, for all non-cancelable operating leases with a term of one
year or more are as follows:
TABLE 68: MINIMUM LEASE PAYMENTS
(In Millions)
2016
2017
2018
2019
2020
Later Years
Total Minimum Lease Payments
Less: Sublease Rentals
Net Minimum Lease Payments
FUTURE MINIMUM
LEASE PAYMENTS
85.1
81.7
75.4
62.2
58.8
172.8
536.0
(10.5)
525.5
$
$
Operating lease rental expense, net of rental income, is recorded in occupancy expense and amounted to $71.6 million in
2015, $73.2 million in 2014, and $76.2 million in 2013.
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, 2015.
TABLE 69: PRESENT VALUE UNDER CAPITAL LEASE OBLIGATIONS
(In Millions)
2016
2017
2018
2019
2020
Later Years
Total Minimum Lease Payments, net
Less: Amount Representing Interest
Net Present Value under Capital Lease Obligations
FUTURE MINIMUM
LEASE PAYMENTS, NET
$
$
9.1
9.2
9.5
8.7
(1.7)
—
34.8
(5.1)
29.7
2015 Annual Report / Northern Trust Corporation
120
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, 2015 and
2014, including the effect of foreign exchange rates on non-U.S.-dollar-denominated balances, were as follows:
TABLE 70: GOODWILL
(In Millions)
Balance at December 31, 2013
Foreign Exchange Rates
Balance at December 31, 2014
Foreign Exchange Rates
Balance at December 31, 2015
CORPORATE &
INSTITUTIONAL
SERVICES
WEALTH
MANAGEMENT
$
$
$
469.2 $
(7.4)
461.8 $
(6.7)
455.1 $
71.5 $
(0.1)
71.4 $
(0.1)
71.3 $
TOTAL
540.7
(7.5)
533.2
(6.8)
526.4
Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other
intangible assets subject to amortization as of December 31, 2015 and 2014 were as follows.
TABLE 71: OTHER INTANGIBLE ASSETS
(In Millions)
Gross Carrying Amount
Accumulated Amortization
Net Book Value
DECEMBER 31,
$
$
2015
182.3 $
135.8
46.5 $
2014
189.5
129.5
60.0
Other intangible assets consist primarily of the value of acquired client relationships and are included within other assets in
the consolidated balance sheets. Amortization expense related to other intangible assets was $10.9 million, $19.5 million,
and $21.1 million for the years ended December 31, 2015, 2014, and 2013, respectively. Amortization for the years 2016,
2017, 2018, 2019, and 2020 is estimated to be $8.4 million, $8.4 million, $7.7 million, $7.5 million, and $7.5 million,
respectively.
2015 Annual Report / Northern Trust Corporation
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Senior Notes and Long-Term Debt
Senior Notes. A summary of senior notes outstanding at December 31, 2015 and 2014 is presented below.
TABLE 72: SENIOR NOTES
($ In Millions)
Corporation-Senior Notes
(1)(4)
Fixed Rate Due Nov. 2020
(5)
Fixed Rate Due Aug. 2021
Fixed Rate Due Aug. 2022
(6)
(7)
Total Senior Notes
DECEMBER 31,
RATE
2015
2014
3.45 $
499.7 $
3.38
2.38
498.7
499.0
499.6
498.5
498.9
$
1,497.4 $
1,497.0
Long-Term Debt. A summary of long-term debt outstanding at December 31, 2015 and 2014 is presented below.
TABLE 73: LONG-TERM DEBT
($ 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)
Capital Lease Obligations
(3)
Total Long-Term Debt
Long-Term Debt Qualifying as Risk-Based Capital
DECEMBER 31,
2015
2014
$
214.5 $
326.7
—
541.2
800.4
29.7
221.6
335.0
233.7
790.3
793.0
31.8
$
$
1,371.3 $
1,615.1
909.2 $
1,009.1
(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, 2015, increases in the carrying values of subordinated notes outstanding of $92.4 million were recorded. As of December 31, 2014, net
adjustments in the carrying values of subordinated notes outstanding of $100.6 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 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.
2015 Annual Report / Northern Trust Corporation
122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2015, 25% of these securities were eligible for Tier 1 capital treatment. In 2016, Tier 1 capital eligibility will be fully
phased out. As these securities phase out of Tier 1 capital, they are eligible for inclusion in Tier 2 capital with 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, 2015, 25% of both Series A and B
securities qualified as Tier 1 capital and 75% 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, 2015 and 2014:
TABLE 74: SUBORDINATED DEBENTURES
(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,
$
$
2015
154.1 $
123.2
277.3 $
2014
154.0
123.2
277.2
Preferred Stock. The Corporation is authorized to issue 10 million shares of preferred stock without par value. The Board
of Directors 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, accrue and are 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%.
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 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 2015. The stock repurchase authorization remaining as of December 31, 2015, was 9.7 million shares. The
repurchased shares are 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.
2015 Annual Report / Northern Trust Corporation
123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Corporation’s capital plan submitted in January 2015, which was reviewed without objection by the Federal
Reserve in March 2015, the Corporation may repurchase up to $285.3 million of common stock after December 31, 2015,
through June 2016.
The average price paid per share for common stock repurchased in 2015, 2014, and 2013 was $72.52, $64.20, and
$55.90, respectively.
An analysis of changes in the number of shares of common stock outstanding follows:
TABLE 75: SHARES OF COMMON STOCK
Balance at January 1
Incentive Plan and Awards
Stock Options Exercised
Treasury Stock Purchased
Balance at December 31
2015
2014
2013
233,390,705
237,322,035
238,914,988
1,033,664
1,721,282
(6,851,868)
1,040,015
2,515,769
(7,487,114)
863,958
3,088,490
(5,545,401)
229,293,783
233,390,705
237,322,035
Note 15 – Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of AOCI at December 31, 2015, 2014, and 2013, and changes during the
years then ended.
TABLE 76: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(In Millions)
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
BALANCE AT
DECEMBER 31,
2015
NET
CHANGE
BALANCE AT
DECEMBER 31,
2014
NET
CHANGE
BALANCE AT
DECEMBER 31,
2013
NET
CHANGE
BALANCE AT
DECEMBER 31,
2012
$
(31.0) $
(58.6) $
27.6 $
21.6 $
6.0 $
(95.0) $
101.0
(3.0)
(17.6)
1.7
(15.9)
(4.7)
(1.7)
(7.6)
(8.8)
2.9
7.1
4.3
(3.4)
(321.1)
19.8
(340.9)
(80.6)
(260.3)
132.8
(1.4)
10.5
(393.1)
(283.0)
Total
$
(372.7) $
(53.0) $
(319.7) $
(75.4) $
(244.3) $
38.7 $
2015 Annual Report / Northern Trust Corporation
124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 77: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(In Millions)
Unrealized Gains (Losses) on Securities
Available for Sale
Noncredit-Related Unrealized Losses
on Securities OTTI
Other Unrealized Gains (Losses) on
Securities Available for Sale
Reclassification Adjustment for
(Gains) Losses Included in Net Income
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
2013
TAX
EFFECT
AFTER
TAX
$
— $
— $
— $
4.5 $
(1.7) $
2.8 $
3.0 $
(1.1) $
1.9
(94.3)
35.5
(58.8)
30.1
(11.4)
18.7
(156.8)
59.0
(97.8)
0.3
(0.1)
0.2
0.1
—
0.1
1.6
(0.7)
0.9
Net Change
$
(94.0) $
35.4 $
(58.6) $
34.7 $
(13.1) $
21.6 $
(152.2) $
57.2 $
(95.0)
Unrealized (Losses) Gains on Cash Flow
Hedges
Unrealized (Losses) Gains 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
$
$
$
$
$
(1.2) $
0.2 $
(1.0) $
(8.7) $
3.6 $
(5.1) $
2.1 $
(0.7) $
4.7
(2.0)
2.7
(4.0)
1.5
(2.5)
4.7
(1.8)
3.5 $
(1.8) $
1.7 $
(12.7) $
5.1 $
(7.6) $
6.8 $
(2.5) $
1.4
2.9
4.3
$
(101.5) $
4.9 $
(96.6) $
(107.8) $
10.8 $
(97.0) $
91.9 $
(29.7) $
62.2
(18.7)
148.6
7.1
(56.3)
(11.6)
92.3
(1.0)
142.6
0.4
(53.8)
(0.6)
88.8
—
(107.3)
—
41.7
—
(65.6)
28.4 $
(44.3) $
(15.9) $
33.8 $
(42.6) $
(8.8) $
(15.4) $
12.0 $
(3.4)
(12.2) $
8.2 $
(4.0) $
(137.8) $
41.5 $
(96.3) $
157.7 $
(54.9) $
102.8
38.3
(14.5)
23.8
25.2
(9.5)
15.7
46.1
(16.1)
30.0
26.1 $
(6.3) $
19.8 $
(112.6) $
32.0 $
(80.6) $
203.8 $
(71.0) $
132.8
The following table provides the location and before-tax amounts of reclassifications out of AOCI during the years ended
December 31, 2015, 2014 and 2013.
TABLE 78: RECLASSIFICATION ADJUSTMENT OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(In Millions)
Securities Available for Sale
LOCATION OF
RECLASSIFICATION ADJUSTMENTS
RECOGNIZED IN INCOME
AMOUNT OF RECLASSIFICATION
ADJUSTMENTS RECOGNIZED
IN INCOME
YEAR ENDED DECEMBER 31,
2015
2014
2013
Realized Losses on Securities Available for Sale
Investment Security Losses, net
$
0.3 $
0.1 $
Realized (Gains) Losses on Cash Flow Hedges
Foreign Exchange Contracts
Other Operating Income/ Expense
4.7
(4.0)
Pension and Other Postretirement Benefit Adjustments
Amortization of Net Actuarial Losses
Amortization of Prior Service Cost
Gross Reclassification Adjustment
Employee Benefits
Employee Benefits
38.5
(0.2)
25.1
0.1
$
38.3 $
25.2 $
2015 Annual Report / Northern Trust Corporation
1.6
4.7
49.0
(2.9)
46.1
125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 – Net Income per Common Share
The computations of net income per common share are presented below.
TABLE 79: NET INCOME PER COMMON SHARE
($ 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
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
$
$
232,279,849
235,829,790
239,265,313
973.8 $
23.4
950.4 $
15.4
935.0
4.03
811.8 $
9.5
802.3 $
13.3
789.0
3.34
731.3
—
731.3
11.9
719.4
3.01
232,279,849
235,829,790
239,265,313
1,941,880
1,890,465
1,289,527
234,221,729
237,720,255
240,554,840
935.0 $
3.99
789.0 $
3.32
719.5
2.99
Note: Common stock equivalents totaling 371,059, 1,517,588, and 3,498,894 for the years ended December 31, 2015, 2014, and 2013, respectively, were not included in the
computation of diluted net income per common share because their inclusion would have been antidilutive.
2015 Annual Report / Northern Trust Corporation
126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Net Interest Income
The components of net interest income were as follows:
TABLE 80: NET INTEREST INCOME
(In Millions)
Interest Income
Loans and Leases
Securities – Taxable
– Non-Taxable
Interest-Bearing Due from and Deposits with Banks
(1)
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,
2015
2014
2013
$
$
$
$
$
731.9 $
735.9 $
332.2
4.8
108.3
46.8
274.9
7.2
127.6
41.3
743.1
237.2
11.6
142.1
21.5
1,224.0 $
1,186.9 $
1,155.5
74.3 $
81.7 $
103.3
0.7
0.3
5.0
46.8
24.4
2.4
1.3
0.4
3.4
54.7
37.7
2.2
153.9 $
181.4 $
1,070.1 $
1,005.5 $
1.5
0.4
3.3
74.4
37.1
2.4
222.4
933.1
(1) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as
presented on the consolidated balance sheets.
Note 18 – Other Operating Income
The components of other operating income were as follows:
TABLE 81: Other Operating Income
(In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
FOR THE YEAR ENDED DECEMBER 31,
$
$
2015
59.1 $
48.2
139.8
2014
62.7 $
49.6
41.2
2013
61.9
50.9
53.7
247.1 $
153.5 $
166.5
Other income in 2015 includes a $99.9 million net gain on the sale of 1.0 million Visa Inc. Class B common shares. In
addition, Other income in 2015 includes a $25.9 million net gain on the sale of certain loans and leases, offset by a $27.0
million fair value adjustment on leases classified as held for sale as of December 31, 2015, each of which is related to the
decision to exit a portion of a non-strategic loan and lease portfolio.
