NORTHERN TRUST
NORTHERN TRUST
ANNUAL REPORT TO
ANNUAL REPORT TO
SHAREHOLDERS
SHAREHOLDERS
2018
2018
At Northern Trust, we work with the world’s most
successful individuals, families, corporations and
institutions to transform their objectives into action
and help them reach their most ambitious goals.
Whatever their greater is, we’re ready to put our
strength, stability and expertise toward helping
them achieve it.
ACHIEVE GREATE R
C O N S O L I D A T E D F I N A N C I A L H I G H L I G H T S
2018
2017
PERCENT CHANGE1
For the Year Ended December 31 ($ in millions)
Revenues (Fully Taxable Equivalent Basis2)
Net Income
Dividends Declared on Common Stock
Dividends Declared on Preferred Stock
Per Common Share
Net Income — Basic
Net Income — Diluted
Cash Dividends Declared per Common Share
Book Value — End of Period
Market Price — End of Period
At Year-End ($ in millions)
Earning Assets
Total Assets
Deposits
Stockholders’ Equity
Average Balances ($ in millions)
Earning Assets
Total Assets
Deposits
Stockholders’ Equity
Client Assets at Year-End ($ in billions)
Assets Under Custody/Administration
Assets Under Custody
Global Custody Assets
Assets Under Management
$ 6,001.4
1,556.4
439.1
46.4
$ 5,421.1
1,199.0
372.5
49.8
$
6.68
6.64
1.94
43.95
83.59
$
4.95
4.92
1.60
41.28
99.89
$ 122,847.3
132,212.5
104,496.8
10,508.3
$ 129,656.6
138,590.5
112,390.8
10,216.2
$ 113,731.0
122,946.6
95,103.1
10,228.9
$ 111,178.3
119,607.4
96,504.8
9,980.6
$ 10,125.3
7,593.9
4,700.3
1,069.4
$ 10,722.6
8,084.6
4,937.6
1,161.0
Financial Ratios and Metrics
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (Fully Taxable Equivalent Basis2)
16.2 %
1.27
29.2
1.46
12.6 %
1.00
32.5
1.33
11 %
30
18
(7)
35 %
35
21
6
(16)
(5) %
(5)
(7)
3
2 %
3
(1)
2
(6) %
(6)
(5)
(8)
CAPITAL RATIOS
Common Equity Tier 1
Tier 1
Total
Tier 1 Leverage
Supplementary Leverage
DECEMBER 31, 2018
DECEMBER 31, 2017
Advanced
Approach
Standardized
Approach
Advanced
Approach
Standardized
Approach
13.7 %
15.0
16.9
8.0
7.0
12.9 %
14.1
16.1
8.0
N/A
13.5 %
14.8
16.7
7.8
6.8
12.6 %
13.8
15.8
7.8
N/A
1 Percentage change calculations are based on actual balances rather than the rounded amounts presented.
2 Revenues and Net Interest Margin are presented on a fully taxable equivalent basis, a non-generally accepted accounting principle financial measure that facilitates the analysis of asset yields.
To My Fellow
Shareholders:
It is an honor to write to you for the first
time as Chairman, President and Chief
Executive Officer of Northern Trust.
I am grateful for everything Rick
Waddell and his predecessors have
done to position the company
as one of the finest financial
institutions in the world.
We had another strong year strategically and
service and leading capabilities tailored to each
financially in 2018, adding to a track record of
client’s specific needs. By maintaining a strong,
solid performance over the long term. As I look
conservative financial profile, we also remain a
ahead, I am confident we will continue to create
reliable partner.
value for all of our stakeholders by relentlessly
pursuing our mission to be our clients’ most
trusted partner for wealth management, asset
servicing, asset management and other
financial services.
Our strategy starts with thoroughly understanding
clients and their goals. Our clients include
individuals, families, corporations and institutions
worldwide. Because each client’s goals are unique,
we combine technology, capabilities and talent to
We earn this trust by staying true to our fiduciary
deliver customized, yet scalable, solutions to meet
heritage and providing differentiated, exceptional
their specific needs.
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L E A D I N G P R O V I D E R
WEALTH
MANAGEMENT
ASSET
MANAGEMENT
FOR INDIVIDUALS,
FAMILIES, CORPORATIONS
AND INSTITUTIONS
ASSET
SERVICING
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TO OUR SHAREHOLDERS ENHANCING SERVICE EXCELLENCE
AND GROWTH
We continually invest meaningful resources to
improve the client experience and grow our business.
Our Wealth Management business is a leader in
holistic advice, particularly for ultra-high-net-worth
and family office clients that have more complex
requirements. We provide technology-enabled
financial planning, investment management, fiduciary,
banking, asset servicing and advisory solutions.
We recently expanded our offerings in alternatives
and analytics capabilities. Our ArcLine Alternatives
platform helps qualified investors take advantage
of select leading hedge and private market offerings.
We also introduced our new Anchor Analytics™
platform, which uses natural language processing and
artificial intelligence to help family offices intuitively
create custom reports on their most-complex data.
Our Corporate & Institutional Services business,
a global leader in asset servicing, continues to
sharpen its focus on the needs of sophisticated
global asset owners and aggregators. For example,
in 2018 we launched Front Office Solutions, a
“We are driven by the power of
purpose. Northern Trust’s Goals
Driven Wealth Management
methodology embraces collaboration
with clients and their advisors. Our
approach architects, integrates and
optimizes financial solutions across
banking, investment management,
planning, fiduciary, family business,
family office and other needs with
a multigenerational mindset. The
sum of the parts, coordinated in a
thoughtful, deliberate, methodical
and strategic manner, enables our
clients to Achieve Greater.”
Steven L. Fradkin
PRESIDENT
WEALTH MANAGEMENT
market-leading, end-to-end platform that integrates
WEALTH MANAGEMENT
data, streamlines operations and enables smarter
investment decisions across complex portfolios
of public and private assets. We remain ahead of
the curve in blockchain for private equity fund
administration, as demonstrated by the patents we
were awarded in 2018. We expanded our capital
markets solutions by introducing Integrated Trading
Solutions, designed to reduce client cost and risk
by seamlessly integrating trade execution, matching,
settlement and middle-office capabilities.
BEST PRIVATE BANK
FOR TECHNOLOGY
(NORTH AMERICA)
– FINANCIAL TIMES GROUP, 2018
BEST PRIVATE BANK
FOR FAMILY OFFICES
(GLOBAL)
– FINANCIAL TIMES GROUP, 2018
(2ND CONSECUTIVE YEAR)
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We also bolstered our foreign exchange
IMPROVING PRODUCTIVITY
capabilities with our acquisition of BEx and
a strategic partnership with Lumint; and
we drove innovation and differentiation
for our alternative fund services through
a partnership with Hazeltree.
Our Asset Management business remains
committed to constructing innovative and
efficient strategies that appropriately
compensate investors for risk. In Europe, where
demand for sustainable investing solutions
remains strong, we helped investors meet their
environmental, social and governance (ESG)
goals with new funds combining quantitative
active and ESG investment strategies. In the
U.S., where fixed income investors continue to
search for new sources of yield, we launched
an exchange traded fund that uses a
proprietary credit scoring model to help
identify and remove low-quality bond
issuers from the fund’s mix.
As always, a key component of our growth
comes from the significant investments
we make in our people. Knowing the most
successful businesses thrive by attracting
employees of diverse talent, cultures and
thought, we are redoubling efforts to improve
our inclusiveness. Notably, in 2018 Northern
Trust was selected for Bloomberg’s
first sector-neutral Gender-Equality Index,
which recognizes companies whose work
environments support gender balance
at all levels.
4 2018 Annual Report | Northern Trust Corporation
Improving our productivity allows us to enhance
our value proposition for clients as well as our
profitability. Through our “Value for Spend”
initiative launched at the end of 2017, we
continue to drive efficiency throughout the
company and remain on track to achieve
$250 million in expense run-rate savings by
2020. For example, we are deploying robotics,
utilizing sophisticated data analytics, refining
client interaction tools and designing a new
fund services platform to produce more
scalable growth.
FINANCIAL PERFORMANCE
Our financial model is aligned with our
business strategy. As a global financial institution,
our business is influenced by capital market
conditions, interest rates and currencies. While
we attempt to position the company for
changing conditions, our focus is on the organic
drivers of our financial performance. As a result,
we have defined three primary components
of our financial strategy: achieving growth,
improving productivity and profitability, and
increasing shareholder returns.
Our 2018 financial performance demonstrates
the excellent results we can achieve when our
strategy execution is buoyed by strong market
conditions and increasing interest rates.
Revenues grew 11 percent from $5.42 billion
to $6.00* billion, headlined by trust fee growth
of 9 percent and net interest income growth
TO OUR SHAREHOLDERS of 13 percent.* Each of our client-facing business
units experienced strong fee growth.
Net income for the year rose $357.4 million, or
30 percent, to $1.56 billion, and earnings per share
increased 35 percent to $6.64. Our return on equity
was 16.2 percent, exceeding our target range of
10 percent to 15 percent. The Federal Reserve Bank
did not object to our annual capital plan and our
common shareholders received $1.36 billion of
capital through dividends and share repurchases.
OUTLOOK
As we begin 2019, the U.S. economy continues its
pace of healthy growth. However, there are signs
that the recovery that commenced approximately
10 years ago is beginning to slow and there are
risks to the global economy. Uncertainty has
increased volatility in financial markets, which could
“Our clients are some of the most
sophisticated asset owners and
managers in the world and they
are constantly adapting to industry
challenges and opportunities. Our
goal is to drive operational alpha for
our clients by deploying advanced
technology, innovative products
and first-class service to meet their
evolving back-, middle- and front-
office needs. Understanding each
client’s business drivers is key to
helping them manage risk, control
cost, increase operational efficiency
and ultimately achieve superior
bottom-line investment performance.”
potentially impact performance in 2019. Regardless
Peter B. Cherecwich
of the environment, we remain steadfast in fulfilling
PRESIDENT
our client-focused mission and creating value for
CORPORATE &
INSTITUTIONAL SERVICES
all stakeholders.
GRATITUDE
Our employees deserve enormous credit for our
success. We thank our nearly 19,000 employees
CORPORATE & INSTITUTIONAL SERVICES
around the world for their dedication, expertise
and enthusiasm, and for the significant
contributions they make every day to our clients,
OUTSTANDING FUND
TECHNOLOGY INNOVATION
– GLOBAL CUSTODIAN’S INDUSTRY LEADERS
each other and the communities we serve.
AWARDS, 2018
PRIVATE EQUITY FUND
ADMINISTRATOR OF
THE YEAR
– GLOBAL INVESTOR/ISF AWARDS 2018
(2ND CONSECUTIVE YEAR)
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“We help investors around the
globe navigate dynamic market
environments so they can confidently
realize their long-term objectives.
We purposefully combine rigorous
capital markets research, expert
portfolio construction and
comprehensive risk management to
deliver efficient investment solutions.
Our fiduciary heritage guides our
principle-based culture and
collaborative service approach.
This yields unique insights and a
distinctive client experience.”
Shundrawn A. Thomas
PRESIDENT
ASSET MANAGEMENT
I am particularly fortunate to be a part of a talented and
experienced Management Group, with each executive
bringing a unique set of qualifications. Their strategic
leadership and partnership is immensely valuable in
our pursuit of excellence. In addition to my
appointment as Chairman, Joyce St. Clair and Tom
South recently assumed new roles, serving as our
Chief Human Resources Officer and Chief Information
Officer, respectively.
We are equally grateful for the guidance and oversight
provided by our Board of Directors. To add to our
strength, the Board recently appointed Marcy Klevorn,
Executive Vice President and President, Mobility, at Ford
Motor Company; and Siddharth “Bobby” Mehta, former
President and Chief Executive Officer of TransUnion,
as Directors of Northern Trust.
Finally, giving back to the communities we serve is
fundamental to our mission. Our charitable giving
across arts, education and social welfare continues to
address critical needs around the globe. Over the past
five years, Northern Trust donated more than 1 percent
of pre-tax earnings, or $84 million, to charitable causes
worldwide. In 2018, our employees invested their time
ASSET MANAGEMENT
as well, collectively volunteering more than 115,000
hours to charities.
WORLD’S 16TH LARGEST
INVESTMENT MANAGER†
– PENSIONS & INVESTMENTS, 2018
We deeply appreciate the trust our stakeholders place
in Northern Trust and we look forward to continuing
to create value for all of them in the years ahead.
DIVERSITY CHAMPION AWARD
Sincerely,
– 2018 RECIPIENT, INVESTMENT NEWS
Michael G. O’Grady
Chairman, President and Chief Executive Officer
6 2018 Annual Report | Northern Trust Corporation
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TO OUR SHAREHOLDERS TRANSITION
In January 2019, after 43 years of distinguished service,
Rick Waddell retired as Northern Trust’s Chairman, capping
a decade of unprecedented global growth for Northern Trust
during historically challenging market conditions.
During Rick’s tenure as CEO and then Chairman, the company
added 11 international markets and 6,000 employees, and
doubled assets under custody, net income and equity.
Rick’s sincere and passionate devotion to civic duty and
community prompted him to contribute generously of his
time and talents to many educational and charitable interests.
We extend our gratitude to Rick and his family for all they
have given Northern Trust. Their contributions have not only
positioned us for continued success, but have benefited our
employees, shareholders, clients and the communities we serve.
2018 Annual Report | Northern Trust Corporation 7
M A N A G E M E N T G R O U P
S T A N D I N G L E F T T O R I G H T
S E A T E D L E F T T O R I G H T
Teresa A. Parker
Executive Vice President
Corporate & Institutional Services
Europe, Middle East and Africa
Michael G. O’Grady
Chairman, President and
Chief Executive Officer
Shundrawn A. Thomas
President
Asset Management
S. Biff Bowman
Executive Vice President
Chief Financial Officer
Peter B. Cherecwich
President
Corporate & Institutional Services
Joyce M. St. Clair
Executive Vice President
Chief Human Resources Officer
Wilson Leech
Executive Vice President
Chief Risk Officer
8 2018 Annual Report | Northern Trust Corporation
Robert P. Browne
Executive Vice President
Chief Investment Officer
Thomas A. South
Executive Vice President
Chief Information Officer
Steven L. Fradkin
President
Wealth Management
Susan C. Levy
Executive Vice President
General Counsel and
Corporate Secretary
Northern Trust
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TO OUR SHAREHOLDERS Donald Thompson
Founder and
Chief Executive Officer
Cleveland Avenue, LLC
Food and beverage accelerator
and investment company
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
B O A R D O F D I R E C T O R S
Michael G. O’Grady
Chairman, President and
Chief Executive Officer
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
Jay L. Henderson
Retired Vice Chairman
Client Service
PricewaterhouseCoopers LLP
Professional services firm
Marcy S. Klevorn
Executive Vice President
and President, Mobility
Ford Motor Company
Global automaker
Siddharth N. (Bobby) Mehta
Retired President and
Chief Executive Officer
TransUnion
Global provider of
credit and information
management services
Jose Luis Prado
Chairman and
Chief Executive Officer
Evans Food Group, Ltd.