2015 Annual Report / Northern Trust Corporation
127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 – Other Operating Expense
The components of other operating expense were as follows:
TABLE 82: OTHER OPERATING EXPENSE
(In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Other Expenses
Total Other Operating Expense
FOR THE YEAR ENDED DECEMBER 31,
$
$
2015
93.2 $
25.2
40.5
10.9
158.2
2014
88.0 $
22.0
39.1
19.5
103.5
328.0 $
272.1 $
2013
91.6
23.5
39.1
21.1
138.9
314.2
Other expenses in 2015 includes a charge related to voluntary cash contributions to certain constant dollar NAV funds
totaling $45.8 million to bring the NAVs of these funds to $1.00. Other expenses in 2013 include a $19.2 million charge in
connection with an agreement to resolve certain litigation.
Note 20 – Income Taxes
The following table reconciles the total provision for income taxes recorded in the consolidated statements of income with
the amounts computed at the statutory federal tax rate of 35%.
TABLE 83: INCOME TAXES
(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,
$
2015
512.7 $
(4.8)
0.1
(44.2)
33.0
(5.6)
2014
416.6 $
(4.9)
(3.4)
(44.1)
29.6
(15.4)
$
491.2 $
378.4 $
2013
376.4
(6.2)
(2.3)
(27.6)
26.3
(22.4)
344.2
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 2009.
Included in other liabilities within the consolidated balance sheets at December 31, 2015 and 2014 were $12.3 million
and $11.9 million of unrecognized tax benefits, respectively. If recognized, 2015 and 2014 net income would have
increased by $8.7 million and $8.8 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:
TABLE 84: UNRECOGNIZED TAX BENEFITS
(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,
2015 Annual Report / Northern Trust Corporation
$
$
2015
11.9 $
3.9
(2.7)
(0.8)
12.3 $
2014
15.6
3.0
(5.5)
(1.2)
11.9
128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unrecognized tax benefits had net increases of $0.4 million, resulting in a remaining balance of $12.3 million at
December 31, 2015, compared to net decreases of $3.7 million resulting in a remaining balance of $11.9 million at
December 31, 2014. 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.
A provision for interest and penalties of $0.1 million, net of tax, was included in the provision for income taxes for the
year ended December 31, 2015. This compares to a provision of interest and penalties of $0.2 million, net of tax, for the
year ended December 31, 2014. As of December 31, 2015 and 2014, the liability for the potential payment of interest and
penalties totaled $11.3 million and $10.2 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 $257.4 million, $177.4 million, and
$141.0 million of 2015, 2014, and 2013 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, 2015, the cumulative amount of undistributed
pre-tax earnings in these subsidiaries was approximately $1.4 billion. Based on the current U.S. federal income tax rate, an
additional deferred tax liability of approximately $298.7 million would have been required as of December 31, 2015, 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:
TABLE 85: PROVISION FOR INCOME TAXES
(In Millions)
Current Tax Provision:
Federal
State
Non-U.S.
Total
Deferred Tax Provision:
Federal
State
Non-U.S.
Total
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
489.8 $
291.5 $
64.5
83.1
637.4
(131.1)
(13.6)
(1.5)
(146.2)
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
Provision for Income Taxes
$
491.2 $
378.4 $
344.2
In addition to the amounts shown above, tax charges and benefits have been recorded directly to stockholders’ equity for
the following items:
TABLE 86: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY
(In Millions)
Current Tax Benefit for Employee Stock Options and Other Stock-Based Plans
$
Tax Effect of Other Comprehensive Income
FOR THE YEAR ENDED DECEMBER 31,
2015
17.7 $
17.0
2014
8.8 $
18.6
2013
3.0
4.3
2015 Annual Report / Northern Trust Corporation
129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
TABLE 87: DEFERRED TAX LIABILITIES
(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,
2015
2014
2013
$
272.6 $
339.9
388.6 $
316.1
20.6
70.7
48.8
169.1
921.7
81.7
185.0
266.7
(1.6)
265.1
24.1
63.5
62.3
157.5
1,012.1
103.5
126.7
230.2
(3.9)
226.3
$
656.6 $
785.8 $
392.0
299.0
22.0
112.2
63.3
104.0
992.5
107.8
85.0
192.8
(3.9)
188.9
803.6
Northern Trust had various state net operating loss carryforwards as of December 31, 2015, 2014, and 2013. The income
tax benefits associated with these loss carryforwards were approximately $1.6 million as of December 31, 2015, and $3.9
million as of December 31, 2014 and 2013. A valuation allowance of $1.6 million was recorded at December 31, 2015, and
$3.9 million as of December 31, 2014, and 2013, 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, 2015, 2014,
and 2013, as management believes it is more likely than not that the deferred tax assets will be fully realized.
Note 21 – Employee Benefits
The Corporation and certain of its subsidiaries provide various benefit programs, including defined benefit pension,
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 sheets. Total assets in the “Rabbi” Trust related to the nonqualified
pension plan at December 31, 2015 and 2014 amounted to $106.1 million and $93.2 million, respectively. Contributions of
$16.5 million and $13.9 million were made to the “Rabbi” Trust in 2015 and 2014, respectively.
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. plan,
non-U.S. plans, and supplemental plan for 2015, 2014, and 2013. Prior service costs are being amortized on a straight-line
basis over 11 years for the U.S. plan and 9 years for the supplemental plan.
2015 Annual Report / Northern Trust Corporation
130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 88: EMPLOYEE BENEFIT PLAN STATUS
($ In Millions)
Accumulated Benefit Obligation
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
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2015
2014
2015
2014
2015
2014
$
903.4
$
974.8
$
156.5
$
184.6
$
102.1
$
109.2
1,006.5
1,342.0
1,091.5
1,440.8
156.5
144.3
184.6
157.6
113.9
—
123.0
—
$
335.5
$
349.3
$
(12.2)
$
(27.0) $
(113.9)
$
(123.0)
4.71%
4.25%
4.25
7.00
4.25
7.25
3.39%
N/A
3.73
3.20%
N/A
4.00
4.71%
4.25
N/A
4.25%
4.25
N/A
TABLE 89: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
(In Millions)
Net Actuarial Loss
Prior Service Cost
Gross Amount in Accumulated Other Comprehensive
Income
Income Tax Effect
Net Amount in Accumulated Other Comprehensive
Income
TABLE 90: NET PERIODIC PENSION EXPENSE
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2015
2014
$
381.0 $
382.9 $
(2.7)
(3.1)
378.3
143.1
379.8
143.3
2015
51.6 $
—
51.6
5.9
2014
60.5 $
—
60.5
6.3
2015
66.1 $
1.0
67.1
25.3
2014
81.5
1.1
82.6
30.9
$
235.2 $
236.5 $
45.7 $
54.2 $
41.8 $
51.7
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
($ In Millions)
Service Cost
Interest Cost
2015
2014
2013
2015
2014
2013
2015
$
37.8
44.7
$
$
32.7
44.4
30.3
42.1
$
— $
— $
— $
5.7
(5.9)
1.5
—
1.3
6.9
(7.0)
(1.6)
—
$
(1.7) $
6.6
(6.2)
1.0
—
1.4
$
3.6
5.0
N/A
7.3
0.2
$
2014
3.1
4.8
N/A
5.8
0.5
2013
1.6
4.4
N/A
6.7
0.5
$
16.1
$
14.2
$
13.2
Expected Return on Plan Assets
(96.5)
(97.7)
(93.3)
Amortization:
Net Loss (Gain)
Prior Service Cost
29.7
(0.4)
21.5
(0.4)
42.5
(0.4)
Net Periodic Pension Expense (Benefit) $
15.3
$
0.5
$
21.2
$
Weighted-Average Assumptions:
Discount Rates
4.25%
5.00%
4.25%
3.20%
4.31%
4.42%
4.25%
5.00%
4.25%
Rate of Increase in Compensation
Level
Expected Long-Term Rate of
Return on Assets
4.25
7.25
4.25
7.75
4.02
7.75
N/A
N/A
N/A
4.25
4.25
4.02
4.00
4.84
4.76
N/A
N/A
N/A
Pension expense for 2016 is expected to include approximately $25.7 million and $(0.3) million related to the amortization
of net loss and prior service cost balances, respectively, from AOCI.
2015 Annual Report / Northern Trust Corporation
131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 91: CHANGE IN PROJECTED BENEFIT OBLIGATION
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial (Gain) Loss
Benefits Paid
Foreign Exchange Rate Changes
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
2015
$
1,091.5 $
37.8
44.7
(93.7)
(73.8)
—
2014
919.7 $
32.7
44.4
153.1
(58.4)
—
2015
184.6 $
—
5.7
(12.0)
(9.4)
(12.4)
2014
164.7 $
—
6.9
33.2
(6.6)
(13.6)
2015
123.0 $
3.6
5.0
(8.1)
(9.6)
—
2014
101.5
3.1
4.8
23.1
(9.5)
—
Ending Balance
$
1,006.5 $
1,091.5 $
156.5 $
184.6 $
113.9 $
123.0
Effective December 31, 2015, Northern Trust changed from the RP-2014 mortality table with improvement scale MP-2014
to the aggregate RP-2014 mortality table with adjustment from 2006 to 2014 to reflect improvement scale MP-2015, and
with future improvement under scale MP-2015 released by the Society of Actuaries in October 2015.
TABLE 92: ESTIMATED FUTURE BENEFIT PAYMENTS
(In Millions)
2016
2017
2018
2019
2020
2021-2025
TABLE 93: CHANGE IN PLAN ASSETS
(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
NON-U.S.
PLANS
SUPPLEMENTAL
PLAN
$
68.0 $
2.3 $
67.8
69.2
70.8
69.1
345.6
2.5
2.9
3.0
3.3
21.4
9.6
12.0
11.7
13.0
11.6
55.6
U.S. PLAN
NON-U.S. PLANS
2015
2014
$
1,440.8 $
1,342.1 $
(25.0)
—
(73.8)
—
157.1
—
(58.4)
—
2015
157.6 $
1.3
4.6
(9.4)
(9.8)
$
1,342.0 $
1,440.8 $
144.3 $
2014
148.5
22.2
4.8
(6.6)
(11.3)
157.6
The minimum required and maximum deductible contributions for the U.S. qualified plan in 2016 are estimated to be zero
and $250.0 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.
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 commingled 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
2015 Annual Report / Northern Trust Corporation
132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015 or 2014.
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, an exchange traded 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 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 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.
2015 Annual Report / Northern Trust Corporation
133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015 and 2014.
TABLE 94: FAIR VALUE OF U.S. PENSION PLAN ASSETS
(In Millions)
Common Stock
U.S.
Canada
Fixed Income – U.S. Government
Other Investments
Mutual Funds:
Global Large Cap Blend
Exchange Traded Fund:
Domestic Large Cap Core
Collective Trust Funds:
Foreign Large Cap Blend
Foreign Small Cap Blend
Domestic Small Cap Value
Domestic Small Cap Growth
Domestic Large Cap Growth
Domestic Large Cap Minimum Volatility
Short-Term Investment
Global Real Estate Blend
Domestic Long-Term Bond
Emerging Market Large Cap Blend
Private Equity Funds
Hedge Funds
Total Assets at Fair Value
December 31, 2015
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$
45.4 $
0.3
—
64.3
0.5
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
135.7
—
—
113.0
37.1
104.9
15.0
36.6
82.4
5.5
67.0
464.3
59.1
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
47.5
63.4
45.4
0.3
135.7
64.3
0.5
113.0
37.1
104.9
15.0
36.6
82.4
5.5
67.0
464.3
59.1
47.5
63.4
$
110.5 $
1,120.6 $
110.9 $
1,342.0
2015 Annual Report / Northern Trust Corporation
134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
The following table presents the changes in Level 3 assets for the years ended December 31, 2015 and 2014.
TABLE 95: CHANGE IN LEVEL 3 ASSETS
(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
$
$
2015
49.0 $
6.6
—
2.4
(10.5)
2014
47.7 $
10.3
—
3.5
(12.5)
2015
68.6 $
(0.2)
2.6
10.0
(17.6)
47.5 $
49.0 $
63.4 $
2014
55.1
1.8
1.7
15.0
(5.0)
68.6
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, 2015, measurement date was set at 7.00%.
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.
2015 Annual Report / Northern Trust Corporation
135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2015 and 2014, and the change in the accumulated
postretirement benefit obligation during 2015 and 2014.
TABLE 96: POSTRETIREMENT HEALTH CARE PLAN STATUS
(In Millions)
Accumulated Postretirement Benefit Obligation at Measurement Date:
Retirees and Dependents
Actives Eligible for Benefits
Net Postretirement Benefit Obligation
TABLE 97: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
DECEMBER 31,
2015
24.9 $
7.3
32.2 $
2014
25.0
8.4
33.4
DECEMBER 31,
2015
(2.6) $
—
(2.6)
(1.0)
(1.6) $
2014
(2.4)
—
(2.4)
(0.9)
(1.5)
$
$
$
$
FOR THE YEAR ENDED DECEMBER 31,
$
$
2015
0.1 $
1.4
—
—
2014
0.1 $
1.5
(0.6)
—
1.5 $
1.0 $
2013
0.1
1.2
(1.2)
(3.0)
(2.9)
(In Millions)
Net Actuarial Gain
Prior Service Cost
Gross Amount in Accumulated Other Comprehensive Income
Income Tax Effect
Net Amount in Accumulated Other Comprehensive Income
TABLE 98: NET PERIODIC POSTRETIREMENT (BENEFIT) EXPENSE
(In Millions)
Service Cost
Interest Cost
Amortization
Net Gain
Prior Service Benefit
Net Periodic Postretirement (Benefit) Expense
TABLE 99: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss
Net Claims Paid
Medicare Subsidy
Ending Balance
FOR THE YEAR ENDED
DECEMBER 31,
$
$
2015
33.4 $
0.1
1.4
(0.2)
(2.5)
—
32.2 $
2014
31.2
0.1
1.5
3.0
(3.1)
0.7
33.4
Effective December 31, 2015, Northern Trust changed from the RP-2014 mortality table with improvement scale MP-2014,
to the aggregate RP-2014 mortality table with adjustment from 2006 to 2014 to reflect improvement scale MP-2015, and
with future improvement under scale MP-2015 released by the Society of Actuaries in October 2015.
2015 Annual Report / Northern Trust Corporation
136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 100: ESTIMATED FUTURE BENEFIT PAYMENTS
(In Millions)
2016
2017
2018
2019
2020
2021-2025
TOTAL
POSTRETIREMENT
MEDICAL
BENEFITS
$
2.8
2.9
3.0
2.9
2.8
11.3
Net periodic postretirement (benefit) expense for 2016 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 4.71% at December 31, 2015, and 4.25% at December 31, 2014. For measurement purposes, an 7.5% annual increase
in the cost of pre-age 65 medical and drug benefits and a 9.3% annual increase in the cost of post-age 65 medical and drug
benefits were assumed for 2015. These rates are both assumed to gradually decrease until they reach 5.0% in 2026. 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.
TABLE 101: HEALTH CARE COST TREND RATE ASSUMPTION
(In Millions)
Effect on Postretirement Benefit Obligation
Effect on Total Service and Interest Cost Components
1–PERCENTAGE
POINT INCREASE
1–PERCENTAGE
POINT DECREASE
$
0.9 $
—
(0.8)
—
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 2015 and 2014, and $43.0 million
in 2013.
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:
TABLE 102: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS TO EMPLOYEES
(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,
$
$
$
2015
51.5 $
10.0
14.9
76.4 $
28.8 $
2014
52.9 $
12.8
12.0
77.7 $
29.1 $
2013
48.0
18.4
7.4
73.8
27.7
As of December 31, 2015, there was $123.6 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 two years.
The Northern Trust Corporation 2012 Stock Plan (2012 Plan) is administered by the Compensation and Benefits
Committee (Committee) of the Board of Directors. 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.
2015 Annual Report / Northern Trust Corporation
137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015, shares available for
future grant under the 2012 Plan, including shares forfeited under the 2002 Plan, totaled 28,597,071.
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 10 year life and generally vest and become
exercisable in 1 year to 4 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:
TABLE 103: WEIGHTED-AVERAGE ASSUMPTIONS USED FOR OPTIONS GRANTED
Expected Term (in Years)
Dividend Yield
Expected Volatility
Risk-Free Interest Rate
2015
7.1
2.07%
30.4
1.83
2014
7.3
2.16%
30.1
2.02
2013
7.6
2.38%
29.5
1.43
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, 2015, 2014, and 2013.
TABLE 104: STOCK OPTIONS GRANTED, VESTED, AND EXERCISED
(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
FOR THE YEAR ENDED DECEMBER 31,
2015
18.72 $
16.0
32.1
94.0
30.1
2014
16.22 $
21.9
35.3
127.5
12.9
2013
12.80
30.0
26.9
146.2
9.8
2015 Annual Report / Northern Trust Corporation
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of changes in nonvested stock options for the year ended December 31, 2015.
TABLE 105: CHANGES IN NONVESTED STOCK OPTIONS
NONVESTED OPTIONS
Nonvested at December 31, 2014
Granted
Vested
Forfeited or Cancelled
Nonvested at December 31, 2015
WEIGHTED-
AVERAGE
GRANT-
DATE FAIR
VALUE
PER SHARE
13.60
18.72
13.79
14.87
15.12
SHARES
2,028,560 $
505,770
(1,161,865)
(31,579)
1,340,886 $
A summary of the status of stock options under the 2012 Plan and the 2002 Plan at December 31, 2015, and changes during
the year then ended, are presented in the table below.
TABLE 106: STATUS OF STOCK OPTIONS AND CHANGES
($ In Millions Except Per Share Information)
Options Outstanding, December 31, 2014
Granted
Exercised
Forfeited, Expired or Cancelled
Options Outstanding, December 31, 2015
Options Exercisable, December 31, 2015
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER SHARE
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC
VALUE
54.70
70.21
54.64
55.41
55.51
55.12
4.7 $
4.1 $
141.6
121.4
SHARES
9,671,081 $
505,770
(1,721,282)
(184,299)
8,271,270 $
6,930,383 $
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 2015 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
970,317, 1,086,241, and 1,181,321, with weighted average grant-date fair values of $70.79, $61.17, and $52.82 per share,
for the years ended December 31, 2015, 2014, and 2013, respectively. The total fair value of restricted stock units vested
during the years ended December 31, 2015, 2014, and 2013, was $58.1 million, $63.9 million, and $47.0 million,
respectively.
A summary of the status of outstanding restricted stock unit awards under the 2012 Plan and the 2002 Plan at
December 31, 2015, and changes during the year then ended, is presented in the table below.
TABLE 107: OUTSTANDING RESTRICTED STOCK UNIT AWARDS
($ In Millions)
Restricted Stock Unit Awards Outstanding, December 31, 2014
Granted
Distributed
Forfeited
Restricted Stock Unit Awards Outstanding, December 31, 2015
Units Convertible at December 31, 2015
2015 Annual Report / Northern Trust Corporation
NUMBER
AGGREGATE
INTRINSIC
VALUE
3,381,909 $
227.9
970,317
(831,661)
(117,595)
3,402,970 $
180,751 $
245.3
13.0
139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of nonvested restricted stock unit awards at December 31, 2015, and changes during the year
then ended.
TABLE 108: NONVESTED RESTRICTED STOCK UNIT AWARDS
NONVESTED RESTRICTED
STOCK UNITS
Nonvested at December 31, 2014
Granted
Vested
Forfeited
Nonvested at December 31, 2015
WEIGHTED
AVERAGE
GRANT-
DATE FAIR
VALUE
PER UNIT
53.14
70.79
48.31
58.30
59.50
WEIGHTED
AVERAGE
REMAINING
VESTING
TERM
(YEARS)
1.9
1.9
NUMBER
3,194,899 $
970,317
(825,402)
(117,595)
3,222,219 $
Performance Stock Units. Each performance stock unit provides the recipient the opportunity to receive one share of
stock for each stock unit that vests over a three-year performance period, subject to satisfaction of specified performance
targets that are a function of return on equity and continued employment until the end of the vesting period. The number of
performance stock units that may vest ranges from 0% to 125% of the original award granted based on the attainment of
the applicable three-year average annual return on equity target. Distribution of the shares is then made after vesting.
During the years ended December 31, 2015 and 2014, respectively, 272,319 and 249,618 performance stock units were
granted with weighted average grant-date fair values of $61.14 and $53.08, respectively. Performance stock units
outstanding at December 31, 2015 and 2014, respectively, had aggregate intrinsic values of $56.7 million and $48.8 million
and weighted average remaining vesting terms of 1.8 and 2.2 years, respectively.
Non-employee Director Stock Awards. Stock units with total values of $1.2 million (16,449 units), $1.0 million
(16,770 units), and $1.1 million (20,599 units) were granted to non-employee directors in 2015, 2014, and 2013,
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 $1.1 million, $1.0 million, and $1.1 million in 2015, 2014, and 2013,
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 $233.0 million in 2015, $212.4
million in 2014, and $192.4 million in 2013.
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.
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
2015 Annual Report / Northern Trust Corporation
140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015, the Corporation has estimated the upper end of the range of reasonably possible losses for these
matters to be approximately $125 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.
A number of participants in Northern Trust’s securities lending program, which is associated with its 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 a settlement to
resolve certain claims related to two of these lawsuits. Other lawsuits and claims related to securities lending are not part
of the previously-announced settlement, and accordingly remain pending.
As previously disclosed in April 2014, Northern Trust remains subject to an investigation by the SEC related to
Northern Trust’s securities lending activities. Northern Trust continues to cooperate with the SEC in this investigation.
In January 2015, the Public Prosecutor’s Office of France recommended that certain charges be brought against
Northern Trust Fiduciary Services (Guernsey) Limited (NTFS), an indirect subsidiary of the Corporation, relating to the
administration of two trusts for which NTFS serves as trustee. In April 2015, a French investigating magistrate judge
charged NTFS with complicity in estate tax fraud. Charges also were brought against a number of other persons and
entities related to this matter. As trustee, NTFS provided no tax advice and had no involvement in the preparation or filing
of the challenged estate tax filings. NTFS has contested the criminal charge in the French court. The trial of all defendants
began on January 4, 2016. On January 6, 2016, the trial court postponed the trial while the French Supreme Court
considers certain constitutional questions raised by some of the individual defendants. No new trial date has been set.
Visa Class B Common Shares. Northern Trust, as a member of Visa U.S.A. Inc. (Visa U.S.A.) and in connection with
the 2007 restructuring of Visa U.S.A. and its affiliates and the 2008 initial public offering of Visa Inc. (Visa), received
certain Visa Class B common shares. The Visa Class B common shares are subject to certain selling restrictions until the
final resolution of the covered litigation noted below, at which time the shares are convertible into Visa Class A common
shares based on a conversion rate dependent upon the ultimate cost of resolving the covered litigation.
Certain members of Visa U.S.A. are obligated to indemnify Visa for losses resulting from certain litigation relating to
interchange fees (the covered litigation). On October 19, 2012, Visa signed a settlement agreement with plaintiff
representatives for binding settlement of the covered 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.
2015 Annual Report / Northern Trust Corporation
141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The ultimate resolution of the covered litigation and the timing for removal of the selling restrictions on the Visa Class B
common shares are uncertain.
In June 2015, Northern Trust recorded a $99.9 million net pre-tax gain on the sale of 1.0 million of its Visa Class B
common shares. This sale does not affect Northern Trust’s risk related to the impact of the covered litigation on the rate at
which such shares will ultimately convert into Visa Class A common shares. As of December 31, 2015, Northern Trust
continued to hold approximately 5.2 million Visa Class B common shares, which are recorded at their original cost basis of
zero.
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, total return swap contracts, and credit default
swap contracts.
Northern Trust’s primary risks associated with these instruments is the possibility that interest rates, foreign exchange
rates, equity prices, 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, equity prices, 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 sheets were each reduced by $1.3 billion and $1.9 billion as of December 31, 2015 and 2014,
respectively, as a result of master netting arrangements and similar agreements in place. Derivative assets and liabilities
recorded at December 31, 2015 also reflect reductions of $322.8 million and $440.3 million, respectively, as a result of
cash collateral received from and deposited with derivative counterparties. This compares with reductions of derivative
assets and liabilities of $315.8 million and $1.2 billion, respectively, at December 31, 2014. Additional cash collateral
received from and deposited with derivative counterparties totaling $31.1 million and $27.3 million, respectively, as of
December 31, 2015, and $19.6 million and $153.2 million, respectively, as of December 31, 2014, were not offset against
derivative assets and liabilities on the consolidated balance sheets 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 $15.4 million and $27.4 million at December 31, 2015 and 2014, respectively, are not offset against
derivative assets and liabilities on the consolidated balance sheets, 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 $553.2 million and $299.5 million at December 31, 2015 and 2014, respectively. Cash collateral
amounts deposited with derivative counterparties on those dates included $163.0 million and $272.9 million, respectively,
posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required
at December 31, 2015 and 2014 of $390.2 million and $26.6 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.