Global food company
Thomas E. Richards
Executive Chairman
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
Retired Chief Executive Officer
Molex LLC
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
2018 Annual Report | Northern Trust Corporation 9
* R evenues 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.
†T otal worldwide assets under management. Ranking is not indicative of future performance. Unless otherwise noted, ranking is
based on total worldwide assets under management of $961 billion as of December 31, 2017 by Pensions & Investments magazine’s
2018 Special Report on the Largest Money Managers.
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, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-36609
____________________________________________________________
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________________
Delaware
(State or other jurisdiction of incorporation or organization)
36-2723087
(I.R.S. Employer Identification No.)
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 every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes 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, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes No
The aggregate market value of the registrant’s common stock as of June 29, 2018 (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 29, 2018 as reported by The NASDAQ Stock Market LLC, held by non-affiliates was
approximately $22.8 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, 2019, 218,411,773 shares of common stock, $1.66 2/3 par value, were outstanding.
Portions of the registrant’s Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
NTAC:3NS-20
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
Form 10-K Summary
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
Signatures
Exhibit Index
Page
1
17
31
31
31
32
33
35
37
38
92
93
167
177
177
179
179
179
179
179
179
180
180
181
183
i 2018 Annual Report | Northern Trust Corporation
PART I
ITEM 1 – BUSINESS
Northern Trust Corporation
Northern Trust Corporation (Corporation) is a financial holding company that is a leading provider of wealth management,
asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The
Corporation 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 20 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-
Pacific region. At December 31, 2018, the Corporation had consolidated total assets of $132.2 billion and stockholders’
equity of $10.5 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, 2018, the Bank had consolidated assets of $131.7 billion and common bank equity
capital of $9.6 billion.
The Corporation expects that the Bank will continue in the foreseeable future to be the major source of the
Corporation’s consolidated assets, revenues, and net income. Except where the context otherwise requires, references to
“Northern Trust,” “we,” “us,” “our” or similar terms mean Northern Trust Corporation and its subsidiaries on a
consolidated basis.
Business Overview
Northern Trust focuses on managing and servicing client assets through its two client-focused reporting segments:
Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided
to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset
Management and certain other support functions are allocated fully to C&IS and Wealth Management. Northern Trust
reports certain income and expense items not allocated to C&IS and Wealth Management in a third reporting segment,
Treasury and Other.
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:
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, 2018, total C&IS assets under custody/administration, assets
under custody, and assets under management were $9.49 trillion, $6.97 trillion, and $790.8 billion, respectively.
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 assets under
custody/administration, assets under custody, and assets under management of $634.8 billion, $622.9 billion, and $278.6
billion, respectively, at December 31, 2018. 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.
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,
2018 Annual Report | Northern Trust Corporation 1
registered investment companies, exchange traded funds, non-U.S. collective investment funds, and unregistered private
investment funds. Asset Management’s capabilities include active and passive 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 $1.07 trillion in assets
as of December 31, 2018, including $790.8 billion for C&IS clients and $278.6 billion for Wealth Management clients.
Competition
Northern Trust faces intense competition in all aspects and areas of its business. Competition comes from both
regulated and unregulated 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, investment counseling firms, and various
financial technology companies, including software providers and data services 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 therefore 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.
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
2 2018 Annual Report | Northern Trust Corporation
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 eligible 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 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 as a swap dealer with the U.S. Commodity Futures Trading Commission (CFTC)
under the Commodity Exchange Act and is a member of the National Futures Association (NFA). As a provisionally
registered swap dealer, the Bank is subject to significant regulatory obligations regarding swap activity and the supervision,
examination and enforcement powers of the CFTC, NFA, and other regulators. Certain of the Corporation’s other affiliates
are registered with the CFTC as commodity trading advisors and commodity pool operators under the Commodity
Exchange Act, are members of the NFA, and are subject to that act and the associated rules and regulations of the CFTC
and NFA.
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) as a broker-dealer and an investment
adviser 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. Those
subsidiaries also act as investment advisers to various mutual funds, exchange-traded funds and hedge funds of funds that
are subject to regulation by the SEC under the Investment Company Act of 1940. Other subsidiaries are regulated by state
regulators in various states.
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 activities by the CFTC, and securities activities by
the SEC and state securities regulators.
A significant component of the functional regulation relates to the application of federal securities laws and SEC
oversight of some bank securities activities. Generally, banks may conduct securities activities without broker-dealer
registration only if the activities fall within a set of activity-based exemptions designed to allow banks to conduct only
those activities traditionally considered to be primarily banking or trust activities. Securities activities outside these
exemptions, as a practical matter, need to be conducted by a registered broker-dealer affiliate. The Investment Advisers Act
of 1940 requires the registration of any bank or separately identifiable division of the bank that acts as an investment
adviser to a registered investment company.
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.
2018 Annual Report | Northern Trust Corporation 3
THE DODD-FRANK ACT, AS AMENDED
The Dodd-Frank Act has had 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 U.S. financial system to be distributed among new and existing federal regulatory agencies,
including the U.S. Financial Stability Oversight Council, the Federal Reserve Board, and the FDIC. In May 2018, the U.S.
Congress passed, and the President signed, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the
“Regulatory Relief Act”), which revised parts of the Dodd-Frank Act and directed the Federal Reserve Board and other
federal regulators to revise parts of their regulations. The Federal Reserve Board has finalized or proposed some of the
regulatory changes required by the Regulatory Relief Act, but other required changes remain to be finalized and/or
proposed. The Corporation cannot predict what changes may occur to the Dodd-Frank Act as a result of the Regulatory
Relief Act or the ultimate effect such changes would have on the Corporation. The following items provide a brief
description of certain provisions of the Dodd-Frank Act, as amended, that currently are the 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, stress testing requirements, and aggregate credit exposure limits. 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”)
and aggregate credit exposure limits, 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
early remediation requirements that are required to be established under section 166 of the Dodd-Frank Act.
The Regulatory Relief Act immediately increased the threshold for imposing enhanced prudential standards on U.S.
bank holding companies from $50 billion to $100 billion in total consolidated assets. This threshold will further increase to
$250 billion in November 2019 for all U.S. bank holding companies, but the Federal Reserve Board retains the ability to
apply enhanced prudential standards to certain U.S. bank holding companies with between $100 billion and $250 billion in
total consolidated assets. To implement this change, in October 2018, the Federal Reserve Board proposed creating risk-
based categories of banking organizations, each of which would be subject to a tailored set of the enhanced prudential
standards. The Federal Reserve Board has indicated that, assuming it finalizes the October 2018 proposal without further
modification, the Corporation will be a Category II institution, which means that the Corporation would remain subject to
the existing enhanced prudential standards described above, but would not be subject to the total loss-absorbing capacity
requirement, capital surcharge, enhanced supplementary leverage ratio, or aggregate credit exposure limit that apply to
U.S. bank holding companies that are global systemically important bank holding companies. As of the date of this report,
the Federal Reserve Board has not finalized the October 2018 proposal and the Corporation cannot predict whether the
October 2018 proposal will be finalized and whether such finalization would alter the way in which the enhanced
prudential standards are applied to the Corporation.
Resolution Planning. As required by Section 165(d) of the Dodd-Frank Act, the Federal Reserve Board and the FDIC
jointly issued a final rule that requires 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 issued a final rule
(the “CIDI Resolution Plan Rule”) that requires 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
Regulatory Relief Act immediately raised the threshold for application of the resolution planning requirement to $100
billion, and this threshold will further increase to $250 billion in November 2019, although the Federal Reserve Board
retains the ability to apply enhanced prudential standards to certain U.S. bank holding companies with between $100
billion and $250 billion in total consolidated assets. The Federal Reserve Board and the FDIC have indicated that in light of
the Regulatory Relief Act, the agencies will publish proposals and solicit comment on revisions to the resolution planning
requirements. Until such time as the Federal Reserve Board and FDIC propose and finalize changes to the resolution
4 2018 Annual Report | Northern Trust Corporation
planning requirements, the Corporation and the Bank will be required to submit resolution plans pursuant to the existing
rules; provided, however, that the agencies have indicated that the Corporation is not required to submit a Section 165(d)
resolution plan before December 31, 2019 and the FDIC has indicated that the Bank is not required to submit an insured
depository institution resolution plan before July 1, 2020.
On March 24, 2017, the Federal Reserve Board and the FDIC provided joint written feedback to the Corporation
regarding the resolution plan submitted by the Corporation in December 2015 pursuant to Section 165(d) of the Dodd-
Frank Act (the “2015 165(d) Plan”). The joint written feedback identified certain “shortcomings” in the Corporation’s 2015
165(d) Plan. While the identification of these shortcomings is different from a determination that the plan is not “credible”,
the Corporation was required to address the shortcomings in a satisfactory manner in the Corporation’s resolution plan to
be submitted to the Federal Reserve Board and the FDIC by December 31, 2017. This plan was submitted on December 19,
2017 (the “2017 165(d) Plan”). If the Federal Reserve Board and the FDIC jointly decide that the 2017 165(d) Plan fails to
address the identified shortcomings in a satisfactory manner, then the Federal Reserve Board and the FDIC could jointly
determine that the 2017 165(d) Plan is not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy
Code. In the event of such a joint determination, 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.
To date, no formal written feedback or guidance has been received regarding the 2017 165(d) Plan. In addition, on June 27,
2018, the Bank submitted its resolution plan (the “2018 CIDI Plan”) to the FDIC under the CIDI Resolution Plan Rule. To
date, no formal written feedback or guidance has been received regarding the 2018 CIDI Plan.
Separately, 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
(since reincorporated as Northern Trust Global Services SE), a UK incorporated indirect subsidiary of the Bank, has been
established and will be reviewed at least annually. PRA guidance also requires institutions to produce resolution planning
information. In accordance with such guidance, a resolution pack for Northern Trust Global Services SE and the Bank’s
London branch has been prepared and such information will be reviewed every two years.
The Corporation and the Bank have and will continue to focus management attention and substantial resources to meet
U.S. and European regulatory expectations with respect to these resolution planning requirements.
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 an 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. 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 and appoint new ones; (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. Generally, 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. Northern Trust has conducted an
2018 Annual Report | Northern Trust Corporation 5
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.
In July 2018, the Federal Reserve Board and other federal regulatory agencies having oversight over the Volcker Rule
proposed amendments to the rule. The notice of proposed rulemaking contains certain revisions to the Volcker Rule’s
restrictions. Northern Trust is evaluating the proposal to determine the impact such proposal will have, if any, if it becomes
effective, but as of the date of this report, no final rule amendments have been issued. The full impact of the Volcker Rule
on Northern Trust ultimately will depend on the finalization of the July 2018 proposed amendments and 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 regulatory structure on the over-
the-counter derivatives market, including requirements for clearing, exchange trading, capital, margin, trade reporting, and
recordkeeping. Title VII also requires 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 has finalized most rules further defining
these registrant categories, while the SEC continues to draft rules related to security-based swaps. The CFTC’s Title VII
rules and regulations are applicable to the Bank’s activity as a swap dealer and include rules related to internal and external
business conduct standards, reporting and recordkeeping, mandatory clearing for certain swaps, and trade documentation
and confirmation requirements, and applied certain regulatory requirements to cross-border swap activities. In addition, the
Federal Reserve Board has finalized regulations applicable to the Bank regarding mandatory posting and collection of
margin by certain swap counterparties. The SEC’s rules related to security-based swaps are not currently applicable to the
Bank’s swap dealing activity and the Bank’s current trading activity does not mandate its regulation as a security-based
swap dealer. Northern Trust continues to monitor Title VII-related regulatory developments and will revise further its
operations and/or swaps compliance program as appropriate or required.
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 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 and
fund dividend payments. 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 (including any prospective dividend) 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
6 2018 Annual Report | Northern Trust Corporation
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 certain 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 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. 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.
On January 30, 2017, the Federal Reserve Board announced modifications to capital plan and stress testing rules.
Under the modified final rules, the qualitative assessment of CCAR was removed for bank holding companies with total
consolidated assets between $50 billion and $250 billion, irrespective of the amount of on-balance-sheet foreign exposure
held by such bank holding companies. As a result, capital plans submitted by the Corporation currently are no longer
subject to objection from the Federal Reserve Board on qualitative grounds. In lieu of the qualitative assessment of CCAR,
the Corporation is subject to a horizontal capital review (HCR), focusing on specific areas of capital planning, conducted as
part of the Federal Reserve Board’s normal supervisory process. Any supervisory findings resulting from the HCR are
addressed through supervisory communications. Capital plans submitted by the Corporation remain subject to objection
from the Federal Reserve Board on quantitative grounds.
The Corporation submitted its capital plan to the Federal Reserve Board in April 2018 as part of the Federal Reserve
Board’s 2018 CCAR exercise, and the Federal Reserve Board did not object to the Corporation’s plan. The Corporation
will submit its 2019 capital plan to the Federal Reserve Board by April 5, 2019. The Federal Reserve Board is expected to
publish either its objection or non-objection to the 2019 capital plan and proposed capital actions, such as dividend
payments and share repurchases, in mid-2019.
In addition to the CCAR stress testing requirements, Federal Reserve Board regulations include Dodd-Frank Act stress
tests (DFAST). 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 June 21, 2018, and the results of its company-run mid-cycle stress tests on October 31, 2018.
In April 2018, the Federal Reserve Board proposed revisions to the CCAR exercise and DFAST regulations that would
in part integrate the forward-looking stress test results with the non-stress capital requirements discussed below by using
the results of the annual supervisory stress test to set specific buffer requirements above minimum capital requirements,
which restrict capital distributions under the capital rule and establish a single approach to capital distribution limitations.