2015 Annual Report / Northern Trust Corporation
142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Client-Related and Trading Derivative Instruments. Approximately 97% of Northern Trust’s derivatives
outstanding at December 31, 2015 and 2014, 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.
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 sheets. 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.
TABLE 109: NOTIONAL AND FAIR VALUES OF CLIENT-RELATED AND TRADING DERIVATIVE FINANCIAL INSTRUMENTS
(In Millions)
Foreign Exchange Contracts
Interest Rate Contracts
Total
DECEMBER 31, 2015
DECEMBER 31, 2014
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
ASSET
LIABILITY
NOTIONAL
VALUE
ASSET
LIABILITY
$
246,628.5 $
2,541.8 $
2,500.4 $
257,568.7 $
4,149.5 $
4,072.0
6,209.5
111.1
108.5
5,353.8
105.5
101.3
$
252,838.0 $
2,652.9 $
2,608.9 $
262,922.5 $
4,255.0 $
4,173.3
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 statements of income for
the years ended December 31, 2015, 2014, and 2013.
TABLE 110: LOCATION AND AMOUNT OF GAINS AND LOSSES RECORDED IN INCOME
(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,
$
$
2015
261.8 $
17.5
279.3 $
2014
210.1 $
9.3
219.4 $
2013
244.4
12.7
257.1
2015 Annual Report / Northern Trust Corporation
143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk Management Instruments. Northern Trust uses derivative instruments to hedge its exposure to foreign currency,
interest rate, equity price, 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.
TABLE 111: NOTIONAL AND FAIR VALUES OF DESIGNATED RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE
INSTRUMENT
RISK
CLASSIFICATION
NOTIONAL
VALUE ASSET
LIABILITY
NOTIONAL
VALUE ASSET
LIABILITY
December 31, 2015
December 31, 2014
FAIR VALUE
FAIR VALUE
(In Millions)
FAIR VALUE HEDGES
Available for Sale Investment
Securities
Senior Notes and Long-Term
Subordinated Debt
Interest Rate
Swap Contracts
Interest Rate
Swap Contracts
CASH FLOW HEDGES
Forecasted Foreign Currency
Denominated Transactions
Foreign Exchange
Contracts
Available for Sale Investment
Securities
Interest Rate
Contracts
NET INVESTMENT
HEDGES
Interest Rate
$
3,042.1 $
10.8 $
19.8 $
2,859.5 $ 12.7 $
28.5
Interest Rate
1,250.0
104.6
2.2
1,250.0
112.8
2.0
Foreign Currency
367.4
8.5
13.8
344.9
6.0
14.8
Interest Rate
$
935.0 $
2.0 $
0.7 $
635.0 $
1.3 $
—
Net Investments in Non-
U.S. Affiliates
Foreign Exchange
Contracts
Foreign Currency
1,961.5
72.9
Total
7,556.0
198.8
1.5
38.0
1,795.4
118.9
6,884.8
251.7
3.4
48.7
In addition to the above, Sterling-denominated debt, totaling $243.9 million at December 31, 2014, was designated as a
hedge of the foreign exchange risk associated with the net investment in certain non-U.S. affiliates. This debt matured
during the quarter ended March 31, 2015.
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 statements of income related to fair value hedges for the years ended December 31,
2015, 2014, and 2013.
TABLE 112: LOCATION AND AMOUNT OF DERIVATIVE GAINS AND LOSSES RECORDED IN INCOME
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
Interest Rate Swap Contracts
Interest Income
Senior Notes and Long-Term Subordinated Debt
Interest Rate Swap Contracts
Interest Expense
Total
2015
2014
(21.1) $
(36.4) $
34.7
104.0
2013
26.3
(44.9)
13.6 $
67.6 $
(18.6)
$
$
There was no ineffectiveness or change in the fair value of hedged items recognized in earnings for fair value long-haul
hedges during the years ended December 31, 2015 and 2014. There were $0.9 million of losses recorded within the fair
values of hedged items for long-haul hedges and $0.8 million of losses from ineffectiveness recorded during the year ended
December 31, 2013.
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, 2015, 2014, or 2013. As of
December 31, 2015, 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.
2015 Annual Report / Northern Trust Corporation
144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015, 2014 and 2013.
TABLE 113: CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECOGNIZED IN AOCI AND RECLASSIFIED TO EARNINGS
(In Millions)
FOREIGN EXCHANGE
CONTRACTS
(BEFORE TAX)
INTEREST RATE
CONTRACTS
(BEFORE TAX)
2015
2014
2013
2015
2014
Net Gain/(Loss) Recognized in AOCI
$
(1.2) $
(9.4) $
2.1 $
— $
0.7 $
Net Gain/(Loss) Reclassified from AOCI to Earnings
Other Operating Income
Interest Income
Other Operating Expense
Total
(8.0)
—
(1.9)
3.3
—
(0.5)
(2.1)
—
(2.6)
—
5.2
—
—
1.2
—
$
(9.9) $
2.8 $
(4.7) $
5.2 $
1.2 $
2013
—
—
—
—
—
There were no gains or losses reclassified during the years ended December 31, 2015, 2014, and 2013 as a result of the
discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated that a net loss of $5.0
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 $2.4 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.
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 no ineffectiveness recorded for these hedges during the
years ended December 31, 2015, 2014, and 2013.
The following table provides net investment hedge gains and losses recognized in AOCI during the years ended
December 31, 2015 and 2014.
TABLE 114: NET INVESTMENT HEDGE GAINS AND LOSSES RECOGNIZED IN AOCI
(In Millions)
Foreign Exchange Contracts
Sterling Denominated Subordinated Debt
Total
AMOUNT OF HEDGING
INSTRUMENT GAIN/(LOSS)
RECOGNIZED IN AOCI
(BEFORE TAX)
2015
143.6 $
5.0
148.6 $
2014
127.4
15.2
142.6
$
$
2015 Annual Report / Northern Trust Corporation
145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. A swap related to the sale of certain Visa Class B common shares was entered into which retains the risks
associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Class A common shares.
Credit default swaps were entered into to manage the credit risk associated with certain loans and loan commitments. Total
return swaps are entered into to manage the equity price risk associated with certain investments. The following table
identifies the types of risk management derivative instruments not formally designated as hedges and their notional
amounts and fair values.
TABLE 115: NOTIONAL AND FAIR VALUES OF NON DESIGNATED RISK MANAGEMENT DERIVATIVE INSTRUMENTS
(In Millions)
Foreign Exchange Contracts
Other Financial Derivatives
(1)
Total
DECEMBER 31, 2015
DECEMBER 31, 2014
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
ASSET
LIABILITY
NOTIONAL
VALUE
ASSET
LIABILITY
$
$
$
244.6 $
152.8 $
397.4 $
0.2 $
— $
0.2 $
3.7 $
246.3 $
10.9 $
— $
14.6 $
246.3 $
0.8 $
— $
0.8 $
5.3
—
5.3
(1) This line consists of a swap related to the sale of certain Visa Class B common shares and total return swaps.
The following table provides the location and amount of gains and losses recorded in the consolidated statements of
income for the years ended December 31, 2015, 2014, and 2013 for derivative instruments not formally designated as
hedges under GAAP.
TABLE 116: LOCATION AND AMOUNT OF GAINS AND LOSSES RECORDED IN INCOME
(In Millions)
Credit Default Swap Contracts
Foreign Exchange Contracts
Other Financial Derivatives
(1)
Total
LOCATION OF DERIVATIVE GAIN/
(LOSS) RECOGNIZED IN INCOME
Other Operating Income
Other Operating Income
Other Operating Income
AMOUNT RECOGNIZED IN INCOME
2015
— $
(10.9)
(12.3)
2014
— $
(14.3)
—
(23.2) $
(14.3) $
$
$
2013
(0.1)
(4.0)
—
(4.1)
(1) This line includes the statement of income impact of a swap related to the sale of certain Visa Class B common shares and total return swaps.
2015 Annual Report / Northern Trust Corporation
146
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 sheets as of December 31, 2015 and 2014.
TABLE 117: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
December 31, 2015
(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
GROSS
AMOUNTS
OFFSET
NET
AMOUNTS
PRESENTED
GROSS
AMOUNTS
NOT OFFSET
NET
AMOUNT(3)
$
1,636.0 $
1,194.3 $
441.7 $
— $
170.3
58.2
—
—
21.5
38.1
23.5
322.8
148.8
20.1
—
—
264.3
987.4
1,251.7
—
—
—
—
—
—
—
441.7
148.8
20.1
—
—
264.3
987.4
1,251.7
Total Derivatives Subject to a Master Netting Arrangement
1,864.5
1,600.2
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
987.4
2,851.9
—
1,600.2
Securities Purchased under Agreements to Resell(2)
$
1,600.0 $
— $
1,600.0 $
1,600.0 $
—
December 31, 2014
(In Millions)
Derivative Assets(1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
GROSS
RECOGNIZED
ASSETS
GROSS
AMOUNTS
OFFSET
NET
AMOUNTS
PRESENTED
GROSS
AMOUNTS
NOT OFFSET
NET
AMOUNT(3)
$
3,442.8 $
1,889.8 $
1,553.0 $
— $
1,553.0
183.9
48.4
—
—
32.1
13.1
6.3
315.8
151.8
35.3
—
—
—
—
—
—
—
—
—
151.8
35.3
—
—
1,418.0
832.4
2,250.4
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
4,507.5
—
2,257.1
832.4
2,250.4
Securities Purchased under Agreements to Resell(2)
$
1,000.0 $
— $
1,000.0 $
1,000.0 $
—
(1) Derivative assets are reported in other assets in the consolidated balance sheets. Other assets (excluding derivative assets) totaled $3,212.7 million and $3,614.7 million as
of December 31, 2015 and 2014, 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 sheets.
Federal funds sold totaled $14.2 million and $62.7 million as of December 31, 2015 and 2014, respectively.
(3) Northern Trust did not possess any cash collateral that was not offset in the consolidated balance sheets that could have been used to offset the net amounts presented in the
consolidated balance sheets as of December 31, 2015 and 2014.
2015 Annual Report / Northern Trust Corporation
147
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 sheets as of December 31, 2015 and 2014.
TABLE 118: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
December 31, 2015
(In Millions)
Derivative Liabilities(1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Other Financial Derivatives
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
GROSS
AMOUNTS
OFFSET
NET
AMOUNTS
PRESENTED
GROSS
AMOUNTS
NOT OFFSET
NET
AMOUNT(2)
$
2,119.7 $
1,194.3 $
925.4 $
— $
925.4
93.1
38.1
10.9
—
—
2,261.8
399.7
2,661.5
21.5
38.1
—
23.5
440.2
1,717.6
—
1,717.6
71.6
—
10.9
—
—
544.2
399.7
943.9
—
—
—
—
—
—
—
—
71.6
—
10.9
—
—
544.2
399.7
943.9
—
Securities Sold under Agreements to Repurchase
$
546.6 $
— $
546.6 $
546.6 $
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
Total Derivatives Subject to a Master Netting Arrangement
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
GROSS
RECOGNIZED
LIABILITIES
GROSS
AMOUNTS
OFFSET
NET
AMOUNTS
PRESENTED
GROSS
AMOUNTS
NOT OFFSET
NET
AMOUNT(2)
$
3,431.0 $
1,889.8 $
1,541.2 $
— $
118.7
13.1
—
—
3,562.8
664.5
4,227.3
32.1
13.1
6.3
1,232.0
3,173.3
—
3,173.3
86.6
—
—
—
389.5
664.5
1,054.0
—
—
—
—
—
—
—
1,541.2
86.6
—
—
—
389.5
664.5
1,054.0
Securities Sold under Agreements to Repurchase
$
885.1 $
— $
885.1 $
885.1 $
—
(1) Derivative liabilities are reported in other liabilities in the consolidated balance sheets. Other liabilities (excluding derivative liabilities) totaled $2,131.7 million and
$2,794.1 million as of December 31, 2015 and 2014, respectively.
(2) Northern Trust did not place any cash collateral with counterparties that was not offset in the consolidated balance sheets that could have been used to offset the net
amounts presented in the consolidated balance sheets as of December 31, 2015 and 2014.
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
2015 Annual Report / Northern Trust Corporation
148
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
TABLE 119: COMMITMENTS AND LETTERS OF CREDIT
(In Millions)
Legally Binding Commitments to Extend Credit
(1)
Standby Letters of Credit
(2)
Commercial Letters of Credit
DECEMBER 31,
2015
2014
$
37,247.0 $
35,127.6
4,305.4
17.2
4,468.1
20.8
(1)These amounts exclude $398.1 million and $481.4 million of commitments participated to others at December 31, 2015 and 2014, respectively.
(2)These amounts include $147.1 million and $221.4 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2015 and 2014,
respectively. The weighted average maturity of standby letters of credit was 24 months at December 31, 2015 and 27 months at December 31, 2014.
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, 2015 and 2014 subject to indemnification was $94.5
billion and $98.1 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 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.
2015 Annual Report / Northern Trust Corporation
149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015 and 2014
was approximately $58 million and $60 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, 2015 and 2014, the carrying amounts of
these investments, which are included in loans and leases in the consolidated balance sheets, were $389.4 million and
$547.6 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, 2015 and
2014, the carrying amounts of these investments in community development projects that generate tax credits, included in
other assets in the consolidated balance sheets, were $173.5 million and $208.9 million, respectively. As of December 31,
2015 and 2014, liabilities related to unfunded commitments on investments in tax credit community development projects,
included in other liabilities in the consolidated balance sheets, were $10.5 million and $15.6 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.
2015 Annual Report / Northern Trust Corporation
150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Affordable housing tax credits and other tax benefits attributable to community development projects totaled $52.5
million and $58.1 million, respectively, as of December 31, 2015 and 2014.
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. Periodically, Northern Trust makes seed capital investments to certain
funds. As of December 31, 2015 Northern Trust had a $25.3 million investment valued using net asset value per share,
included in other assets, and a $25.0 million unfunded commitment related to seed capital investments.
In June 2015, Northern Trust voluntarily elected to contribute an aggregate $45.8 million of cash to four constant-dollar-
net-asset-value investment funds (Funds) for which it serves as asset manager to bring the net asset values of such funds to
$1.00. The contributions, which were recorded to other operating expense in the consolidated statements of income, resulted
in a pre-tax charge of $45.8 million. Under GAAP, the contributions noted above are deemed to reflect Northern Trust’s
implicit interest in the credit risk of the Funds, which must be considered when determining whether it is the primary beneficiary
of the Funds. In determining whether Northern Trust is the primary beneficiary of the Funds, Northern Trust used an expected
loss calculation based on the characteristics of the underlying investments in the Funds to estimate the expected losses related
to interest rate and credit risk, and also considered the relative rights and obligations of each of the applicable variable interest
holders. Upon consideration of this analysis, Northern Trust determined that it is not the primary beneficiary of the Funds, as
interest rate risk was determined to be the primary driver of expected losses within such funds. Similarly, based on its analysis,
including consideration of the contributions noted above, Northern Trust has also determined that it is not the primary
beneficiary of any other investment funds for which it serves as asset manager under GAAP. Accordingly, Northern Trust is
not required to consolidate the Funds or any other investment funds for which it serves as asset manager within its consolidated
balance sheets. Any potential future support of the Funds will be at the discretion of Northern Trust after an evaluation of the
specific facts and circumstances and with careful consideration as to the potential impact on Northern Trust’s regulatory capital
levels and other operational needs. As of December 31, 2015, Northern Trust has no exposure to loss from its implicit interest
in such Funds as there are no current plans to provide any further support to the Funds.
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, 2015, securities and loans totaling $35.8 billion ($27.1 billion of government sponsored agency and other
securities, $117.5 million of obligations of states and political subdivisions, and $8.6 billion of loans), were pledged.
Collateral required for these purposes totaled $8.9 billion. Included in the total pledged assets are available for sale
securities with a total fair value of $1.5 billion 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, 2015 was $1.5 billion.
There was no repledged or sold collateral as of December 31, 2015.
Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $1.7 billion in 2015.
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 six months or more, unless the same are well secured and in the process of collection).
2015 Annual Report / Northern Trust Corporation
151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Segment 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.”
2015 Annual Report / Northern Trust Corporation
152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables show the earnings contribution of Northern Trust’s reporting segments for the years ended
December 31, 2015, 2014, and 2013.
TABLE 120: CORPORATE AND INSTITUTIONAL SERVICES RESULTS OF OPERATIONS
(In Millions)
NONINTEREST INCOME
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (Note)
Revenue (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.
TABLE 121: WEALTH MANAGEMENT RESULTS OF OPERATIONS
(In Millions)
NONINTEREST INCOME
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (Note)
Revenue (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.
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
1,696.9
$
1,584.0
$
1,443.8
249.4
170.5
414.4
2,531.2
(22.6)
1,856.4
697.4
212.8
200.4
177.9
310.0
2,272.3
5.8
1,732.8
533.7
149.4
484.6
$
384.3
$
238.8
177.3
275.9
2,135.8
(3.4)
1,657.9
481.3
145.6
335.7
50%
47%
46%
42,313.9
$
59,462.9
$
53,308.2
$
$
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
1,283.6
$
1,248.8
$
1,166.0
12.4
111.8
568.1
1,975.9
(20.4)
1,291.9
704.4
264.7
9.7
98.3
536.1
1,892.9
0.2
1,268.7
624.0
234.8
439.7
$
389.2
$
5.6
116.7
557.7
1,846.0
23.4
1,215.0
607.6
229.2
378.4
45%
48%
52%
25,048.7
$
23,629.3
$
22,887.6
$
$
2015 Annual Report / Northern Trust Corporation
153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 122: TREASURY AND OTHER RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
(In Millions)
Noninterest Income
Net Interest Income (Note)
Revenue (Note)
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.
TABLE 123: CONSOLIDATED FINANCIAL INFORMATION
(In Millions)
NONINTEREST INCOME
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Net Interest Income (Note)
Revenue (Note)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes (Note)
Provision for Income Taxes (Note)
Net Income
Average Assets
2015
$
107.9
$
2014
6.6
$
112.9
220.8
132.3
88.5
39.0
188.8
195.4
133.5
61.9
23.6
49.5
$
38.3
$
2013
8.0
132.0
140.0
120.9
19.1
1.9
17.2
5%
5%
2%
43,352.5
$
20,991.3
$
18,661.9
$
$
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
2,980.5 $
2,832.8 $
2,609.8
261.8
390.2
1,095.4
4,727.9
(43.0)
3,280.6
1,490.3
516.5
210.1
282.8
1,034.9
4,360.6
6.0
3,135.0
1,219.6
407.8
973.8 $
811.8 $
244.4
302.0
965.6
4,121.8
20.0
2,993.8
1,108.0
376.7
731.3
110,715.1 $
104,083.5 $
94,857.7
$
$
Note: Stated on an FTE basis. The consolidated figures include $25.3 million, $29.4 million, and $32.5 million, of FTE adjustments for 2015, 2014, and 2013, respectively.
In 2015, the presentation of certain assets was changed from C&IS to Treasury and Other to reflect better the internal
management responsibility for these assets. In addition to the transfer of assets, the Corporation’s internal funds pricing
treatment of deposits that fund the transferred assets were updated to reflect the economics of these deposits. Further
discussion of reporting segment results is provided within the “Reporting Segments and Related Information” section of
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Geographic Area Information. 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.
2015 Annual Report / Northern Trust Corporation
154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes Northern Trust’s performance based on the allocation process described above without
regard to guarantors or the location of collateral.
TABLE 124: DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE
(In Millions)
2015
Non-U.S.
U.S.
Total
2014
Non-U.S.
U.S.
Total
2013
Non-U.S.
U.S.
Total
TOTAL ASSETS
TOTAL
REVENUE
INCOME BEFORE
INCOME TAXES
NET INCOME
$
$
$
$
$
$
30,636.5 $
86,113.1
116,749.6 $
28,326.1 $
81,620.4
109,946.5 $
30,241.3 $
72,706.0
102,947.3 $
1,358.4 $
3,344.2
4,702.6 $
1,341.8 $
2,989.4
4,331.2 $
1,101.0 $
2,988.3
4,089.3 $
483.2 $
981.8
1,465.0 $
446.5 $
743.7
1,190.2 $
272.4 $
803.1
1,075.5 $
344.4
629.4
973.8
322.7
489.1
811.8
201.3
530.0
731.3
Note: Total revenue is comprised of net interest income and noninterest income.
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, 2015 and 2014, 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, 2015 and 2014, 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, 2015, that management
believes have adversely affected the capital categorization of any Northern Trust subsidiary bank.
2015 Annual Report / Northern Trust Corporation
155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below provides capital ratios for Northern Trust Corporation and The Northern Trust Company determined
by Basel III phased in requirements.
TABLE 125: RISK-BASED CAPITAL AMOUNTS AND RATIOS
($ In Millions)
Common Equity Tier 1
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized
Northern Trust Corporation
The Northern Trust Company
Tier 1
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
Total
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
Tier 1 Leverage
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
Supplementary Leverage(2)
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
December 31, 2015
December 31, 2014
ADVANCED
APPROACH
STANDARDIZED
APPROACH(1)
ADVANCED
APPROACH
STANDARDIZED
APPROACH(1)
BALANCE
RATIO BALANCE
RATIO BALANCE
RATIO BALANCE
RATIO
$ 8,012.6
11.9% $ 8,012.6
10.8% $ 7,813.3
12.4% $ 7,813.3
7,591.7
11.6
7,591.7
10.4
7,327.3
12.0
7,327.3
4,376.7
4,245.5
8,431.3
7,591.7
5,386.8
5,225.2
9,529.7
8,538.1
6,733.5
6,531.5
8,431.3
7,591.7
5,655.0
5,639.0
8,431.3
7,591.7
4,085.0
4,075.3
6.5
6.5
12.5
11.6
8.0
8.0
14.2
13.1
10.0
10.0
7.5
6.7
5.0
5.0
6.2
5.6
N/A
N/A
4,807.6
4,755.9
8,431.3
7,591.7
5,917.0
5,853.4
9,767.7
8,771.4
7,396.3
7,316.8
8,431.3
7,591.7
5,655.0
5,639.0
N/A
N/A
N/A
N/A
6.5
6.5
11.4
10.4
8.0
8.0
13.2
12.0
10.0
10.0
7.5
6.7
5.0
5.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
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
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
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
N/A
N/A
N/A
N/A
12.5%
11.8
N/A
N/A
13.3
11.8
6.0
6.0
15.5
14.0
10.0
10.0
7.8
6.9
5.0
5.0
N/A
N/A
N/A
N/A
(1) In 2014, Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated
in accordance with the Basel III Standardized Approach final rules.
(2) Beginning with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective January 1,
2018, the Corporation will be subject to a minimum supplementary leverage ratio of 3 percent.
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.