The April 2018 proposal also would replace the 2.5% capital conservation buffer requirement with a stress capital buffer
requirement and establish a stress leverage buffer requirement in addition to the minimum 4% Tier 1 leverage ratio
requirement. Under the April 2018 proposal, an institution would be required to maintain capital ratios above its minimum
plus its buffer requirements in order to avoid restrictions on its capital distributions and discretionary bonus payments. An
institution would be bound by the most stringent distribution limitations, if any, as determined by its capital conservation
buffer requirement, its stress leverage buffer requirement and, if applicable, its advanced approaches capital conservation
buffer requirement and enhanced supplementary leverage ratio standard.
2018 Annual Report | Northern Trust Corporation 7
The April 2018 proposal also would remove the stress testing assumption that an institution would make all planned
capital distributions over the planning horizon, including any planned common stock dividends and repurchases of
common stock. Instead, the stress buffer requirements would include only four quarters of planned common stock
dividends in order to preserve the incentives for an institution to engage in disciplined, forward-looking dividend planning.
Further, the April 2018 proposal would adjust the methodology used in the supervisory stress test to assume that the
institution takes actions to maintain a constant level of assets, including loans, trading assets, and securities over the
planning horizon and assume that the institution’s risk-weighted assets and leverage ratio denominator generally remain
unchanged over the planning horizon. The April 2018 proposal also would remove the quantitative objection in CCAR and
eliminate the 30 percent dividend payout ratio as a criterion for heightened scrutiny of an institution's capital plan. The
Federal Reserve Board would retain the CCAR qualitative supervisory review and the ability to object to an institution’s
capital plan on qualitative grounds based on the adequacy of the institution’s capital planning processes (qualitative
objection) for institutions supervised by the Large Institution Supervision Coordination Committee and other large and
complex institutions.
Separately, the Regulatory Relief Act immediately raised the threshold for application of DFAST regulations to $100
billion, and this threshold will further increase to $250 billion in November 2019. However, the Regulatory Relief Act did
not directly affect the CCAR exercise. In its October 2018 proposal described above, the Federal Reserve Board proposed
that the Corporation will be subject to the qualitative and quantitative assessments of the CCAR exercise and the DFAST
regulations, but did not address the April 2018 proposal. As of the date of this filing, the Federal Reserve Board has not
finalized the April 2018 or October 2018 proposals, and the Corporation cannot predict whether either proposal will be
finalized and whether such finalization would alter the way in which the CCAR exercise and DFAST regulations are
applied to the Corporation.
Additionally, on December 21, 2018, the Federal Reserve Board announced it will not incorporate the current expected
credit losses methodology (CECL) from Accounting Standards Update No. 2016-13 into its supervisory stress tests until at
least 2022 to reduce uncertainty, allow for better capital planning at affected firms, and allow the Federal Reserve Board to
gather additional information on the impact of CECL. The Federal Reserve Board will still require banking organizations
subject to company-run stress test requirements as part of the CCAR exercise to incorporate CECL into their internal stress
testing processes beginning in 2020.
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, 2018, 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.
8 2018 Annual Report | Northern Trust Corporation
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, 2018
COMMON EQUITY
TIER 1 CAPITAL
TIER 1 CAPITAL
TOTAL CAPITAL
TIER 1 LEVERAGE
SUPPLEMENTAR
Y 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 ratios, as
applicable
Northern Trust
Corporation
The Northern
Trust Company
13.7 %
12.9 %
15.0 %
14.1 %
16.9 %
16.1 %
8.0 %
14.1 %
13.1 %
14.1 %
13.1 %
15.8 %
14.8 %
7.3 %
4.5 %
4.5 %
6.0 %
6.0 %
8.0 %
8.0 %
4.0 %
8.0 %
7.3 %
4.0 %
N/A
N/A
6.0 %
6.0 %
10.0 %
10.0 %
N/A
N/A
6.5 %
6.5 %
8.0 %
8.0 %
10.0 %
10.0 %
5.0 %
5.0 %
7.0 %
6.4 %
3.0 %
N/A
3.0 %
In addition to the above, as of January 1 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 are subject to a minimum supplementary leverage ratio of 3.0%. Insured depository institutions that
are advanced approaches institutions, such as the Bank, also are 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. The minimum capital conservation buffer in 2018
was 1.875% and will increase to 2.5% for 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. The U.S. countercyclical buffer is currently set at 0%, and the Federal Reserve Board has indicated that
generally it will provide a 12-month phase-in of changes to the minimum required countercyclical buffer and use the notice
and comment process to communicate proposed changes to the public. Certain other jurisdictions in which the Corporation
has credit exposures currently have countercyclical buffers set at levels greater than 0%, slightly increasing the weighted
average countercyclical buffer to which the Corporation is subject.
On December 21, 2018, the Federal Reserve Board adopted a final rule that will permit banking organizations,
including the Corporation and the Bank, to elect to phase-in the day-one adverse effects of implementing CECL on
regulatory capital calculations over a three-year period. The final rule will take effect April 1, 2019, although CECL is not
required to be implemented by public companies until 2020.
As discussed above, in April 2018, the Federal Reserve Board proposed revisions to the Basel III rules that would in
part integrate the forward-looking stress test results with the non-stress capital requirements discussed in this section. If
implemented, the revisions would establish revised capital requirements for large banking organizations, such as the
Corporation, that are institution-specific and risk-sensitive. The April 2018 proposal would also modify several
assumptions in the CCAR exercise to align them better with an institution’s expected actions under stress. Separately, the
Regulatory Relief Act directed the Federal Reserve Board to revise the Basel III rules to provide relief from the
supplementary leverage ratio requirement for certain funds that are deposited with a central bank. Further, in October 2018,
the Federal Reserve Board proposed changes to the applicability thresholds for regulatory capital and liquidity
requirements for certain large U.S. banking organizations. At the same time, the Federal Reserve Board indicated that,
assuming it finalizes the proposal without further modification, the Corporation will be a Category II institution, meaning
that it will become subject to certain additional capital planning and liquidity reporting requirements. As of the date of this
2018 Annual Report | Northern Trust Corporation 9
report, the Federal Reserve Board has not finalized the April 2018 or October 2018 proposals or proposed rules to
implement the relief provided for in the Regulatory Relief Act. The Corporation cannot predict whether the April 2018 or
October 2018 proposals will be finalized, whether and when the rules to implement the relief provided for in the
Regulatory Relief Act will be proposed and finalized, and whether finalization of any proposal would alter the way in
which the Basel III rules are applied to the Corporation and Bank.
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 has been fully implemented since January 1, 2017. Northern Trust is required to
calculate its LCR on a daily basis and 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, which were to be implemented by the Federal Reserve Board as a minimum
standard by January 1, 2018. The Federal Reserve Board issued a proposal on May 3, 2016 to implement the NSFR and
revised aspects of that proposal in the two October 2018 proposals discussed above, but has not adopted a final rule.
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. The Board of Directors has approved a 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, the Federal Reserve Board has issued proposed rules to implement certain “early remediation
requirements” applicable to U.S. bank holding companies with total consolidated assets of $50 billion or more as required
under Section 166 of the Dodd-Frank Act. Similar to prompt corrective action, the early remediation requirements would
require institutions subject to the proposal to take increasingly stringent corrective measures as the institution’s financial
condition deteriorates. No final rule implementing Section 166 has been issued as of the date of this report, and the
thresholds at which such a final rule would apply have been raised by the Regulatory Relief Act and may be subject to
further rulemaking by the Federal Reserve Board.
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
10 2018 Annual Report | Northern Trust Corporation
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, but not limited to, standards for
conducting due diligence, 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 laws and related requirements is a common area of review for financial
regulators, and the Corporation’s and its subsidiaries’ failure to comply 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.
In May 2016, the Financial Crimes Enforcement Network (FinCEN) issued a new rule that requires certain financial
institutions, including the Bank, to obtain beneficial ownership information related to certain legal entity clients.
Compliance with the new rule has been required since May 2018. As part of its AML compliance program, Northern Trust
has implemented, and continues to maintain, processes and controls to comply with the new beneficial ownership
information collection rule.
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 business with certain prohibited parties and jurisdictions, 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, trafficking in narcotics, proliferating weapons of mass destruction or representing other threats to
national security, known as Specially Designated Nationals and Blocked Persons. If the Corporation or the Bank finds a
sanctioned name or jurisdiction on any transaction or account, the Corporation or the Bank must reject or block such
account or transaction as required, 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.
2018 Annual Report | Northern Trust Corporation 11
DEPOSIT INSURANCE AND ASSESSMENTS
The Bank accepts deposits, and eligible 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 March 2016, the FDIC finalized 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. This surcharge
assessment remained in effect until September 30, 2018, when the reserve ratio reached 1.35%. On December 22, 2017, the
Tax Cuts and Jobs Act was signed into law, placing new restrictions on insured depository institutions with total
consolidated assets of $10 billion or more, such as the Bank, with respect to the deduction of all or a portion of all of their
deposit insurance assessment payments as business expenses for federal taxation purposes. As a result of this tax law
change, the Bank is no longer able to deduct its FDIC deposit insurance assessment payments.
FIDUCIARY RULE
The U.S. Department of Labor issued a final regulation and related prohibited transaction exemptions, effective June 2017,
which significantly expanded the concept of “investment advice” for the purpose of determining fiduciary status to
employee benefits plans, plan participants, and individual retirement account (IRA) owners under ERISA and the Internal
Revenue Code (IRC). However, in June 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the final regulation,
and related prohibited transaction exemptions, and thus they are no longer in effect. In anticipation of the Fifth Circuit’s
action, the Department of Labor issued guidance in May 2018 stating that, pending the issuance of further regulations,
exemptions or administrative guidance, it will not pursue prohibited transaction claims against investment advice
fiduciaries who are working diligently and in good faith to comply with the “impartial conduct standards” set forth in the
vacated regulation for transactions that would have been exempted by the vacated prohibited transaction exemptions. The
Corporation is operating under the Department of Labor’s May 2018 guidance pending further developments.
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. Regulations adopted under the federal law set standards for
protecting the security, confidentiality and integrity of client information, and require notice of data breaches to regulators,
and in some cases, to clients.
Most states, the European Union (EU) and other non-U.S. jurisdictions also have adopted their own statutes and/or
regulations concerning financial privacy and security and requiring notification of data breaches. For example, a new
European data protection framework - the General Data Protection Regulation (GDPR) - was adopted on April 8, 2016, and
became effective in all European Economic Area (EEA) member states on May 25, 2018. GDPR is designed to harmonize
data privacy laws across the EEA, to protect EEA citizens’ data privacy and to reshape the way organizations across the
region approach data privacy. GDPR has extraterritorial effect as its scope includes all data controllers and processors
outside the EEA whose processing activities relate to the offering of goods or services to, or monitoring the behavior of,
EEA individuals. Organizations that violate certain provisions of GDPR could be fined up to €20 million or 4% of their
annual global turnover (i.e., revenue) for the preceding fiscal year, whichever is greater.
12 2018 Annual Report | Northern Trust Corporation
The Corporation has adopted and disseminated privacy policies, and communicates required information relating to
financial privacy and data security, in accordance with applicable law.
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 has led to enhanced enforcement of consumer financial protection laws.
NON-U.S. REGULATION
Northern Trust is subject to the laws and regulatory authorities of the jurisdictions in which its non-U.S. branches and
subsidiaries operate. For example, branches and subsidiaries conducting banking 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 EU and
the member states in which they are domiciled. Moreover, Northern Trust’s non-European branches and subsidiaries
conducting financial services activities also may be within the scope of these laws, given that some EU laws apply to the
wider EEA, which includes not only all EU member states but also the non-EU member states Iceland, Liechtenstein and
Norway, and because of increasing extraterritorial effect of European legislation.
The following items provide a brief description of certain recently implemented and in-progress regulatory changes in
the EU and UK relevant to the Corporation and its subsidiaries, in addition to the BRRD and GDPR discussed under “The
Dodd-Frank Act – Resolution Planning” and “Privacy and Security,” respectively, above.
Revised Capital Requirements Directive and revised Capital Requirements Regulation. The EU Capital
Requirements Directive of June 26, 2013 (CRD) and the EU Capital Requirements Regulation of June 26, 2013 (CRR)
govern the legal framework for banking regulation in the EU, including, among other things, own fund requirements. On
November 23, 2016, the EU Commission published a proposal for a revision of the CRD (CRD V) and the CRR (CRR II).
Formal adoption of CRD V and CRR II by the EU Parliament and European Council has not yet occurred. Further, CRD V
and CRR II currently contain mandates for the European Banking Authority (EBA) to produce a number of regulatory
technical standards (RTS) and implementing technical standards (ITS), which remain under development.
Central Securities Depositories Regulation. On September 17, 2014, the EU Central Securities Depositories
Regulation (CSDR) entered into force (subject to a number of transitional provisions). The CSDR aims principally to
ensure that transactions between buyers and sellers of dematerialized securities are settled in a safe and timely manner by
introducing common securities settlement standards across the EU. CSDR requires several “Level 2” (or implementing)
measures in order for its provisions to take effect fully. A number of these “Level 2” measures were published in 2017.
Most recently, on September 13, 2018, the EU Commission Delegated Regulation (EU) 2018/1229 supplementing the
CSDR with regard to technical standards on settlement discipline was published in the EU’s Official Journal. The
Delegated Regulation, which is expected to enter into force on September 14, 2020, sets out measures to prevent and
address failed settlements and encourage settlement discipline by monitoring failed settlements, collecting and distributing
cash penalties for failed settlements, and specifying the operational details of the buy-in process.
Securities Financing Transactions and Reuse of Collateral Regulation. On November 25, 2015, the EU adopted a
regulation on securities financing transactions and reuse of collateral (SFTR) as part of its approach to addressing shadow
banking. The regulation includes provisions for enhanced transparency and reporting of securities financing transactions.
The SFTR entered into force on January 12, 2016, subject to certain transitional provisions. SFTR requires adoption of
certain “Level 2” measures which are being finalized by relevant authorities.
UK Criminal Finances Act. On September 30, 2017, the UK Criminal Finances Act (CFA) entered into force. The
CFA has extra-territorial effect, introducing certain new corporate criminal offenses in circumstances where a corporate
entity or partnership (a “relevant body”) fails to prevent an “associated person” (broadly meaning an employee, agent or
2018 Annual Report | Northern Trust Corporation 13
person who performs services for or on behalf of the relevant body) from criminally facilitating the evasion of tax, whether
the tax evaded is owed (i) in the United Kingdom or (ii) in a foreign country if the relevant body has a nexus, or any
conduct constituting part of the foreign tax evasion facilitation offence takes place, in the United Kingdom. These
corporate offenses are strict liability offenses, such that in circumstances where an associated person of a relevant body
criminally facilitates the evasion of tax and such relevant body has failed to prevent the associated person from committing
such criminal facilitation of tax evasion, the relevant body will itself be guilty of a criminal offense carrying unlimited
fines, unless it can show that it put in place reasonable prevention procedures (or by showing that it was not reasonable in
all the circumstances to expect the relevant body to have any prevention procedures in place).
Benchmarks Regulation. On January 1, 2018, the EU Benchmarks Regulation (BMR) became applicable in all EU
member states, subject to certain transitional provisions. The principal objectives of the BMR are to restore investor
confidence in the accuracy, robustness and integrity of indices used as benchmarks in financial instruments and financial
contracts or to measure the performance of investment funds, and the benchmark-setting process itself. The BMR aims to
achieve these objectives by ensuring that benchmarks are not subject to conflicts of interest, are used appropriately, and
reflect the actual market or economic reality they are intended to measure.
Market in Financial Instruments Directive. On January 3, 2018, the recast Market in Financial Instruments Directive
(MiFID II) became applicable to investment services and activities in the EU. MiFID II, together with the Markets in
Financial Instruments Regulation (MiFIR I), repealed and recast the Markets in Financial Instruments Directive
(2004/39/EC) (MiFID). Going forward, MiFID II and MiFIR I form the EU legal framework governing the requirements
applicable to investment firms, trading venues, data reporting service providers and third-country firms providing
investment services or activities in the EU.
Money Market Funds Regulation. On June 30, 2017, an EU regulation on money market funds (MMFR) with a view
of making money market funds more resistant to crises and market turbulence was published. Subject to certain transitional
provisions, the MMFR became applicable on July 21, 2018 for new money market funds and January 21, 2019 for existing
money market funds. It will impose detailed rules relating to the investment policies, risk management and other
operational aspects of such funds. Further “Level 2” regulations containing the technical implementation of the MMFR
were published in 2018. Technical guidelines to clarify how to comply with certain reporting obligations under MMFR
remain under development.
European Deposit Insurance Scheme. On October 11, 2017, the EU Commission announced that it aims to complete
all parts of the European Banking Union by 2018. This will require, among other things, the creation of a single European
Deposit Insurance Scheme (EDIS), applying to deposit guarantee schemes (DGSs) in EU member states participating in the
single supervisory mechanism (SSM) and credit institutions in those member states. The EDIS will not directly affect
member states that are not participating in the SSM, such as the United Kingdom, meaning that the Financial Services
Compensation Scheme (FSCS), the UK DGS, will not be subject to the EDIS. The EU Council and Parliament continue to
consider the legislative proposal for the EDIS regulation, which was published by the EU Commission in November 2015.
The EU Commission proposed changes to its approach to the EDIS in its October 2017 communication on completing the
banking union but to date has not published any revisions to the text of the EDIS regulation to reflect these changes.
Fifth EU Money Laundering Directive. On July 9, 2018, the Fifth EU Money Laundering Directive (MLD5) entered
into force. MLD5 must be transposed into local law by EU member states by January 10, 2020 and introduces the
following key changes to the current EU AML regime: (i) EU member states must ensure that registers of ultimate
beneficial owners of companies and other legal entities become accessible to the general public; (ii) the current AML
regime is extended to additional service providers, such as electronic wallet providers, virtual currency exchange service
providers, and art dealers, and further specifications regarding the scope of application of MLD5 with respect to tax
advisors and estate agents are provided; (iii) the threshold for identifying holders of prepaid cards is lowered to €150; and
(iv) EU member states will be required to implement enhanced due diligence measures to monitor suspicious transactions
involving high-risk countries more strictly.
In addition to the above, 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, 2018, each of our non-U.S.
banking subsidiaries had capital ratios above their specified minimum requirements.
Staff
Northern Trust employed approximately 18,800 full-time equivalent staff members as of December 31, 2018.
14 2018 Annual Report | Northern Trust Corporation
Available Information
Through the Corporation’s website at www.northerntrust.com, the Corporation 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, 2018,
2017 and 2016.
• Changes in Net Interest Income for the years ended December 31, 2018 and 2017.
• Remaining Maturity and Average Yield of Debt Securities Held to Maturity and Available for Sale as of December 31,
2018.
• Remaining Maturity of Selected Loans and Leases as of December 31, 2018.
• Distribution of Non-U.S. Loans by Type as of December 31, 2018, 2017, 2016, 2015 and 2014.
• Allowance for Credit Losses Relating to Non-U.S. Operations for the years ended December 31, 2018, 2017, 2016,
2015 and 2014.
• Analysis of Allowance for Credit Losses for the years ended December 31, 2018, 2017, 2016, 2015 and 2014.
• Average Deposits by Type as of December 31, 2018, 2017 and 2016.
• Distribution of Non-U.S. Deposits by Type as of December 31, 2018, 2017 and 2016.
• Remaining Maturity of Time Deposits $100,000 or More as of December 31, 2018.
• Average Rates Paid on Interest-Related Deposits by Type for the years ended December 31, 2018, 2017 and 2016.
• Selected Average Assets and Liabilities Attributable to Non-U.S. Operations for the years ended December 31, 2018,
2017, 2016, 2015 and 2014.
• Percent of Non-U.S.-Related Average Assets and Liabilities to Total Consolidated Average Assets for the years ended
December 31, 2018, 2017, 2016, 2015 and 2014.
• Non-U.S. Outstandings as of December 31, 2018, 2017 and 2016.
• Purchased Funds as of December 31, 2018, 2017 and 2016.
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 Portfolio” 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 debt securities as of
December 31, 2018, 2017 and 2016.
• The “Composition of Loan Portfolio” table (Item 7) provides loans and leases by type as of December 31, 2018, 2017,
2016, 2015 and 2014.
• The “Nonperforming Assets” table (Item 7) provides information about the Corporation’s nonaccrual, past due and
restructured loans receivable as of December 31, 2018, 2017, 2016, 2015 and 2014.
• The “Commercial Real Estate Loans” table (Item 7) provides details of loan concentrations as of December 31, 2018
and 2017.
• 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 and Provision 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 as of December 31, 2018 and 2017.
• 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 is 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.”
2018 Annual Report | Northern Trust Corporation 15
• Note 1, “Summary of Significant Accounting Policies”:
• H. Loans and Leases.
•
I. Allowance for Credit Losses.
• L. Other Real Estate Owned (OREO).
• Note 6, “Loans and Leases.”
• Note 7, “Allowance for Credit Losses.”
• Note 8, “Concentrations of Credit Risk.”
• Note 28, “Off-Balance-Sheet Financial Instruments.”
16 2018 Annual Report | Northern Trust Corporation
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 cost 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
We are dependent on fee-based business for a majority of our revenues, which may be affected adversely by market
volatility, a downturn in economic conditions, underperformance and/or negative trends in investment preferences.
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, a downturn in economic conditions, underperformance and/or negative trends in
investment preferences. For example, downturns in equity markets and decreases in the value of debt-related investments
resulting from market disruption, illiquidity or other factors historically have 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.
Our earnings also may be affected by poor investment returns or changes in investment preferences driven by factors
beyond market volatility or weak economic conditions. For example, poor investment performance in funds or client
accounts that we manage or in investment products that we design or provide that is due to underperformance relative to
our competitors or benchmarks could result in declines in the market values of portfolios that we manage and/or administer
and may affect our ability to retain existing assets and to attract new clients or additional assets from existing
clients. Further, broader changes in investment preferences that lead to less investment in mutual funds or other collective
funds, such as the recent shift in investor preference to lower fee products, could impact our earnings negatively.
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 has
raised the target Federal Funds rate range in recent years, interest rates generally remain low relative to historical levels.
Low interest rate environments have had in the past, and may have in the future, 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. Low interest rate environments also have historically had a negative impact on our fees earned on
certain of our products. For example, in the past, we have from time to time waived certain fees associated with money
market mutual funds due to short-term interest rate levels. While we did not implement any such fee waivers in 2018, we
may do so in the future if short-term interest rate levels decline. Low net interest margins and fee waivers each negatively
impact our earnings.
Conversely, a continued rise in interest rates also may affect us negatively. For example, we may be impacted
negatively if such an increase were to cause: market volatility and downturns in equity markets, resulting in a decrease in
the valuations of the assets we manage or service for others, which generally impact our earnings negatively; 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
2018 Annual Report | Northern Trust Corporation 17
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.
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.
The ultimate impact on us of the United Kingdom’s referendum regarding whether to remain part of the European
Union remains uncertain.
In June 2016, United Kingdom (UK) voters approved a departure from the European Union (EU), commonly referred to as
“Brexit.” In March 2017, the UK delivered a formal notice of withdrawal to the EU. The terms of the withdrawal are
subject to a negotiation period expected to last at least two years from the withdrawal notification date and such negotiation
period likely will be followed by additional negotiations between the EU and the UK concerning future relations between
the parties. On December 8, 2018, the UK and EU jointly published the terms of a withdrawal agreement, which to date
has failed to generate the support of the UK Parliament, and a non-binding statement on future relations. The ultimate
impact of Brexit on the Corporation and the Bank remains uncertain and will depend on the final terms of withdrawal and
the post-Brexit relationships between the UK and other EU nations. Further, such impact may be more pronounced if the
withdrawal were to occur without a transition agreement in place between the UK and the EU. Brexit has contributed, and
may continue to contribute, to market volatility, particularly the valuation of the Euro and British pound, and could have
significant adverse effects on our businesses, financial condition and results of operations. Additionally, certain of our EU
operations are conducted through subsidiaries located in the UK, leveraging the EU financial services “passport,” which
permits activities throughout the single EU market without needing to obtain local authorizations. In conjunction with our
Brexit-related preparations, and to mitigate the potential risk that our UK subsidiaries will be unable to retain their EU
financial services “passports,” we have taken steps to implement certain changes to our organizational structure, including
the establishment of an EU-domiciled credit institution in Luxembourg. We have incurred, and may in the future continue
to incur, additional costs associated with such measures and unforeseen political, regulatory, or other developments related
to Brexit, or operational issues associated with the organizational restructuring related thereto, also may result in additional
costs and disruption to our EU banking business.
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 of and default on consumer debt, and home prices. Economic challenges faced in various foreign
markets, including negative interest rates in some jurisdictions, 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
18 2018 Annual Report | Northern Trust Corporation
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
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 market volatility and illiquidity and lack of reliable
pricing from third-party vendors;
2018 Annual Report | Northern Trust Corporation 19
• 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, pandemics, 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 these risks effectively. We also 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 for our role as a major
financial institution. Nonetheless, if we fail to provide 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 and confidential information, and security breaches, including cyber-attacks,
could expose us to a risk of theft, loss or other misappropriation of this information. Our security measures may be
breached due to the actions of outside parties, employee error, failure of our controls with respect to granting access to our
systems, malfeasance or otherwise, and, as a result, an unauthorized party may obtain access to our or our clients’
proprietary and confidential information, resulting in theft, loss or other misappropriation of this information. Regulators
globally are also introducing the potential for greater monetary fines on institutions that suffer from breaches leading to the
theft, loss or other misappropriation of such information. For example, the General Data Protection Regulation (GDPR),
which was adopted by the EU in 2016 and became effective in May 2018, establishes new requirements regarding the
handling of personal information. Noncompliance with the GDPR may result in monetary penalties of up to 4% of
worldwide revenue. The GDPR and other changes in laws or regulations associated with the enhanced protection of
personal and other types of information could greatly increase the size of potential fines related to the protection of such
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 hackers, terrorists,
organized crime and other external parties, including foreign state actors. If we fail to continue to upgrade our technology
infrastructure to ensure effective cyber-security relative to the type, size and complexity of our operations, we could
become more vulnerable to cyber-attack and, consequently, subject to significant regulatory penalties. Additionally, 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,
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 information, and
reputational harm. Although we have not to our knowledge 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, to implement adequate
preventative measures, or to address them until they are discovered. We expect to continue to face increasing cyber-threats,
20 2018 Annual Report | Northern Trust Corporation
including computer viruses, ransomware and other 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. A breach of our security also may affect adversely our
ability to effect transactions, service our clients, manage our exposure to risk or expand our business. An event that results
in the loss of information also may require us to reconstruct lost data or reimburse clients for data and credit monitoring
services, which could be costly and have a negative impact on our business and reputation.
Further, even if not directed at us, attacks on financial or other institutions important to the overall functioning of the
financial system or on our counterparties could affect, directly or indirectly, aspects of our business.
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, and the need to update frequently our technology infrastructure, 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.
Upgrading, replacing, and modernizing 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 those offered by our competitors, inhibit our ability to meet regulatory requirements or
otherwise have a material adverse effect on our operations.
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.
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
2018 Annual Report | Northern Trust Corporation 21
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 U.S. and non-U.S. 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 34% of our revenue in 2018. 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. Moreover, the regulatory and supervisory standards and expectations in one jurisdiction may not conform with
standards or expectations in other jurisdictions. Even within a particular jurisdiction, the standards and expectations of
multiple supervisory agencies exercising authority over our affairs may not be harmonized fully. Accordingly, 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 geographic diversity of our
operations, employees, clients and customers, as well as the vendors and other third parties with whom we deal, presents
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.
22 2018 Annual Report | Northern Trust Corporation
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. In
October 2017, we announced our “Value for Spend” expense management initiative, through which we intend to realize
$250 million in expense run-rate savings by 2020 through improved organizational alignment, process optimization and
strategic sourcing. Although we have made progress toward achieving this level of expense run-rate savings, we cannot
provide assurance that the overall “Value for Spend” initiative will be successful, nor can we predict its overall effect on
our financial condition or results of operations.
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, 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.
Market volatility and/or weak 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 market volatility and/or 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 market volatility and/or weakened
economic conditions could impact the borrowers’ abilities to repay outstanding loans, which could in turn impact our
financial condition and results of operations negatively.
2018 Annual Report | Northern Trust Corporation 23
The failure or perceived weakness 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. Further, the
consolidation of financial service firms and the failures of other financial institutions has in the past, and may in the future
increase the concentration of our counterparty risk. These risks are heightened by the fact that our operating model relies
on the use of unaffiliated sub-custodians to a greater degree than certain of our competitors that have banking operations in
more jurisdictions than we do. 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, financial condition and results of operations.