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
2015 Annual Report / Northern Trust Corporation
156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
TABLE 126: CONDENSED BALANCE SHEETS
(In Millions)
ASSETS
Cash on Deposit with Subsidiary Bank
Securities
Advances to Wholly-Owned Subsidiaries – Banks
– Nonbank
Investments in Wholly-Owned Subsidiaries – Banks
– Nonbank
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,
2015
2014
$
757.5 $
1.2
2,260.0
18.5
7,927.8
153.4
682.3
869.4
2.3
2,273.5
5.0
7,604.5
123.0
605.8
$
$
11,800.7 $
11,483.5
1,497.4 $
1,497.0
800.3
277.3
519.8
793.0
277.2
467.4
3,094.8
3,034.6
388.5
408.6
1,072.3
8,242.8
(372.7)
(1,033.6)
8,705.9
$
11,800.7 $
388.5
408.6
1,050.9
7,625.4
(319.7)
(704.8)
8,448.9
11,483.5
2015 Annual Report / Northern Trust Corporation
157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 127: CONDENSED STATEMENTS OF INCOME
(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
Net Income Applicable to Common Stock
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
600.0 $
300.0 $
8.7
38.5
5.4
652.6
59.3
56.8
116.1
536.5
29.0
565.5
392.8
15.5
3.8
42.9
(0.3)
346.4
66.6
17.0
83.6
262.8
16.6
279.4
522.1
10.3
$
$
973.8 $
23.4
950.4 $
811.8 $
9.5
802.3 $
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
—
731.3
2015 Annual Report / Northern Trust Corporation
158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 128: CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating
Activities:
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
Cash Dividends Paid on Preferred 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
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
2013
$
973.8 $
811.8 $
731.3
(408.3)
1.2
22.8
58.4
647.9
—
—
1.3
(10.0)
—
0.2
(8.5)
—
—
(496.9)
94.0
(321.4)
(27.0)
—
(751.3)
(111.9)
869.4
(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
$
757.5 $
869.4 $
1,566.4
2015 Annual Report / Northern Trust Corporation
159
SUPPLEMENTAL ITEM – SELECTED STATISTICAL AND SUPPLEMENTAL FINANCIAL DATA
TABLE 129: QUARTERLY FINANCIAL DATA (UNAUDITED)
STATEMENTS OF INCOME
2015
2014
($ In Millions Except Per Share Information)
Trust, Investment and Other Servicing Fees
FOURTH
QUARTER
747.1
$
THIRD
QUARTER
749.1
SECOND
QUARTER
756.8
$
$
FIRST
QUARTER
727.5
$
FOURTH
QUARTER
728.2
$
THIRD
QUARTER
718.2
$
SECOND
QUARTER
706.9
$
FIRST
QUARTER
679.5
$
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
Net Income Applicable to Common Stock
PER COMMON SHARE
Net Income – Basic
– Diluted
AVERAGE BALANCE SHEET ASSETS
120.2
137.5
247.9
146.4
138.0
111.4
128.2
115.3
330.7
41.3
289.4
(18.5)
824.8
111.1
239.3
5.9
233.4
1.00
0.99
$
$
$
305.7
36.8
268.9
(10.0)
812.3
118.6
234.6
5.8
228.8
0.97
0.96
$
$
$
288.8
37.6
251.2
(10.0)
854.5
142.2
269.2
5.8
263.4
1.11
1.10
$
$
$
298.8
38.2
260.6
(4.5)
789.0
119.3
230.7
5.9
224.8
0.95
0.94
$
$
$
303.9
40.0
263.9
3.0
781.3
101.8
244.0
9.5
234.5
0.98
0.98
$
$
$
293.8
44.5
249.3
—
774.7
99.7
204.5
—
204.5
0.85
0.84
$
$
$
293.8
47.2
246.6
—
811.0
88.8
181.9
—
181.9
0.76
0.75
$
$
$
295.4
49.7
245.7
3.0
768.0
88.1
181.4
—
181.4
0.75
0.75
$
$
$
Cash and Due from Banks
$
2,142.7
$
2,683.5
$
2,142.9
$
1,573.4
$
1,217.4
$
2,783.0
$
2,838.4
$
2,806.6
Federal Funds Sold and Securities Purchased
under Agreements to Resell
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
1,490.3
1,080.4
1,041.9
1,033.7
1,045.8
923.1
554.1
530.3
14,709.6
17,708.1
37,838.5
33,884.0
15,828.1
12,721.3
38,041.1
33,138.3
16,920.6
14,992.1
37,930.0
32,921.4
15,263.1
14,504.0
35,792.5
32,099.8
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
(242.0)
6,141.9
(256.0)
6,687.4
(260.0)
6,002.2
(265.9)
7,512.6
(267.1)
7,091.2
(273.4)
5,767.6
(276.8)
5,289.8
(277.8)
5,874.0
Total Assets
$ 113,673.1
$ 109,924.1
$ 111,691.1
$ 107,513.2
$ 107,430.0
$ 105,244.7
$ 103,324.1
$ 100,243.5
LIABILITIES AND STOCKHOLDERS’
EQUITY
Deposits
Demand and Other Noninterest-Bearing
$ 26,009.2
$ 24,263.7
$ 25,558.4
$ 22,023.6
$
21,732.7
$
20,069.8
$
18,832.3
$
17,642.1
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
14,998.5
1,436.2
50,664.5
93,108.4
5,566.3
1,497.3
1,382.0
277.3
3,138.3
8,703.5
15,168.4
1,487.0
50,107.9
91,027.0
3,878.5
1,497.2
1,374.3
277.3
3,159.3
8,710.5
15,705.4
1,779.5
49,291.8
92,335.1
4,404.8
1,497.1
1,380.2
277.3
3,188.7
8,607.9
15,361.0
1,741.7
47,399.8
86,526.1
5,187.4
1,497.0
1,571.9
277.2
3,980.9
8,472.7
15,051.2
1,829.3
48,817.9
87,431.1
4,364.4
1,496.9
1,613.4
277.2
3,747.8
8,499.2
15,019.0
1,902.9
48,725.5
85,717.2
4,860.3
1,496.8
1,636.5
277.2
2,971.2
8,285.5
14,828.6
1,996.2
48,988.1
84,645.2
4,217.8
1,661.6
1,642.4
277.2
2,932.7
7,947.2
14,713.8
1,825.5
46,566.4
80,747.8
4,552.0
1,996.6
1,728.9
277.1
3,014.7
7,926.4
Total Liabilities and Stockholders’ Equity
$ 113,673.1
$ 109,924.1
$ 111,691.1
$ 107,513.2
$ 107,430.0
$ 105,244.7
$ 103,324.1
$ 100,243.5
ANALYSIS OF NET INTEREST INCOME
Earning Assets
Interest-Related Funds
Noninterest-Related Funds
$ 105,630.5
$ 100,809.2
$ 103,806.0
$ 98,693.1
$
99,388.5
$
96,967.5
$
95,472.7
$
91,840.7
75,822.1
73,790.6
74,336.1
73,036.0
73,450.3
73,918.2
73,611.9
71,660.3
$ 29,808.4
$ 27,018.6
$ 29,469.9
$ 25,657.1
$
25,938.2
$
23,049.3
$
21,860.8
$
20,180.4
Net Interest Income (Fully Taxable Equivalent)
Net Interest Margin (Fully Taxable Equivalent)
296.0
1.11%
275.0
1.08%
257.6
1.00%
266.8
1.10%
270.9
1.08%
256.2
1.05%
253.4
1.06%
254.4
1.12%
COMMON STOCK DIVIDEND AND
MARKET PRICE
Dividends-Common Stock
Market Price Range – High
– Low
$
0.36
$
0.36
$
0.36
$
0.33
$
0.33
$
0.33
$
0.33
$
76.11
64.77
79.25
65.17
78.88
68.88
72.72
61.10
69.15
60.78
70.84
63.11
65.98
58.30
0.31
67.17
58.31
(1) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated
balance sheets.
(2) 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 sheets as of
December 31, 2014, and 2013.
Note: The common stock of the Corporation is traded on The NASDAQ Stock Market LLC under the symbol “NTRS”.
2015 Annual Report / Northern Trust Corporation
160
TABLE 130: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME
(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)
($ In Millions)
AVERAGE EARNING ASSETS
Federal Funds Sold and Resell Agreements
Interest-Bearing Due from and Deposits with
Banks(1)
Federal Reserve Deposits
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other(2)
Total Securities
Loans and Leases(3)
Total Earning Assets
Allowance for Credit Losses Assigned to Loans and
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
Interest Rate Spread
Demand and Other Noninterest-Bearing Deposits
Other Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Net Interest Income/Margin (FTE Adjusted)
Net Interest Income/Margin (Unadjusted)
Net Interest Income/Margin Components (FTE Adjusted)
U.S.
Non-U.S.
Consolidated
INTEREST
2015
AVERAGE
BALANCE
RATE(4)
INTEREST
2014
AVERAGE
BALANCE
RATE(4)
INTEREST
2013
AVERAGE
BALANCE
RATE(4)
$
6.3 $
1,162.6
0.54% $
3.5 $
765.2
0.45% $
1.9 $
415.5
0.46%
108.3
40.5
15,679.2
14,984.0
0.69
0.27
127.6
37.8
16,783.6
14,737.2
56.0
4,985.5
1.12
31.2
2,892.7
7.4
154.8
137.9
113.2
16,458.8
15,850.4
356.1
37,407.9
738.1
33,016.1
1,249.3
102,249.8
—
—
—
—
—
—
(255.9)
2,138.7
442.5
1,002.2
530.8
4,607.0
6.58
0.94
0.87
0.95
2.24
1.22
—
—
—
—
—
—
11.1
148.9
114.3
165.8
17,514.8
12,872.6
305.5
33,445.9
741.9
30,215.6
1,216.3
95,947.5
—
—
—
—
—
—
(273.7)
2,401.4
448.7
865.2
540.2
4,154.2
0.76
0.26
1.08
6.69
0.85
0.89
0.91
2.46
1.27
—
—
—
—
—
142.1
19.6
18,080.7
7,615.7
18.3
1,625.8
18.0
141.2
97.5
281.0
17,548.8
11,364.3
275.0
30,819.9
749.4
28,696.5
1,188.0
85,628.3
—
—
—
—
—
—
(289.9)
2,950.4
459.0
785.8
533.6
4,790.5
0.79
0.26
1.12
6.40
0.80
0.86
0.89
2.61
1.39
—
—
—
—
—
— $ 110,715.1
—% $
— $ 104,083.5
—% $
— $ 94,857.7
—%
9.7 $ 15,306.9
0.06% $
9.9 $ 14,904.4
0.07% $
9.7 $ 14,533.4
0.07%
7.5
57.1
74.3
6.0
46.8
24.4
2.4
1,609.9
49,377.1
66,293.9
4,757.9
1,497.2
1,426.4
277.3
153.9
74,252.7
—
—
—
—
—
24,474.1
3,363.8
8,624.5
0.47
0.12
0.11
0.13
3.13
1.71
0.86
0.21
1.01
—
—
—
6.1
65.7
81.7
5.1
54.7
37.7
2.2
1,888.5
48,281.9
65,074.8
4,499.1
1,661.2
1,654.9
277.2
181.4
73,167.2
—
—
—
—
—
19,581.8
3,168.0
8,166.5
0.32
0.14
0.13
0.11
3.29
2.28
0.81
0.25
1.02
—
—
—
12.4
81.2
2,102.0
42,338.3
103.3
58,973.7
5.2
74.4
37.1
2.4
4,654.7
2,247.0
1,211.7
277.1
222.4
67,364.2
—
—
—
—
—
16,622.6
3,203.9
7,667.0
0.59
0.19
0.18
0.11
3.31
3.06
0.85
0.33
1.06
—
—
—
— $ 110,715.1
—% $
— $ 104,083.5
—% $
— $ 94,857.7
—%
1,095.4 $
1,070.1 $
—
—
1.07% $ 1,034.9 $
1.05% $ 1,005.5 $
—
—
1.08% $
965.6 $
1.05% $
933.1 $
—
—
842.5 $ 78,136.5
1.08% $
843.1 $ 71,803.1
1.17% $
814.9 $ 61,223.6
252.9
24,113.3
1.05
191.8
24,144.4
0.79
150.7
24,404.7
1.13%
1.09%
1.33%
0.62
$
$
$
$
$
$
$
1,095.4 $ 102,249.8
1.07% $ 1,034.9 $ 95,947.5
1.08% $
965.6 $ 85,628.3
1.13%
(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 sheets 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 sheets 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 Sheets with Analysis of Net Interest Income.
Notes: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 37.6%.
Total taxable equivalent interest adjustments amounted to $25.3 million in 2015, $29.4 million in 2014 and $32.5 million in 2013. 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.