Changes in the method pursuant to which the London Interbank Offered Rate (LIBOR) or other interest rate
benchmarks are determined could adversely impact our business and results of operations.
Many financial markets currently rely on interbank offered rates (each, an IBOR) as mutually agreed upon reference rates
serving as the basis for the pricing and valuation of assets, trading positions, loans and other financial transactions.
Following historical concerns about attempted manipulation of IBOR levels, as well as a potential lack of liquidity in the
underlying activity that contributes to an IBOR setting, global regulators have signaled interest in replacing existing IBOR
rates with alternative reference rates. While there are multiple IBORs, LIBOR is the most widely used interest rate
benchmark in the world and serves as the reference rate for our floating-rate funding, certain of the products that we own or
offer, various lending and securities transactions in which we are involved, and many derivatives that we use to manage our
or our clients’ risk. LIBOR has been the subject of recent national and international regulatory guidance and proposals for
reform. The United Kingdom Financial Conduct Authority, which regulates the process for establishing LIBOR, announced
in July 2017 that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the
administrator of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis
cannot be guaranteed after 2021. At this time, it is not possible to predict the effect that these developments, any
discontinuance, modification or other reforms to LIBOR or any other interest rate benchmarks, or the establishment of
alternative reference rates may have on LIBOR or other interest rate benchmarks. Any change in the availability or
calculation of LIBOR or other interest rate benchmarks may affect adversely the cost or availability of floating-rate
funding; the yield on loans or securities held by us; the amounts received and paid on derivative instruments we have
entered into; the value of loans, securities, or derivative instruments held by us or our clients, which, in the case of assets
held by our clients, could also negatively impact the amount of fees we earn in relation to such assets; the trading market
for securities based on LIBOR or other benchmarks; the terms of new loans being made using different or modified
reference rates; or our ability to use derivative instruments to manage risk effectively. Further, the potential transition away
from the use of LIBOR or other interest rate benchmarks, or uncertainty related to any such potential transition, may cause
us to recognize additional costs or experience operational disruptions, which may negatively impact our business, financial
condition or results of operations.
Liquidity Risks
If we do not manage our liquidity effectively, 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 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. Further evolution in the
regulatory requirements relating to liquidity and risk management also may impact us negatively. Additional regulations
may 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,” of
24 2018 Annual Report | Northern Trust Corporation
this Annual Report on Form 10-K. 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,” of this Annual Report on Form 10-K.
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
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.
2018 Annual Report | Northern Trust Corporation 25
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 and subject to evolving laws and regulations regarding privacy and data protection, including
the GDPR. 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, changes in laws or 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, as amended by the Economic Growth, Regulatory Relief, and
Consumer Protection Act, may have a material effect on our operations.
The Dodd-Frank Act became law in July 2010 and has had a significant impact on the regulatory and compliance structure
in which we operate. In February 2017, an executive order was issued by the President (i) establishing core principles for
regulating the U.S. financial system and (ii) instructing the U.S. Secretary of the Treasury to consult with heads of the
member agencies of the U.S. Financial Stability Oversight Council and to issue reports that identify laws, regulations, and
policies, including those implemented under the Dodd-Frank Act, that inhibit federal regulation of the U.S. financial
system in a manner consistent with the core principles. The required reports were issued in 2017 and 2018, and further
action may be taken in the future regarding the reports’ recommendations. In May 2018, Congress passed, and the
President signed into law, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), containing
significant amendments to the Dodd-Frank Act and requiring the Federal Reserve Board and other regulatory agencies to
adopt various implementing regulations. While some of the implementing regulations have been finalized, others remain
subject to further regulatory action, and there remains uncertainty surrounding the manner in which certain of the existing
provisions will be implemented by the various regulatory agencies. These legislative and regulatory 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, and any further changes to or resulting from the Dodd-Frank Act and the
EGRRCPA may impact the profitability of our business activities, require changes to certain of our business practices, or
otherwise affect our business adversely.
Failure to address shortcomings identified by regulators in our 2015 resolution plan could result in restrictions or
directives that restrict our ability to grow or even conduct our business.
Section 165(d) of the Dodd-Frank Act and implementing regulations jointly issued by the Federal Reserve Board and the
FDIC require bank holding companies with at least $50 billion in assets, which includes the Corporation, to submit
annually a resolution plan to the Federal Reserve Board and the FDIC detailing the bank holding company’s plan for rapid
and orderly resolution in the event of material financial distress or failure. If the regulators jointly determine that our
resolution plan is not “credible” or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, 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. On March 24, 2017, the Federal Reserve Board and the
FDIC jointly identified certain “shortcomings” in the resolution plan submitted by the Corporation in December 2015.
While the identification of shortcomings is different from a determination that the plan is not credible, the Corporation was
required to address satisfactorily the identified shortcomings in the Corporation’s resolution plan submitted to the Federal
Reserve Board and the FDIC on December 19, 2017, with respect to which the Corporation has not yet received formal
regulatory feedback. If the Federal Reserve Board and the FDIC jointly decide that the Corporation’s 2017 resolution plan
fails to address the identified shortcomings in a satisfactory manner, then the Federal Reserve Board and the FDIC could
jointly determine that the 2017 resolution plan is not credible or would not facilitate an orderly resolution under the U.S.
Bankruptcy Code, and could subject us to the measures described above.
26 2018 Annual Report | Northern Trust Corporation
Changes by the U.S. and other governments to policies involving 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
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. We cannot currently predict the impact, if any, of these
changes to our business. Additionally, governments and regulators may take actions that increase intervention 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. Any
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 legislative or regulatory changes and the extent of
regulatory activity 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 an important part of our business. 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.
2018 Annual Report | Northern Trust Corporation 27
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,
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. Pricing pressures, as a result of
the willingness of competitors to offer comparable or improved products or services at a lower price, also may result in a
reduction in the price we can charge for our products and services, which could have, and in some cases has had, 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.
The failure to meet client expectations or fiduciary or other obligations, operational failures, litigation, regulatory actions
or fines, the purported actions of our affiliates, vendors or other third parties with which we do business, the purported
actions or statements of our employees or adverse publicity could materially and adversely affect our reputation as well as
our ability to attract and retain clients or key employees. Damage to our reputation for delivery of a high level of service
could undermine the confidence of clients and prospects in our ability to serve them and accordingly affect our earnings
negatively. Damage to our reputation also could affect the confidence of rating agencies, regulators, stockholders and other
28 2018 Annual Report | Northern Trust Corporation
parties in a wide range of transactions that are important to our business and the performance of our common stock. Failure
to maintain our reputation ultimately would have an adverse effect on our ability to manage our balance sheet or grow our
business. 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, whereas negative public opinion once was driven
primarily by adverse news coverage in traditional media, the proliferation of social media channels 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, including through the rapid dissemination of inaccurate, misleading or false information, which could harm our
reputation or have other negative consequences.
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, particularly in light of the current “FinTech” environment, in which financial institutions are
investing significantly in evaluating new technologies, such as blockchain and other distributed ledger technologies, and
developing potentially industry-changing new products, services and industry standards. Our 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. Our 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 to our success. 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, including an increased risk that new and emerging technologies may expose us to increased cybersecurity and other
information technology threats. 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.
2018 Annual Report | Northern Trust Corporation 29
We may take actions to maintain client satisfaction that result in losses or reduced earnings.
We may take action or incur expenses in order to maintain client satisfaction or preserve the usefulness of investments or
investment vehicles we manage in light of changes in security ratings, liquidity or valuation issues or other developments,
even though we are not required to do so by law or the terms of governing instruments. The risk that we will decide to take
actions to maintain client satisfaction that result in losses or reduced earnings is greater in periods when credit or equity
markets are deteriorating in value or are particularly volatile and liquidity in markets is disrupted.
Other Risks
Changes in tax laws and interpretations and tax challenges may affect our earnings negatively.
Both U.S. and non-U.S. governments and tax authorities, including states and municipalities, 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 affects our earnings negatively.
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the Act) was signed into law. The Act introduced a
number of changes in then-existing tax law impacting businesses including, among other things, a reduction in the
corporate income tax rate from 35% to 21%, disallowance of certain deductions that had previously been allowed,
limitations on interest deductions, alteration of the expensing of capital expenditures, adoption of a territorial tax system,
assessment of a repatriation tax or “toll-charge” on undistributed earnings and profits of U.S.-owned foreign corporations,
and introduction of certain anti-base erosion provisions. In the fourth quarter of 2017, we recognized a net tax benefit of
$53.1 million associated with the Act. In conjunction with the issuance by the IRS of additional guidance with respect to
the Act and certain additional analyses conducted by the Corporation, we also recognized an additional $4.8 million of net
income tax benefits in 2018 related to the Act. The ultimate impact of the Act on our financial condition and results of
operations in 2018 and future years remains uncertain and may differ materially from our expectations due to the issuance
of technical guidance regarding elements of the Act, changes in interpretations and assumptions we have made with respect
to the Act, and changes to the competitive landscape in which we operate and other factors.
In the course of our business, we are sometimes subject to challenges from U.S. and non-U.S. tax authorities,
including states and municipalities, 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 as to which the Federal Reserve Board has not objected. There can be no assurance that the Federal Reserve Board
will not object 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
30 2018 Annual Report | Northern Trust Corporation
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 on our Series C Non-Cumulative Perpetual Preferred Stock (Series C preferred stock)
and Series D Non-Cumulative Perpetual Preferred Stock (Series D preferred stock). Further, in the future if we default on
certain of our outstanding debt 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,” of this Annual Report on Form 10-K.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
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 20 U.S. states and Washington, D.C., and
across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. The majority of those offices are
leased. The Bank’s other primary U.S. operations are located in six facilities: a leased facility at 801 South Canal Street in
Chicago; a leased facility at 231 South La Salle Street in Chicago; a leased facility in Tempe, Arizona; and three 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 three facilities in Bangalore, two facilities in Limerick, as well as one facility in each of Manila and Pune,
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 25, “Contingent Liabilities,” included under
Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K is incorporated herein by
reference.
2018 Annual Report | Northern Trust Corporation 31
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
32 2018 Annual Report | Northern Trust Corporation
SUPPLEMENTAL ITEM – EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with regard to each executive officer of the Corporation.
Michael G. O’Grady - Mr. O’Grady, age 53, joined Northern Trust in 2011 and has served as Chairman of the Board
since January 2019, Chief Executive Officer since January 2018 and as President since January 2017. Prior to that, Mr.
O’Grady served as Executive Vice President and President of Corporate & Institutional Services from 2014 to 2016 and 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.
Aileen B. Blake - Ms. Blake, age 51, joined Northern Trust in 2004 and has served as Executive Vice President and
Controller since May 2017. Prior to that, Ms. Blake served as Executive Vice President and Director of Financial Planning
and Strategy from February 2016 to May 2017 and as Head of Enterprise Productivity from 2011 to February 2016. She
also previously served as Controller from 2004 to 2011.
S. Biff Bowman - Mr. Bowman, age 55, joined Northern Trust in 1985 and has served as Executive Vice President and
Chief Financial Officer since 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 53, 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 54, joined Northern Trust in 2007 and has served as Executive Vice
President and President of Corporate & Institutional Services since February 2017. Prior to that, Mr. Cherecwich served as
Executive Vice President and President of Global Fund Services from 2010 to 2017 and as Chief Operating Officer of
Corporate & Institutional Services from 2008 to 2014. From 2007 to 2008, he served as Head of Institutional Strategy &
Product Development. Before joining Northern Trust, Mr. Cherecwich served in several executive and operational roles at
State Street Corporation.
Steven L. Fradkin - Mr. Fradkin, age 57, 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.
Wilson Leech - Mr. Leech, age 57, joined Northern Trust in 2004 and has served as Executive Vice President and
Chief Risk Officer since February 2017. Prior to that Mr. Leech served as Executive Vice President, Corporate &
Institutional Services for Europe, Middle East and Africa from 2010 to 2017 and as Head of Global Fund Services from
2005 to 2010. From 2004 to 2005, he served as Chief Financial Officer for Europe, Middle East and Africa and Asia
Pacific. 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 61, joined Northern Trust in 2014 and has served as Executive Vice President and
General Counsel since that time and as Corporate Secretary since October 2018. 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.
Teresa A. Parker - Ms. Parker, age 58, joined Northern Trust in 1982 and has served as Executive Vice President and
President of Corporate & Institutional Services for Europe, Middle East and Africa since June 2017. Prior to that, Ms.
Parker served as Chief Operating Officer of Corporate & Institutional Services from 2014 to 2017. From 2009 to 2014, she
served as Executive Vice President, Corporate & Institutional Services for Asia Pacific.
Thomas A. South - Mr. South, age 49, joined Northern Trust in 1999 and has served as Executive Vice President and
Chief Information Officer since September 2018. Prior to that, Mr. South served as Chief Business Architect from 2014 to
2018 and as Chief Operating Officer for Operations & Technology from 2013 to 2014.
2018 Annual Report | Northern Trust Corporation 33
Joyce M. St. Clair - Ms. St. Clair, age 59, joined Northern Trust in 1992 and has served as Executive Vice President
and Chief Human Resources Officer since July 2018. Prior to that, Ms. St. Clair served as Executive Vice President and
Chief Capital Management Officer from 2015 to 2018, as President of Enterprise Operations from 2014 to 2015, as
President of Operations & Technology from 2011 to 2014, and as Chief Risk Officer from 2007 to 2011.
Shundrawn A. Thomas - Mr. Thomas, age 45, joined Northern Trust in 2004 and has served as Executive Vice
President and President of Asset Management since October 2017. Prior to that, Mr. Thomas served as Executive Vice
President and Head of the Funds and Managed Accounts Group from 2014 to 2017 and as Head of the Exchange-Traded
Funds Group from 2010 to 2014. He also previously served as President and Chief Executive Officer of Northern Trust
Securities, Inc. from 2009 to 2010 and as Head of Corporate Strategy from 2006 to 2009.
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.
34 2018 Annual Report | Northern Trust Corporation
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 1,805
shareholders of record as of January 31, 2019.
The following table shows certain information relating to the Corporation’s purchases of common stock for the three
months ended December 31, 2018.