2015 Annual Report / Northern Trust Corporation
161
TABLE 131: CHANGES IN NET INTEREST INCOME
(INTEREST AND RATE ON A FULLY TAXABLE
EQUIVALENT BASIS)
(In Millions)
Increase (Decrease) in Interest Income
Money Market Assets
2015/2014 CHANGE DUE TO
2014/2013 CHANGE DUE TO
AVERAGE
BALANCE
RATE
TOTAL
AVERAGE
BALANCE
RATE
TOTAL
Federal Funds Sold and Resell Agreements
$
1.8 $
0.7 $
2.5 $
1.6 $
— $
Time Deposits with Banks
Other Interest-Bearing
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Loans and Leases
Total
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
$
$
$
$
(8.5)
0.6
22.8
(3.5)
(9.1)
26.7
49.8
(11.6)
1.5
1.2
(0.2)
15.7
(2.6)
(52.3)
(20.1)
2.1
24.0
(3.7)
6.6
24.1
(2.5)
(10.2)
18.5
14.2
(7.4)
(0.3)
13.0
114.0
(4.3)
(0.3)
(1.3)
0.5
8.0
3.8
(121.5)
80.6 $
(47.6) $
33.0 $
143.4 $
(115.1) $
0.3 $
(1.5) $
(1.2) $
0.3 $
(0.1) $
(0.9)
1.4
0.3
(5.2)
6.7
—
2.9
(10.0)
0.9
(2.8)
(19.7)
0.1
2.0
(8.6)
1.2
(8.0)
(13.0)
0.1
(1.3)
11.3
(0.2)
(19.4)
28.4
—
(5.0)
(26.8)
0.1
(0.3)
(27.8)
(0.2)
1.6
(14.5)
18.2
12.9
(6.9)
7.7
16.8
(7.5)
28.3
0.2
(6.3)
(15.5)
(0.1)
(19.7)
0.6
(0.2)
2.6 $
(30.1) $
(27.5) $
19.1 $
(60.1) $
(41.0)
78.0 $
(17.5) $
60.5 $
124.3 $
(55.0) $
69.3
Note: Changes not due solely to average balance changes or rate changes are allocated proportionately to average balance and rate based on their relative absolute
magnitudes.
2015 Annual Report / Northern Trust Corporation
162
Investment Securities Portfolio
TABLE 132: REMAINING MATURITY AND AVERAGE YIELD OF SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE
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, 2015
($ in Millions)
Securities Held to Maturity
U.S. Government
$
26.0
0.42% $
—
—% $
Obligations of States and Political
Subdivisions
Government Sponsored Agency
Other – Fixed
– Floating
21.6
2.1
1,859.1
—
4.53
3.07
0.63
—
66.1
2.2
2,174.6
1,028.2
4.69
3.42
0.80
2.13
—
1.5
1.4
12.0
—
—% $
5.47
5.06
2.10
—
—
—
4.2
49.3
—
—%
5 mos.
—
5.05
2.63
—
26 mos.
102 mos.
21 mos.
34 mos.
Total Securities Held to Maturity
$ 1,908.8
0.67% $ 3,271.1
1.30% $
14.9
2.73% $
53.5
2.82%
24 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
$ 1,798.6
0.74% $ 4,279.8
1.30% $
99.9
1.82% $
—
4,310.6
1,018.4
492.3
0.2
1,433.0
279.5
—
1.03
0.85
0.68
0.28
1.52
0.62
36.4
7,553.1
555.5
799.1
0.6
3,353.0
1,199.5
1.36
0.94
1.43
0.74
1.07
1.46
0.72
—
3,341.0
—
9.2
0.8
446.6
125.6
—
0.94
—
1.05
0.51
1.80
0.69
—
—
1,162.1
—
—
15.5
—
7.6
—%
29 mos.
—
1.39
—
—
1.74
—
0.86
36 mos.
48 mos.
13 mos.
16 mos.
77 mos.
26 mos.
32 mos.
Total Securities Available for Sale
$ 9,332.6
1.00% $ 17,777.0
1.12% $ 4,023.1
1.05% $ 1,185.2
1.39%
37 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, 2015, 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, “Securities,” to the consolidated financial statements provided in Item 8, “Financial
Statements and Supplementary Data,” for more information on securities.
2015 Annual Report / Northern Trust Corporation
163
Loans and Leases Portfolio
TABLE 133: REMAINING MATURITY OF SELECTED LOANS AND LEASES
(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, 2015
TOTAL
ONE YEAR
OR LESS
ONE TO FIVE
YEARS
OVER FIVE
YEARS
$
9,431.5 $
6,535.0 $
1,681.6 $
3,848.8
544.4
194.1
37.3
569.1
64.0
134.8
1.6
2,085.1
177.2
34.2
4.0
1,214.9
1,194.6
303.2
25.1
31.7
$
$
$
$
$
14,056.1 $
7,304.5 $
3,982.1 $
2,769.5
1,137.7 $
962.2 $
161.5 $
15,193.8 $
8,266.7 $
4,143.6 $
10,169.6 $
7,059.8 $
1,885.2 $
5,024.2
1,231.4
2,262.5
14.0
2,783.5
1,224.6
1,530.3
15,193.8 $
8,291.2 $
4,147.7 $
2,754.9
TABLE 134: DISTRIBUTION OF NON-U.S. LOANS BY TYPE
(In Millions)
Commercial
Non-U.S. Governments and Official Institutions
Banks
Other
Total
DECEMBER 31,
2015
335.2 $
—
8.5
794.0
2014
154.0 $
—
—
1,376.6
2013
497.0 $
250.1
10.4
197.2
2012
498.0 $
252.4
9.9
432.0
2011
335.9
197.8
13.3
510.5
1,137.7 $
1,530.6 $
954.7 $
1,192.3 $
1,057.5
$
$
Note: Non-U.S. loans primarily include short duration advances related to the processing of custodied client investments.
TABLE 135: ALLOWANCE FOR CREDIT LOSSES RELATING TO NON-U.S. OPERATIONS
The following table should be read in conjunction with the “Risk Management” section of Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
(In Millions)
Balance at Beginning of Year
Charge-Offs
Recoveries
Provision for Credit Losses
Balance at End of Year
$
$
2015
3.3 $
—
—
(3.3)
2014
2.1 $
—
—
1.2
2013
3.4 $
—
—
(1.3)
2012
4.7 $
—
—
(1.3)
— $
3.3 $
2.1 $
3.4 $
2011
3.8
—
—
0.9
4.7
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.
2015 Annual Report / Northern Trust Corporation
164
Summary of Loans and Leases Loss Experience
TABLE 136: ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
The following table should be read in conjunction with the “Risk Management” section of Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
($ 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
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
2015 Annual Report / Northern Trust Corporation
2015
2014
2013
2012
2011
$
295.9
$
307.9
$
327.6
$
328.9
$
357.3
9.2
3.9
13.1
16.7
0.9
—
17.6
30.7
1.7
3.8
—
5.5
4.5
1.2
5.7
11.2
19.5
(43.0)
(0.1)
(62.6)
233.3
193.8
39.5
233.3
33,180.9
33,016.1
0.06%
(0.13)
0.58
0.06%
0.59
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
—
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
—
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
—
(12.0)
295.9
(19.7)
307.9
(1.3)
327.6
267.0
$
278.1
$
297.9
$
28.9
295.9
31,640.2
30,215.6
$
$
$
29.8
307.9
29,385.5
28,696.5
$
$
$
29.7
327.6
29,504.5
28,975.7
$
$
$
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
22.0
34.3
56.3
55.0
5.0
—
60.0
116.3
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
29,063.9
28,346.7
0.29%
0.19
1.01
0.29%
1.04
165
Deposits
TABLE 137: AVERAGE DEPOSITS BY TYPE
(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
TABLE 138: DISTRIBUTION OF NON-U.S. DEPOSITS BY TYPE
(In Millions)
Commercial
Non-U.S. Governments and Official Institutions
Banks
Other Time
Other Demand
Total
TABLE 139: REMAINING MATURITY OF TIME DEPOSITS $100,000 OR MORE
(In Millions)
3 Months or Less
Over 3 through 6 Months
Over 6 through 12 Months
Over 12 Months
Total
DECEMBER 31,
2015
2014
2013
$
20,684.9 $
17,816.4 $
12,816.4
59.8
124.6
78.9
111.6
71.6
161.7
20,869.3
18,006.9
13,049.7
15,306.9
14,904.4
14,533.4
175.9
669.9
764.1
16,916.8
37,786.1
3,604.8
49,377.1
52,981.9
209.1
767.6
911.8
16,792.9
34,799.8
1,574.9
48,281.9
49,856.8
252.5
968.4
881.1
16,635.4
29,685.1
3,572.9
42,338.3
45,911.2
$
90,768.0 $
84,656.6 $
75,596.3
DECEMBER 31,
2015
2014
2013
$
50,965.8 $
43,466.6 $
43,638.1
5,464.3
489.5
18.2
3.9
6,094.6
678.5
21.9
6.6
6,370.5
306.0
26.4
2.5
$
56,941.7 $
50,268.2 $
50,343.5
DECEMBER 31, 2015
U.S. OFFICES
NON-U.S. OFFICES
CERTIFICATES
OF DEPOSIT
OTHER
TIME
378.6 $
— $
9,225.8
259.7
424.3
219.9
—
—
—
93.2
5.6
1.7
1,282.5 $
— $
9,326.3
$
$
2015 Annual Report / Northern Trust Corporation
166
TABLE 140: AVERAGE RATES PAID ON INTEREST-RELATED DEPOSITS BY TYPE
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,
2015
0.06%
0.19
0.38
0.63
0.10
0.12
2014
0.07%
0.28
0.46
0.25
0.10
0.14
2013
0.07%
0.56
0.73
0.44
0.13
0.19
0.11%
0.13%
0.18%
Non-U.S. Operations (Based on Obligor’s Domicile)
See also Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and
Supplementary Data.”
TABLE 141: SELECTED AVERAGE ASSETS AND LIABILITIES ATTRIBUTABLE TO NON-U.S. OPERATIONS
(In Millions)
Total Assets
Time Deposits with Banks
Loans
Customers’ Acceptance Liability
Non-U.S. Investments
Total Liabilities
Deposits
Liability on Acceptances
2015
2014
2013
2012
$
29,411.2 $
28,072.8 $
29,315.6 $
29,237.4 $
13,712.9
1,759.4
—
8,590.8
54,521.0
52,981.2
—
16,106.9
1,490.2
—
6,446.5
52,123.3
49,854.7
—
17,785.5
1,164.0
0.5
5,334.1
48,144.4
45,865.7
0.5
18,580.4
1,091.1
0.7
4,470.4
43,436.7
41,160.9
0.7
2011
29,201.2
16,906.5
1,301.7
0.3
5,370.2
45,757.5
43,370.3
0.3
TABLE 142: PERCENT OF NON-U.S.-RELATED AVERAGE ASSETS AND LIABILITIES TO TOTAL CONSOLIDATED AVERAGE
ASSETS
Assets
Liabilities
2015
27%
49%
2014
27%
50%
2013
31%
51%
2012
31%
47%
2011
32%
50%
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 SEC. 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. 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.
2015 Annual Report / Northern Trust Corporation
167
The following table provides information on non-U.S. outstandings by country that exceed 1.00% of Northern Trust’s
assets.
TABLE 143: NON-U.S. OUTSTANDINGS
(In Millions)
AT DECEMBER 31, 2015
Canada
Japan
United Kingdom
AT DECEMBER 31, 2014
Canada
Australia
Singapore
Netherlands
Germany
AT DECEMBER 31, 2013
Canada
Singapore
Australia
BANKS
COMMERCIAL
AND OTHER
TOTAL
$
$
2,293 $
277 $
2,290
428
2,209 $
878
1,180
575
950
—
764
304 $
1,076
59
658
165
$
2,779 $
322 $
1,992
1,347
13
126
2,570
2,290
1,192
2,513
1,954
1,239
1,233
1,115
3,101
2,005
1,473
Countries whose aggregate outstandings totaled between 0.75% and 1.00% of total assets were as follows: Germany with aggregate outstandings of $1.1 billion, Singapore
with aggregate outstandings of $1.1 billion, Sweden with aggregate outstandings of $1.1 billion, France with aggregate outstandings of $1.0 billion, Switzerland with aggregate
outstandings of $976 million, Australia with aggregate outstandings of $962 million, Netherlands with aggregate outstandings of $943 million, and Finland with aggregate
outstandings of $925 million at December 31, 2015; Switzerland with aggregate outstandings of $879 million and Japan with aggregate outstandings of $859 million at
December 31, 2014; and France with aggregate outstandings of $820 million at December 31, 2013.