TABLE 2: PURCHASES OF COMMON STOCK IN THE FOURTH QUARTER OF 2018
PERIOD
October 1 - 31, 2018
November 1 - 30, 2018
December 1 - 31, 2018
Total (Fourth Quarter)
TOTAL NUMBER
OF SHARES
PURCHASED AS
PART OF A
PUBLICLY
ANNOUNCED PLAN
(1)
797,315
545,459
1,139,328
MAXIMUM
NUMBER OF
SHARES THAT MAY
YET BE
PURCHASED
UNDER THE PLAN
22,085,658
21,540,199
20,400,871
AVERAGE PRICE
PAID PER SHARE
97.04
96.25
88.53
92.96
2,482,102
20,400,871
TOTAL NUMBER
OF SHARES
PURCHASED
797,315 $
545,459
1,139,328
2,482,102 $
(1) Repurchases were made pursuant to the repurchase program announced by the Corporation on July 17, 2018 under which the Corporation’s Board of Directors authorized
the Corporation to repurchase up to 25.0 million shares of the Corporation's common stock. The repurchase program has no expiration date.
2018 Annual Report | Northern Trust Corporation 35
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 ended December 31, 2018. The
cumulative total stockholder return assumes the investment of $100 in the Corporation’s common stock and in each index
on December 31, 2013 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, 2013 with Reinvestment of Dividends
Northern Trust
S&P 500
KBW Bank Index
DECEMBER 31,
$
2013
100 $
100
100
2014
111 $
114
109
2015
121 $
115
110
2016
153 $
129
141
2017
174 $
157
167
2018
149
150
138
36 2018 Annual Report | Northern Trust Corporation
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/Administration
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
2018
2017
2016
2015
2014
$
$
$
$
$
$
$
$
$
4,337.5 $
1,622.7
5,960.2 $
(14.5 )
4,016.9
1,957.8 $
401.4
1,556.4 $
46.4
1,510.0 $
6.68 $
6.64
1.94
43.95
83.59
3,946.1 $
1,429.2
5,375.3 $
(28.0 )
3,769.4
1,633.9 $
434.9
1,199.0 $
49.8
1,149.2 $
4.95 $
4.92
1.60
41.28
99.89
3,726.9 $
1,234.9
4,961.8 $
(26.0 )
3,470.7
1,517.1 $
484.6
1,032.5 $
23.4
1,009.1 $
4.35 $
4.32
1.48
38.88
89.05
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
122,847.3 $
132,212.5
104,496.8
2,011.3
1,112.4
10,508.3
113,731.0 $
122,946.6
95,103.1
1,704.0
1,296.8
10,228.9
129,656.6 $
138,590.5
112,390.8
1,497.3
1,449.5
10,216.2
111,178.3 $
119,607.4
96,504.8
1,496.9
1,519.4
9,980.6
115,446.4 $
123,926.9
101,651.7
1,496.6
1,330.9
9,770.4
107,037.6 $
115,570.3
93,613.9
1,496.6
1,392.4
9,085.3
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
10,125.3 $
7,593.9
1,069.4
10,722.6 $
8,084.6
1,161.0
8,541.3 $
6,720.5
942.4
7,797.0
6,072.1
875.3
N/A
5,968.8
934.1
16.2 %
1.27
29.2
1.46
8.3
12.6 %
1.00
32.5
1.33
8.3
11.9 %
0.89
34.3
1.18
7.9
11.5 %
0.88
35.3
1.07
7.8
10.0 %
0.78
39.2
1.08
7.8
Capital Ratios:
DECEMBER 31,
2018
DECEMBER 31,
2017
DECEMBER 31,
2016
DECEMBER 31,
2015
DECEMBER 31,
2014
ADVANCED
APPROACH
STANDARDIZE
D
APPROACH(a)
ADVANCED
APPROACH
STANDARDIZED
APPROACH(a)
ADVANCED
APPROACH
STANDARDIZED
APPROACH(a)
ADVANCED
APPROACH
STANDARDIZED
APPROACH(a)
ADVANCED
APPROACH
STANDARDIZED
APPROACH(a)
Common Equity Tier 1
Tier 1
Total
Tier 1 Leverage
Supplementary Leverage(b)
13.7 %
15.0
16.9
8.0
7.0
12.9 %
14.1
16.1
8.0
N/A
13.5 %
14.8
16.7
7.8
6.8
12.6 %
13.8
15.8
7.8
N/A
12.4 %
13.7
15.1
8.0
6.8
11.8 %
12.9
14.5
8.0
N/A
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
(*) 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 88.
(a) In 2014, Standardized Approach risk-weighted assets were determined by Basel I requirements. Effective with the first quarter of 2015, risk-weighted assets are calculated in accordance with the Basel
II Standardized Approach final rules.
(b) Effective with the first quarter of 2015, advanced approaches banking organizations must calculate and report their supplementary leverage ratio. Effective January 1, 2018, the Corporation and Bank
are subject to a minimum supplementary leverage ratio of 3 percent.
2018 Annual Report | Northern Trust Corporation 37
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 (the Corporation) is a financial holding company that is a leading provider of wealth
management, asset servicing, asset management, and banking solutions to corporations, institutions, families and
individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting
segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are
provided to C&IS and Wealth Management clients primarily by the Asset Management business.
The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust
Company (the Bank). The Corporation was originally formed as a holding company for the Bank in 1971. The Corporation
has a global presence with offices in 20 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the
Middle East and the Asia-Pacific region. Except where the context requires otherwise, the terms “Northern Trust,” “we,”
“us,” “our” or similar terms refers to the Corporation and its subsidiaries on a consolidated basis.
FINANCIAL OVERVIEW
Net income in 2018 totaled $1.56 billion, up $357.4 million or 30%, from $1.20 billion in 2017. Earnings per diluted
common share totaled $6.64 in 2018 compared to $4.92 in 2017. Return on average common equity improved to 16.2% in
2018 from 12.6% in 2017.
Revenue increased 11% to $5.96 billion in 2018 from $5.38 billion in the prior year, driven by a 9% increase in trust,
investment and other servicing fees, a 14% increase in net interest income, and a 46% increase in foreign exchange trading
income, partially offset by a 19% decline in other operating income.
Client assets under custody/administration (AUC/A) and under custody, a component of AUC/A, were each down 6%,
as of December 31, 2018 as compared to December 31, 2017 levels. Client assets under management were down 8% as of
December 31, 2018 as compared to December 31, 2017 levels. As of December 31, 2018, AUC/A decreased to $10.13
trillion from $10.72 trillion at December 31, 2017. As of December 31, 2018, client assets under custody decreased to
$7.59 trillion from $8.08 trillion, and included $4.70 trillion of global custody assets, down 5% from $4.94 trillion at
December 31, 2017. As of December 31, 2018, client assets under management decreased to $1.07 trillion from $1.16
trillion at December 31, 2017.
Trust, investment and other servicing fees, which represent the largest component of total revenue, increased 9% to
$3.75 billion, from $3.43 billion in 2017, primarily due to favorable markets, revenue associated with the acquisition and
integration of UBS Asset Management’s fund administration units in Luxembourg and Switzerland (the UBS acquisition),
new business, a change in presentation of certain fees resulting from the adoption of the new revenue recognition standard,
and the favorable impact of movements in foreign exchange rates.
Foreign exchange trading income of $307.2 million increased 46% from $209.9 million in 2017, primarily resulting
from increased foreign exchange swap activity in Treasury and higher volatility.
Other operating income was $127.5 million in 2018, down 19% from $157.5 million in the prior year, primarily due to
the impairment of a community development equity investment previously held at cost, expenses related to existing swap
agreements related to Visa Inc. Class B common shares, and the net impact of various other operating income categories.
Net interest income on a fully taxable equivalent (FTE) basis in 2018 was $1.66 billion, an increase of $188.9 million,
or 13%, from $1.48 billion in 2017, due to an increased net interest margin and higher levels of average earning assets. The
net interest margin on an FTE basis increased to 1.46% in 2018 from 1.33% in 2017, primarily due to higher short-term
interest rates.
The provision for credit losses in 2018 was a credit of $14.5 million, reflecting reductions in outstanding loans and
undrawn loan commitments and standby letters of credit and improved credit quality across the portfolio. This was partially
offset by increases in specific reserves primarily related to the commercial and institutional portfolio. The provision for
credit losses in 2017 was a credit of $28.0 million, reflecting improvement in the credit quality of the Corporation’s loan
portfolio and reductions in outstanding loans and undrawn loan commitments and standby letters of credit. Loans and
leases as of December 31, 2018 totaled $32.5 billion, down slightly from $32.6 billion in 2017. Net charge-offs for the year
ended December 31, 2018 were $1.1 million, down from $10.2 million in 2017. Nonperforming assets as of December 31,
2018 were $117.7 million, a decline from $155.3 million in 2017.
Noninterest expense totaled $4.02 billion in 2018, up $247.5 million, or 7%, from $3.77 billion in the prior year,
reflecting increased compensation, outside services, equipment and software expense, and employee benefit expense,
38 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
including higher third-party advisor costs due to a change in presentation resulting from the adoption of the new revenue
recognition standard and higher expenses associated with the UBS acquisition, partially offset by lower severance and
related charges. The prior year also included a one-time employee cash bonus recorded in connection with the Tax Cuts and
Jobs Act (TCJA).
The provision for income taxes in 2018 totaled $401.4 million, representing an effective tax rate of 20.5%. The
provision for income taxes in 2017 totaled $434.9 million, representing an effective tax rate of 26.6%. The current year
includes a net benefit to the tax provision primarily attributable to the reduction in the U.S. corporate income tax rate from
35% to 21% as a result of the TCJA enacted in the fourth quarter of 2017 as well as adjustments recorded in the current
year associated with the implementation of the TCJA. Also in 2018, the Corporation recognized a tax benefit resulting from
a change in accounting method regarding the timing of tax deductions for software-development related expenses. These
decreases to the provision for income taxes in the current year were partially offset by tax accounting changes in 2018
brought about by the TCJA including the tax accounting associated with additional non-deductible expenses and a
reduction in the income tax benefit derived from the vesting of restricted stock units and stock option exercises.
Northern Trust continued to maintain a strong capital position during 2018, with all capital ratios exceeding those
required for classification as “well-capitalized” under federal bank regulatory capital requirements. Total stockholders’
equity was $10.5 billion at year-end, up 3% from $10.2 billion in 2017. During the year ended December 31, 2018,
Northern Trust increased its quarterly common stock dividend to $0.55 per share and repurchased 9.0 million shares of
common stock, returning $1.36 billion in capital to common stockholders, compared to $895.6 million in 2017.
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 2018 was $5.96 billion, an increase of 11% from $5.38 billion in 2017. Noninterest income represented
73% of total revenue in 2018 and 2017, and totaled $4.34 billion, up 10% from $3.95 billion in 2017.
The current-year increase in noninterest income primarily reflected higher trust, investment and other servicing fees
and foreign exchange trading income, partially offset by lower other operating income. Trust, investment and other
servicing fees totaled $3.75 billion in 2018, up $319.3 million, or 9%, from $3.43 billion in 2017, primarily due to
favorable markets, revenue associated with the UBS acquisition, new business, a change in presentation of certain fees
resulting from the adoption of the new revenue recognition standard, and the favorable impact of movements in foreign
exchange rates. Foreign exchange trading income in 2018 totaled $307.2 million, up $97.3 million, or 46%, compared with
$209.9 million in 2017, primarily resulting from increased foreign exchange swap activity in Treasury and higher volatility.
Other operating income was $127.5 million in 2018, down 19% from $157.5 million in the prior year, primarily due to the
impairment of a community development equity investment previously held at cost, expenses related to existing swap
agreements related to Visa Inc. Class B common shares, and the net impact of various other operating income categories.
Net interest income on an FTE basis in 2018 was $1.66 billion, an increase of $188.9 million, or 13%, from $1.48
billion in 2017, due to an increased net interest margin and higher levels of average earning assets. The net interest margin
on an FTE basis increased to 1.46% in 2018 from 1.33% in 2017, primarily due to higher short-term interest rates. Average
earning assets increased $2.6 billion, or 2%, in 2018, primarily reflecting higher levels of securities, partially offset by a
decrease in loans and leases and short-term interest bearing deposits.
2018 Annual Report | Northern Trust Corporation 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional information regarding Northern Trust’s revenue by type is provided below.
2018 TOTAL REVENUE OF $5.96 BILLION
63% Trust, Investment and Other Servicing Fees
27% Net Interest Income
5% Foreign Exchange Trading Income
5% Other Noninterest Income
Noninterest Income
The components of noninterest income, and a discussion of significant changes during 2018 and 2017, are provided below.
TABLE 3: NONINTEREST INCOME
($ In Millions)
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
Total Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2018
3,753.7 $
307.2
51.8
98.3
127.5
(1.0 )
4,337.5 $
2017
3,434.3 $
209.9
56.4
89.6
157.5
(1.6 )
3,946.1 $
2016
3,108.1
236.6
62.8
81.4
241.2
(3.2 )
3,726.9
$
$
2018 / 2017
2017 / 2016
9 %
46
(8 )
10
(19 )
(33 )
10 %
10 %
(11 )
(10 )
10
(35 )
(50 )
6 %
Trust, Investment and Other Servicing Fees
Trust, investment and other servicing fees were $3.75 billion in 2018 compared with $3.43 billion in 2017. 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 2018 trust,
investment and other servicing fees, refer to the “Reporting Segments and Related Information” section.
40 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When considering the impact of markets on the Corporation’s results, the following tables present selected market
indices and the percentage changes year over year.
TABLE 4: EQUITY MARKET INDICES
S&P 500
MSCI EAFE (U.S. dollars)
MSCI EAFE (local currency)
TABLE 5: FIXED INCOME MARKET INDICES
Barclays Capital U.S. Aggregate Bond Index
Barclays Capital Global Aggregate Bond Index
DAILY AVERAGES
YEAR-END
2018
2,746
1,966
1,125
2017
2,448
1,886
1,105
CHANGE
12 %
4
2
2018
2,507
1,720
1,008
2017
2,674
2,051
1,164
CHANGE
(6 )%
(16 )
(13 )
AS OF DECEMBER 31,
2018
2,047
479
2017
2,046
485
CHANGE
— %
(1 )
ASSETS UNDER CUSTODY/ADMINISTRATION AND ASSETS UNDER MANAGEMENT
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, 2018, AUC/A were $10.13 trillion, down 6% from $10.72 trillion at
December 31, 2017. The decrease in AUC/A primarily reflected unfavorable markets, the unfavorable impact of
movements in foreign exchange rates, and net outflows. Assets under custody, a component of AUC/A, were $7.59 trillion
at December 31, 2018, down 6% from $8.08 trillion at December 31, 2017, and included $4.70 trillion of global custody
assets, compared to $4.94 trillion at December 31, 2017. The decrease in assets under custody primarily reflected
unfavorable markets, the unfavorable impact of movements in foreign exchange rates, and net outflows. Assets under
management totaled $1.07 trillion, down 8% from $1.16 trillion at the end of 2017. The decrease primarily reflected
unfavorable markets and net outflows.
AUC/A by reporting segment were as follows:
TABLE 6: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT
DECEMBER 31,
CHANGE
($ In Billions)
Corporate & Institutional
Wealth Management
2018
2017
2015
$ 9,490.5 $ 10,066.8 $ 7,987.0 $ 7,279.7
517.3
655.8
554.3
634.8
2016
Total Assets Under Custody/Administration
$ 10,125.3 $ 10,722.6 $ 8,541.3 $ 7,797.0
Assets under custody by reporting segment were as follows:
TABLE 7: ASSETS UNDER CUSTODY BY REPORTING SEGMENT
2018 /2017
2017 /2016
(6 )%
(3 )
(6 )%
26 %
18
26 %
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE
($ In Billions)
Corporate & Institutional
Wealth Management
2018
2017
2014
$ 6,971.0 $ 7,439.1 $ 6,176.9 $ 5,565.8 $ 5,453.1
515.7
645.5
506.3
543.6
622.9
2016
2015
Total Assets Under Custody
$ 7,593.9 $ 8,084.6 $ 6,720.5 $ 6,072.1 $ 5,968.8
Assets under custody were invested as follows:
2018 /2017
(6 )%
(4 )
(6 )%
2017 / 2016
20 %
19
20 %
7 %
5
6 %
2018 Annual Report | Northern Trust Corporation 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 8: ASSETS UNDER CUSTODY BY INVESTMENT TYPE
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
DECEMBER 31,
2018
45 %
37
16
2
2017
47 %
35
16
2
2016
46 %
36
17
1
2015
44 %
37
17
2
2014
45 %
36
17
2
Assets under management by reporting segment were as follows:
TABLE 9: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT
($ In Billions)
Corporate & Institutional
Wealth Management
$
2018
790.8 $
278.6
2017
871.2 $
289.8
2016
694.0 $
248.4
2015
648.0 $
227.3
Total Assets Under Management
$ 1,069.4 $ 1,161.0 $
942.4 $
875.3 $
2014
709.6
224.5
934.1
2018 / 2017
(9 )%
(4 )
(8 )%
2017 / 2016
26 %
17
23 %
DECEMBER 31,
CHANGE
Assets under management were invested and managed as follows:
TABLE 10: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
DECEMBER 31,
2018
50 %
17
19
14
2017
51 %
16
19
14
2016
51 %
17
20
12
TABLE 11: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE
Index
Active
Multi-Manager
Other
DECEMBER 31,
2018
49 %
38
5
8
2017
46 %
41
5
8
2016
47 %
40
5
8
2015
51 %
17
20
12
2015
47 %
40
4
9
FIVE-YEAR
COMPOUND
GROWTH
RATE
4 %
5
4 %
2014
52 %
17
18
13
2014
49 %
39
6
6
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 in 2018 totaled $307.2 million, up $97.3 million, or 46%, compared with $209.9
million in 2017, primarily resulting from increased foreign exchange swap activity in Treasury and higher volatility.
Treasury Management Fees
Treasury management fees, generated from cash and treasury management products and services provided to clients,
totaled $51.8 million in 2018, down 8%, from $56.4 million in 2017, primarily due to an increase in the earnings credit rate
applied to client balances.
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 $98.3 million in 2018, up 10%, or $8.7 million, from $89.6 million in 2017, primarily due
to higher core brokerage revenues and transition management revenues.
42 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operating Income
The components of other operating income include:
TABLE 12: OTHER OPERATING INCOME
($ In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
$
$
2018
48.9 $
46.4
32.2
127.5 $
2017
50.7 $
48.6
58.2
157.5 $
2016
56.6
50.6
134.0
241.2
2018 / 2017
2017 / 2016
(4 )%
(5 )
(44 )
(19 )%
(10 )%
(4 )
(57 )
(35 )%
Other income totaled $32.2 million in 2018, down $26.0 million or 44%, from $58.2 million in 2017, primarily due to the
impairment of a community development equity investment previously held at cost, expenses related to existing swap
agreements related to Visa Inc. Class B common shares, and the net impact of various other operating income categories.
Investment Security Losses, Net
Net investment security losses totaled $1.0 million and $1.6 million in 2018 and 2017, respectively. Losses in 2018 and
2017 include $0.5 million and $0.2 million of charges related to the other-than-temporary impairment (OTTI) of certain
Community Reinvestment Act (CRA) eligible held-to-maturity securities, respectively.
NONINTEREST INCOME – 2017 COMPARED WITH 2016
Trust, investment and other servicing fees were $3.43 billion in 2017, up 10% from $3.11 billion in 2016, primarily due to
favorable markets, new business, and revenue associated with the UBS acquisition. Foreign exchange trading income
decreased 11% to $209.9 million in 2017 from $236.6 million in 2016, primarily resulting from lower volatility and client
volumes in 2017.
Other operating income totaled $157.5 million in 2017, a decrease of 35% from $241.2 million in 2016. Other
operating income in 2016 included a gain on the sale of 1.1 million Visa Inc. Class B common shares, net of a valuation
adjustment to existing swap agreements, totaling $118.2 million, offset by impairment charges and a loss on sale related to
the decision to exit a portion of a non-strategic loan and lease portfolio, as well as impairment charges related to the
residual value of certain aircraft and rail cars of $18.9 million.
Net investment security losses totaled $1.6 million and $3.2 million in 2017 and 2016, respectively. Losses in 2017
and 2016 include $0.2 million and $3.7 million of charges related to the OTTI of certain CRA eligible held-to-maturity
securities, respectively.
Net Interest Income
Net interest income stated on an FTE basis is a non-generally-accepted-accounting-principle (GAAP) financial measure
that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net
interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially
taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of
net interest income on a GAAP basis to net interest income on an FTE basis is provided on page 88.
2018 Annual Report | Northern Trust Corporation 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
An analysis of net interest income on an FTE basis, major balance sheet components impacting net interest income and
related ratios are provided below.
TABLE 13: ANALYSIS OF NET INTEREST INCOME (FTE)
($ 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 – GAAP
Net Interest Margin – FTE
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
$
$
2018
2,321.4 $
41.2
2017
1,769.4 $
45.8
2,362.6
698.7
1,663.9
1,622.7
1,815.2
340.2
1,475.0
1,429.2
2016
1,416.9
25.1
1,442.0
182.0
1,260.0
1,234.9
113,731.0 $
88,638.4
25,092.6
111,178.3 $
83,422.0
27,756.3
107,037.6
76,886.0
30,151.6
2018 / 2017
2017 / 2016
31 %
(10 )
30
105
13
14
2 %
6
(10 )
25 %
82
26
87
17
16
4 %
9
(8 )
CHANGE IN PERCENTAGE
2.08 %
0.79
1.29
0.62
1.43 %
1.46 %
1.63 %
0.41
1.22
0.31
1.29 %
1.33 %
1.35 %
0.24
1.11
0.17
1.15 %
1.18 %
0.45
0.38
0.07
0.31
0.14
0.13
0.28
0.17
0.11
0.14
0.14
0.15
Refer to pages 168 and 169 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 and other central bank 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, 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 2018 was $1.62 billion, up $193.5 million, or 14%, from $1.43 billion in 2017. Net interest
income on an FTE basis for 2018 was $1.66 billion, an increase of $188.9 million, or 13%, from $1.48 billion in 2017, due
to an increased net interest margin and higher levels of average earning assets. Average earning assets increased $2.6
billion, or 2%, to $113.7 billion in 2018 from $111.2 billion in 2017. The net interest margin in 2018 was 1.43%, up from
1.29% in 2017. The net interest margin on an FTE basis in 2018 was 1.46%, up from 1.33% in 2017.
Growth in average earning assets primarily reflected higher levels of securities, partially offset by reductions in loans
and leases and 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 $50.3 billion, an increase of $5.6 billion, or 12%, from $44.7 billion in 2017. Loans
and leases averaged $32.0 billion, a decrease of $1.6 billion, or 5%, from $33.6 billion in 2017. Interest-bearing due from
and deposits with banks averaged $6.0 billion in 2018, down $1.1 billion, or 16%, from $7.1 billion in 2017.
The increase in average earning assets was primarily funded by higher levels of short-term borrowings and interest-
bearing deposits, partially offset by reductions of demand and other noninterest-bearing deposits. Average short-term
borrowings increased $4.1 billion, or 61%, to $10.8 billion in 2018 from $6.7 billion in 2017. Average interest-bearing
deposits increased $1.2 billion, or 2%, to $74.6 billion in 2018 from $73.4 billion in 2017. Average demand and other
noninterest-bearing deposits decreased $2.6 billion, or 11%, to $20.5 billion in 2018 from $23.1 billion in 2017.
44 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Stockholders’ equity averaged $10.2 billion in 2018, compared with $10.0 billion in 2017. The increase of $248.3
million, or 2%, was attributable to current-year earnings, partially offset by the repurchase of common stock pursuant to the
Corporation’s share repurchase program and dividend declarations. During the year ended December 31, 2018, the
Corporation increased its quarterly common stock dividend by 31% to $0.55 per share and repurchased 9.0 million shares,
returning $1.4 billion in capital to common stockholders, compared to $895.6 million in 2017.
Under the Corporation’s 2018 Capital Plan, which was reviewed without objection by the Federal Reserve, the
Corporation may repurchase up to $529.5 million of common stock after December 31, 2018, through June 2019.
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 – 2017 COMPARED WITH 2016
Net interest income on an FTE basis increased 17% to $1.48 billion in 2017 from $1.26 billion in 2016, reflecting higher
levels of average earning assets and an increased net interest margin. Average earning assets increased $4.1 billion, or 4%,
to $111.2 billion in 2017 from $107.0 billion in 2016, primarily reflecting higher levels of securities and short-term
interest-bearing deposits, partially offset by reductions in loans and leases. The net interest margin on an FTE basis
increased to 1.33% in 2017 from 1.18% in 2016, primarily due to an increase in short-term interest rates.
Stockholders’ equity averaged $10.0 billion in 2017, compared with $9.1 billion in 2016. The increase in 2017 was
attributable to prior-year earnings, partially offset by the repurchase of common stock pursuant to the Corporation’s share
repurchase program and dividend declarations.
Provision for Credit Losses
The provision for credit losses was a credit of $14.5 million in 2018 compared with a credit provision of $28.0 million in
2017, and a credit provision of $26.0 million in 2016. The current-year provision primarily reflected reductions in
outstanding loans and undrawn loan commitments and standby letters of credit and improved credit quality across the
portfolio. This was partially offset by increases in specific reserves primarily related to the commercial and institutional
portfolio. Nonperforming assets at December 31, 2018 decreased 24% from the prior year-end. Residential real estate,
commercial, commercial real estate, and non-U.S. loans accounted for 87%, 6%, 6%, and 1% respectively, of
nonperforming loans and leases at December 31, 2018. For further discussion of the allowance and provision for credit
losses for 2018, 2017, and 2016, refer to the “Asset Quality” section.
Noninterest Expense
Noninterest expense for 2018 totaled $4.02 billion, up $247.5 million, or 7%, from $3.77 billion in 2017, primarily
reflecting increased compensation, outside services, equipment and software expense, and employee benefits expense. The
current year included higher third-party advisor costs due to a change in presentation resulting from the adoption of the
new revenue recognition standard and higher expenses associated with the UBS acquisition, partially offset by lower
severance-related charges. The prior year also included a one-time employee cash bonus recorded in connection with the
Tax Cuts and Jobs Act.
The components of noninterest expense and a discussion of significant changes during 2018 and 2017 are provided
below.
TABLE 14: NONINTEREST EXPENSE
($ In Millions)
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Other Operating Expense
Total Noninterest Expense
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2018
1,806.9 $
356.7
739.4
582.2
201.1
330.6
4,016.9 $
2017
1,733.7 $
319.9
668.4
524.0
191.8
331.6
3,769.4 $
2016
1,541.1
293.3
627.1
467.4
177.4
364.4
3,470.7
$
$
2018 / 2017
2017 / 2016
4 %
12
11
11
5
—
7 %
13 %
9
7
12
8
(9 )
9 %
Compensation
Compensation expense, the largest component of noninterest expense, totaled $1.81 billion in 2018, up $73.2 million, or
4%, compared to $1.73 billion in 2017, reflecting increases due to higher salary expense and higher cash-based incentive
2018 Annual Report | Northern Trust Corporation 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
compensation, partially offset by lower severance-related charges and a one-time employee cash bonus recorded in the
prior year in connection with the Tax Cuts and Jobs Act. The increase in salary expense was primarily driven by base pay
adjustments. Staff on a full-time equivalent basis totaled approximately 18,800 at December 31, 2018, up 4% from
approximately 18,100 at December 31, 2017.
Employee Benefits
Employee benefits expense totaled $356.7 million in 2018, up $36.8 million, or 12%, from $319.9 million in 2017
reflecting higher retirement plan expenses, medical expenses, and payroll taxes, partially offset by lower severance-related
charges.
Outside Services
Outside services expense totaled $739.4 million in 2018, up $71.0 million, or 11%, from $668.4 million in 2017, primarily
reflecting a change in presentation of third-party advisor costs resulting from the adoption of the new revenue recognition
accounting standard, increased costs associated with the UBS acquisition, higher technical services costs, increased
restructuring charges, and higher subcustodian expense, partially offset by lower consulting services. There is a
corresponding increase to trust, investment, and other servicing fees as a result of the adoption of the new revenue
recognition accounting standard.
Equipment and Software
Equipment and software expense, comprised of depreciation and amortization, rental, and maintenance costs, increased
$58.2 million, or 11%, to $582.2 million in 2018 compared to $524.0 million in 2017, reflecting increased software
amortization and higher software-related charges.
Occupancy
Occupancy expense totaled $201.1 million in 2018, up $9.3 million, or 5%, from $191.8 million in 2017, primarily
reflecting accelerated depreciation expense related to a previously-announced facility exit.