TABLE 144: PURCHASED FUNDS
Federal Funds Purchased
(Overnight Borrowings)
(In Millions)
Balance on December 31
Highest Month-End Balance
Year – Average Balance
– Average Rate
Average Rate at Year-End
Securities Sold under Agreements to Repurchase
(In Millions)
Balance on December 31
Highest Month-End Balance
Year – Average Balance
– Average Rate
Average Rate at Year-End
DECEMBER 31,
2015
2014
2013
$
351.5
$
932.9
$
982.2
823.6
0.08%
0.05%
3,371.7
1,892.2
0.07%
0.01%
DECEMBER 31,
2015
2014
$
546.6
$
885.1
$
802.4
649.5
0.05%
0.36%
1,038.1
989.6
0.04%
0.13%
965.1
2,547.5
2,255.5
0.07%
0.01%
2013
917.3
917.3
594.3
0.07%
0.01%
2015 Annual Report / Northern Trust Corporation
168
Other Borrowings
(Includes Treasury Investment Program Balances, Term Federal Funds Purchased and Other Short-Term Borrowings)
(In Millions)
Balance on December 31
Highest Month-End Balance
Year – Average Balance
– Average Rate
Average Rate at Year-End
Total Purchased Funds
(In Millions)
Balance on December 31
Year – Average Balance
– Average Rate
DECEMBER 31,
2015
2014
2013
$
4,055.1
$
1,685.2
$
4,123.2
3,284.9
0.15%
0.16%
2,307.8
1,617.3
0.21%
0.07%
DECEMBER 31,
2015
2014
$
4,953.2
$
3,503.2
$
4,757.9
0.13%
4,499.1
0.11%
1,558.6
2,065.3
1,804.9
0.19%
0.40%
2013
3,441.0
4,654.7
0.11%
2015 Annual Report / Northern Trust Corporation
169
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A – CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 31, 2015, 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, 2015, 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, 2015, 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, 2015, 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, 2015, 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, 2015.
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.
2015 Annual Report / Northern Trust Corporation
170
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF NORTHERN TRUST CORPORATION:
We have audited Northern Trust Corporation’s internal control over financial reporting as of December 31, 2015, 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, 2015, 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, 2015 and 2014,
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, 2015, and our report dated February 29, 2016 expressed
an unqualified opinion on those consolidated financial statements.
CHICAGO, ILLINOIS
FEBRUARY 29, 2016
2015 Annual Report / Northern Trust Corporation
171
ITEM 9B – OTHER INFORMATION
Not applicable.
PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2016 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,” “Board and Board Committee Information – Audit Committee” and “Board and Board
Committee Information – Committee Composition.”
ITEM 11 – EXECUTIVE COMPENSATION
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 2016 Annual Meeting of Stockholders.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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 2016 Annual Meeting of Stockholders.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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 2016 Annual Meeting of Stockholders.
ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
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 2016 Annual Meeting of Stockholders.
2015 Annual Report / Northern Trust Corporation
172
PART IV
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 15(a)(1) AND (2) – NORTHERN TRUST CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of the Corporation and its Subsidiaries included in Item 8, “Financial Statements and
Supplementary Data,” of this Annual Report on Form 10-K are incorporated herein by reference.
For Northern Trust Corporation and Subsidiaries:
Consolidated Balance Sheets - December 31, 2015 and 2014
Consolidated Statements of Income - Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows - Years Ended December 31, 2015, 2014, and 2013
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.
ITEM 15(a)(3) – EXHIBITS
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.
2015 Annual Report / Northern Trust Corporation
173
SIGNATURES
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 29, 2016
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/ Susan Crown
Susan Crown
/s/ Dean M. Harrison
Dean M. Harrison
/s/ Dipak C. Jain
Dipak C. Jain
/s/ Jose Luis Prado
Jose Luis Prado
/s/ Thomas E. Richards
Thomas E. Richards
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
2015 Annual Report / Northern Trust Corporation
174
/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.
/s/ Donald Thompson
Donald Thompson
/s/ Charles A. Tribbett, III
Charles A. Tribbett, III
Date: February 29, 2016
Director
Director
Director
Director
Director
2015 Annual Report / Northern Trust Corporation
175
EXHIBIT INDEX
Exhibit
Number
Description
3.1
3.2
3.3
4.1
4.2
10.1**
(i)**
(ii)**
10.2**
10.3**
(i)**
(ii)**
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 20, 2015).
Deposit Agreement, dated August 5, 2014, among 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).
Amendment Number Two, dated August 6, 2015 and effective January 1, 2015 (incorporated herein by
reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2015).
2015 Annual Report / Northern Trust Corporation
176
Exhibit
Number
10.4**
10.5**
10.6**
(i)**
(ii)**
(iii)**
Description
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).
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 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).
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).
(iv)**
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).
10.7**
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).
(i)**
(ii)**
Form of 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 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).
(iii)**
Form of 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).
(iv)**
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).
(v)**
(vi)**
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).
2015 Annual Report / Northern Trust Corporation
177
Exhibit
Number
(vii)**
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).
Description
(viii)**
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).
(ix)**
(x)**
(xi)**
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).
(xii)**
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).
(xiii)**
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).
(xiv)**
Terms and Conditions of 2016 Equity Awards under the Northern Trust Corporation 2012 Stock Plan.
10.8**
10.9**
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).
10.10**
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).
10.11**
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).
10.12**
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).
10.13**
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).
2015 Annual Report / Northern Trust Corporation
178
Exhibit
Number
10.14**
(i)**
(ii)**
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).
Description
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).
Amendment Number One to the 2012 Long Term Cash Incentive Plan, dated as of January 20, 2015
(incorporated herein by reference to Exhibit 10.14(ii) to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 2014).
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.
31.1
Rule 13a-14(a)/15d-14(a) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Rule 13a-14(a)/15d-14(a) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
101
Certifications 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.
Includes the following financial and related information from the Corporation’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL):
(i) the Consolidated Balance Sheets as of December 31, 2015 and 2014, (ii) the Consolidated Statements of
Income for the twelve months ended December 31, 2015, 2014 and 2013, (iii) the Consolidated Statements
of Comprehensive Income for the twelve months ended December 31, 2015, 2014 and 2013, (iv) the
Consolidated Statements of Changes in Stockholders’ Equity for the twelve months ended December 31,
2015, 2014 and 2013, (v) the Consolidated Statements of Cash Flows for the twelve months ended December
31, 2015, 2014 and 2013, and (vi) Notes to Consolidated Financial Statements.
** Indicates a management contract or a compensatory plan or agreement.
2015 Annual Report / Northern Trust Corporation
179
Exhibit 31.1
Certification of CEO Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Frederick H. Waddell, certify that:
I have reviewed this report on Form 10-K for the year ended December 31, 2015 of Northern Trust Corporation;
1.
2. 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;
3. 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;
4. 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 29, 2016
/s/ Frederick H. Waddell
Frederick H. Waddell
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of CFO Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, S. Biff Bowman, certify that:
I have reviewed this report on Form 10-K for the year ended December 31, 2015 of Northern Trust Corporation;
1.
2. 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;
3. 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;
4. 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 29, 2016
/s/ S. Biff Bowman
S. Biff Bowman
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
Certifications 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
In connection with the Annual Report of Northern Trust Corporation (the “Corporation”) on Form 10-K for the period ended
December 31, 2015 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 29, 2016
/s/ S. Biff Bowman
S. Biff Bowman
Chief Financial Officer
(Principal Financial Officer)
February 29, 2016
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
NORTHERN TRUST CORPORATION
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
Susan Crown
Chairman and Chief Executive Officer
Owl Creek Partners, LLC
Private equity firm
Chairman and Founder
Susan Crown Exchange Inc.
Social investment organization
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
Jose Luis Prado
Retired President
Quaker Oats North America, a division of PepsiCo, Inc.
Global food and beverage company
Thomas E. Richards
Chairman, President and Chief Executive Officer
CDW Corporation
Provider of integrated information technology solutions
in the United States, Canada and the United Kingdom
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
Donald Thompson
Retired President and Chief Executive Officer
McDonald’s Corporation
Global foodservice retailer
Charles A. Tribbett III
Managing Director
Russell Reynolds Associates
Global executive recruiting firm
Advisory Director
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
Katherine E. Nixon
Executive Vice President
Chief Investment Officer –
Wealth Management
Brian P. Ovaert
Executive Vice President
Enterprise Operations
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 – Institutional
David C. Wicks
Executive Vice President
Enterprise Operations
(Europe, Middle East and Africa)
SENIOR OFFICERS
NORTHERN TRUST CORPORATION
THE NORTHERN TRUST COMPANY
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
Wilson Leech
Executive Vice President
Corporate & Institutional Services
Europe, Middle East and Africa
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
Executive Vice President
Chief Capital Management Officer
Aileen B. Blake
Executive Vice President
Director, Planning & Strategy
David C. Blowers
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
Enterprise Partner Services
David W. Fox, Jr.
Executive Vice President
Global Family Office –
Wealth Management
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
Sheryl K. Muniz
Executive Vice President
Enterprise Operations
(North America)
Scott S. Murray
Executive Vice President
Chief Technology Officer
CORPORATE INFORMATION
CORPORATE INFORMATION
ANNUAL MEETING
The 2016 Annual Meeting of Stockholders will be held on
Tuesday, April 19, 2016, 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.
STOCK LISTING
The common stock of Northern Trust Corporation is
traded on the NASDAQ Global Select Market under the
symbol “NTRS”.
AVAILABLE INFORMATION
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.
STOCK TRANSFER AGENT, REGISTRAR,
AND DIVIDEND DISBURSING AGENT
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
INVESTOR RELATIONS
Please direct Investor Relations inquiries to:
Mark M. Bette, Senior Vice President, at
312-444-2301 or mark_bette@ntrs.com; or
Kelly K. Moen, Second Vice President, at
312-444-7214 or kelly_moen@ntrs.com.
NORTHERNTRUST.COM
Information about the Corporation, including financial
performance and products and services, is available on
Northern Trust’s website at northerntrust.com.
n o r t h e r n t r u s t . c o m
FOR THE YEAR ENDED DECEMBER 31 ($ IN MILLIONS)
Revenues (Fully Taxable Equivalent Basis)
$ 4,727.9
$ 4,360.6
2015
2014
PERCENT CHANGE*
CONSOLIDATED FINANCIAL HIGHLIGHTS
Net Income
Dividends Declared on Common Stock
Dividends Declared on Preferred Stock
Cash Dividends Declared per Common Share
PER COMMON SHARE
Net Income — Basic
Net Income — Diluted
Book Value — End of Period
Market Price — End of Period
AT YEAR-END ($ IN MILLIONS)
Earning Assets
Total Assets
Deposits
Stockholders’ Equity
AVERAGE BALANCES ($ 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
FINANCIAL RATIOS AND METRICS
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (Fully Taxable Equivalent Basis)
CAPITAL RATIOS
Common Equity Tier 1
Tier 1
Total
Tier 1 Leverage
Supplementary Leverage (c)
12.5
14.2
7.5
6.2
$ 4.03
$ 3.34
$ 106,848.9
116,749.6
96,868.9
8,705.9
$ 100,889.8
109,946.5
90,757.0
8,448.9
$ 102,249.8
$ 95,947.5
7 %
110,715.1
90,768.0
8,624.5
104,083.5
84,656.6
8,166.5
$ 6,072.1
$ 5,968.8
3,529.9
875.3
3,458.1
934.1
11.54 %
10.02 %
973.8
333.0
23.4
3.99
1.41
36.27
72.09
0.88
35.3
1.07
11.4
13.2
7.5
N/A
811.8
311.7
9.5
3.32
1.30
34.54
67.40
0.78
39.2
1.08
13.2
15.0
N/A
N/A
8 %
20
7
146
21 %
20
6 %
8
5
7
6
7
3
6
7
6
2 %
2
(6)
13.3
15.5
7.8
N/A
DECEMBER 31, 2015
DECEMBER 31, 2014
Advanced
Approach (a)
Standardized
Approach (b)
11.9 %
10.8 %
Advanced
Approach (a)
12.4 %
Standardized
Approach (b)
12.5 %
* Percentage change calculations are based on actual balances rather than the rounded amounts presented. (a) Effective with the second quarter of 2014, Northern Trust exited its parallel run. Accordingly,
the December 31, 2015, and 2014 capital balances and ratios are calculated in accordance with the Basel III Advanced Approach final rules released by the Federal Reserve Board on July 2, 2013. (b) In 2014,
Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated in accordance with the Basel III
Standardized Approach final rules. (c) Beginning with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective
January 1, 2018, the Corporation will be subject to a minimum supplementary leverage ratio of 3 percent.
NORTHERN TRUST
INSIDE CVR
PMS425
PG 2
120206
02.18.16
The 2015 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
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