Other Operating Expense
Other operating expense in 2018 totaled $330.6 million, down $1.0 million from $331.6 million in 2017. The components
of other operating expense are as follows:
TABLE 15: OTHER OPERATING EXPENSE
($ 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
$
$
2018
98.3 $
27.4
33.6
17.4
153.9
330.6 $
2017
95.4 $
34.7
42.8
11.4
147.3
331.6 $
2016
83.6
31.7
43.0
8.8
197.3
364.4
2018 / 2017
2017 / 2016
3 %
(21 )
(22 )
52
4
— %
14 %
9
(1 )
30
(25 )
(9 )%
Other operating expense in the current year compared to the prior year reflects lower staff-related expense and FDIC
deposit protection expense from the prior-year, offset by higher intangibles amortization driven by the UBS acquisition and
increased other expenses driven primarily by higher expense associated with account servicing activities.
NONINTEREST EXPENSE – 2017 COMPARED WITH 2016
Noninterest expense in 2017 totaled $3.77 billion, up 9% from $3.47 billion in 2016, primarily reflecting increased
compensation, equipment and software expense, and outside services expense. Results for 2017 included higher severance-
related charges, expenses associated with the UBS acquisition, and a one-time employee cash bonus. Results for 2016
included charges relating to certain securities lending litigation, contractual modifications associated with certain existing
asset servicing clients, and severance and other personnel related charges.
Compensation expense increased 13% to $1.73 billion in 2017 from $1.54 billion in 2016, reflecting higher salary
expense, performance-based incentive compensation, severance-related charges, a one-time employee cash bonus recorded
in 2017, and expense associated with the UBS acquisition. The increase in salary expense was driven by staff growth and
base-pay adjustments.
46 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Employee benefits expense totaled $319.9 million in 2017, up 9% from $293.3 million in 2016, reflecting increases in
payroll taxes, medical expense, severance-related charges, expense associated with the UBS acquisition and payroll taxes
on a one-time employee cash bonus recorded in 2017.
Outside services expense totaled $668.4 million in 2017, up 7% from $627.1 million in 2016, reflecting an increase in
technical services, subcustodian expense, expense associated with the UBS acquisition, and severance-related charges.
Equipment and software expense increased 12% to $524.0 million in 2017 compared to $467.4 million in 2016,
reflecting increased software amortization, software support costs, computer maintenance and rental costs, and expense
associated with the UBS acquisition.
Occupancy expense for 2017 was $191.8 million, up 8% from $177.4 million in 2016, primarily reflecting accelerated
depreciation expense related to a previously-announced facility exit, higher rent expense, and higher costs associated with
the UBS acquisition.
Other operating expense totaled $331.6 million in 2017, down 9% from $364.4 million in 2016, primarily due to
charges recorded in 2016 relating to certain securities lending litigation and contractual modifications associated with
existing C&IS clients, partially offset by increases in expense in 2017 related to higher business promotion expense driven
by increased costs associated with the Northern Trust-sponsored PGA TOUR golf tournament, and higher charges
associated with account servicing activities, supplemental compensation plans, and costs associated with the UBS
acquisition.
Provision for Income Taxes
Provisions for income tax and effective tax rates are impacted by levels of pre-tax income as well as nonrecurring items
such as the resolution of tax matters and changes in income tax rates and tax laws. The 2018 provision for income taxes
was $401.4 million, representing an effective rate of 20.5%. This compares with a provision for income taxes of $434.9
million and an effective rate of 26.6% in 2017.
The current year includes tax benefits primarily attributable to the reduction in the U.S. corporate income tax rate from
35% to 21% as a result of the TCJA enacted in the fourth quarter of 2017, a tax benefit recognized in 2018 resulting from a
change in accounting method regarding the timing of tax deductions for software-related expenses, and adjustments
recorded in the current year associated with the implementation of the TCJA as outlined below. These decreases to the
provision for income taxes in the current year were partially offset by the impact of an increase in income before income
taxes, tax accounting changes in 2018 brought about by the TCJA including the tax accounting associated with additional
non-deductible expenses, and a reduction in the income tax benefit derived from the vesting of restricted stock units and
stock option exercises. Also included in the 2017 tax provision were Federal and State research tax credits related to the
Corporation’s technology spend between 2013 and 2016.
The TCJA was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%. It
also required companies to pay a mandatory deemed repatriation tax on earnings of foreign subsidiaries that were
previously tax deferred. At December 31, 2017, Northern Trust made a reasonable estimate as to the impact of the TCJA.
During 2018, Northern Trust completed the related calculations and additional analyses associated with the implementation
of the TCJA, resulting in a number of adjustments to the 2018 tax provision as follows:
TABLE 16: IMPACT OF TAX CUTS AND JOBS ACT
(In Millions)
Federal Taxes on Mandatory Deemed Repatriation
Impact Related to Federal Deferred Taxes
Other Adjustments
Provision (Benefit) for Income Taxes
2018
(16.8 ) $
12.7
(0.7 )
2017
150.0
(210.0 )
6.9
(4.8 ) $
(53.1 )
$
$
Adjustments in the above table include a tax benefit of $16.8 million resulting from an adjustment to the Corporation’s
2017 income tax provision for mandatory deemed repatriation with respect to the pre-2018 earnings of its non-US
subsidiaries, offset by a $12.7 million net provision associated with the repricing of deferred taxes.
The income tax provision of $434.9 million for 2017 represented an effective tax rate of 26.6%, and reflects reductions
totaling $50.0 million related to certain non-U.S. subsidiaries whose earnings were reinvested indefinitely outside of the
United States. As a result of the TCJA enacted in the fourth quarter of 2017, these earnings and the earnings from prior
years which have been reinvested indefinitely outside of the United States are deemed to have been repatriated to the
United States and subject to a repatriation tax. As of December 31, 2018, Northern Trust’s repatriation tax has been
estimated to be $133.2 million.
2018 Annual Report | Northern Trust Corporation 47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The 2016 income tax provision of $484.6 million represented an effective tax rate of 31.9%, and reflects reductions of
$50.1 million related to certain non-U.S. subsidiaries whose earnings were 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
certain 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.
TABLE 17: 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
$
$
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2018
2017
2016
2018 / 2017
2017 / 2016
3,753.7 $
307.2
276.6
1,663.9
6,001.4
(14.5 )
4,016.9
1,999.0
442.6
3,434.3 $
209.9
301.9
1,475.0
5,421.1
(28.0 )
3,769.4
1,679.7
480.7
1,556.4 $
1,199.0 $
3,108.1
236.6
382.2
1,260.0
4,986.9
(26.0 )
3,470.7
1,542.2
509.7
1,032.5
122,946.6 $
119,607.4 $
115,570.3
9 %
46
(8 )
13
11
(48 )
7
19
(8 )
30 %
3 %
10 %
(11 )
(21 )
17
9
8
9
9
(6 )
16 %
3 %
Note: Stated on an FTE basis. The consolidated figures include $41.2 million, $45.8 million, and $25.1 million of FTE adjustments for 2018, 2017, and 2016, respectively.
Corporate & Institutional Services
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds,
foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors
around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to:
custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical
services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services;
transition management services; banking and cash management. Client relationships are managed through the Bank and the
Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle
East, and the Asia-Pacific region.
48 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the results of operations of C&IS for the years ended December 31, 2018, 2017, and
2016 on a management-reporting basis.
TABLE 18: C&IS RESULTS OF OPERATIONS
($ 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,
CHANGE
2018
2017
2016
2018 / 2017
2017 / 2016
2,173.1 $
233.4
183.0
992.2
3,581.7
1.9
2,421.4
1,158.4
255.3
1,984.6 $
197.9
176.1
733.8
3,092.4
3.4
2,194.5
894.5
279.5
903.1 $
615.0 $
1,787.8
224.4
147.0
565.0
2,724.2
1.9
2,012.2
710.1
212.9
497.2
58 %
82,996.5 $
51 %
80,105.6 $
48 %
76,194.7
9 %
18
4
35
16
(44 )
10
30
(9 )
11 %
(12 )
20
30
14
79
9
26
31
47 %
24 %
4 %
5 %
The 47% increase in C&IS net income in 2018 compared to 2017 primarily resulted from higher net interest income, trust,
investment and other servicing fees, foreign exchange trading income, and a lower provision for income taxes, partially
offset by higher noninterest expense including expenses associated with the UBS acquisition. The 24% increase in C&IS
net income in 2017 compared to 2016 primarily resulted from higher trust, investment and other servicing fees, net interest
income, and other noninterest income, partially offset by higher noninterest expense, including expenses associated with
the UBS acquisition, and lower foreign exchange trading income.
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 month-end market values, quarter-end market values, or
the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced
using month-end, quarter-end, or average daily balances. Investment management fees, 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 investment risk and analytical services,
benefit payments, 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 19: 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
2018
1,501.1 $
436.8
102.0
133.2
2,173.1 $
2017
1,342.1 $
403.5
96.4
142.6
1,984.6 $
2016
1,182.2
371.8
97.7
136.1
1,787.8
$
$
2018 / 2017
2017 / 2016
12 %
8
6
(7 )
10 %
14 %
9
(1 )
5
11 %
2018 Annual Report | Northern Trust Corporation 49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2018 C&IS TRUST, INVESTMENT, AND OTHER SERVICING FEES
69% Custody and Fund Administration
20% Investment Management
5% Securities Lending
6% Other Services
Custody and fund administration fees, the largest component of trust, investment and other servicing fees, increased $159.0
million, or 12%, from 2017 to 2018 primarily due to new business, revenue associated with the UBS acquisition, the
favorable impact of movements in foreign exchange rates, and favorable markets. Fees from investment management
increased $33.3 million, or 8%, from 2017 to 2018 primarily due to favorable markets and a change in presentation of
certain fees resulting from the adoption of the new revenue recognition standard. Securities lending revenue increased $5.6
million, or 6% from 2017 to 2018, primarily driven by higher loan volumes, partially offset by lower spreads. C&IS other
trust, investment and servicing fees decreased $9.4 million, or 7%, from 2017 to 2018 primarily due to lower sub-advisor
fees. The income associated with sub-advisor fees has an associated expense in outside services. C&IS trust, investment,
and other servicing fees totaled $1.98 billion in 2017, an increase of $196.8 million, or 11%, from $1.79 billion in 2016,
primarily due to new business, favorable markets, and revenue associated with the UBS acquisition.
Provided below is a breakdown of the C&IS assets under custody and under management.
TABLE 20: C&IS ASSETS UNDER CUSTODY
($ In Billions)
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
Total Assets Under Custody
DECEMBER 31,
CHANGE
2018
3,693.4 $
2,538.6
589.2
149.8
6,971.0 $
2017
3,972.1 $
2,602.4
697.1
167.5
7,439.1 $
2016
3,334.5
2,152.2
578.4
111.8
6,176.9
$
$
2018 / 2017
2017 / 2016
(7 )%
(2 )
(15 )
(11 )
(6 )%
19 %
21
21
50
20 %
50 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2018 C&IS ASSETS UNDER CUSTODY
53% North America
36% Europe, Middle East, and Africa
9% Asia Pacific
2% Securities Lending
TABLE 21: C&IS ASSETS UNDER MANAGEMENT
($ In Billions)
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
Total Assets Under Management
2018 C&IS ASSETS UNDER MANAGEMENT
DECEMBER 31,
CHANGE
$
$
2018
493.1 $
113.3
34.6
149.8
790.8 $
2017
533.5 $
127.3
42.9
167.5
871.2 $
2016
450.2
98.8
33.2
111.8
694.0
2018 / 2017
2017 / 2016
(8 )%
(11 )
(19 )
(11 )
(9 )%
19 %
29
29
50
26 %
2018 Annual Report | Northern Trust Corporation 51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
62% North America
14% Europe, Middle East, and Africa
5% Asia Pacific
19% Securities Lending
2018 C&IS ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
51% Equities
19% Securities Lending
17% Cash and Other Assets
13% Fixed Income Securities
C&IS assets under custody were $6.97 trillion at December 31, 2018, 6% lower than $7.44 trillion at December 31, 2017.
Assets under management decreased 9% to $790.8 billion at December 31, 2018, from $871.2 billion at December 31,
2017. 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 $149.8 billion and $167.5 billion at December 31, 2018 and 2017, respectively.
52 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
C&IS Foreign Exchange Trading Income
Foreign exchange trading income totaled $233.4 million in 2018, a $35.5 million, or 18%, increase from $197.9 million in
2017. The increase is primarily attributable to higher client volumes and market volatility. Foreign exchange trading
income in 2017 of $197.9 million decreased $26.5 million, or 12%, from $224.4 million in 2016, due to lower market
volatility and client volumes.
C&IS Other Noninterest Income
Other noninterest income for 2018 totaled $183.0 million, up $6.9 million, or 4%, from $176.1 million in 2017. The
increase was primarily due to an increase in security commissions and trading income. Other noninterest income in 2017 of
$176.1 million increased $29.1 million, or 20%, from $147.0 million in 2016 primarily due to impairment charges and loss
on sales related to the decision to exit a portion of a non-strategic loans and leases portfolio in 2016.
C&IS Net Interest Income
Net interest income on an FTE basis increased $258.4 million, or 35%, in 2018 to $992.2 million from $733.8 million in
2017, primarily attributable to an increase in the net interest margin and average earning assets. Net interest margin on an
FTE basis increased to 1.29% from 0.99%, primarily due to higher short-term interest rates and a mix shift in earning
assets. Average earning assets totaled $76.9 billion, an increase of $2.6 billion, or 3%, from $74.3 billion in the prior year.
The earning assets in C&IS consisted primarily of intercompany assets and loans and leases. Funding sources were
primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $58.0 billion in 2018, up from
$53.8 billion in 2017. Net interest income on an FTE basis increased $168.8 million or 30%, in 2017 to $733.8 million
from $565.0 million in 2016, primarily attributable to increases in the net interest margin and average earning assets.
C&IS Provision for Credit Losses
The provision for credit losses was $1.9 million for 2018, compared to a provision of $3.4 million in 2017, and a provision
of $1.9 million in 2016. The 2018 provision reflected increases to specific reserves related to standby letters of credit,
partially offset by reductions in standby letters of credit and undrawn loan commitments and improved credit quality
resulting in a reduction of the inherent allowance. The 2017 provision reflected an increase to a specific reserve in the
commercial portfolio which was partially charged-off during the prior year, partially offset by improved credit quality
across the portfolio. The 2016 provision reflected an increase to a specific reserve in the commercial portfolio that was
charged-off during 2016, partially offset by improved credit quality across the portfolio.
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 $2.42
billion in 2018, an increase of $226.9 million, or 10%, from $2.19 billion in 2017. The increase was primarily due to higher
compensation expense, indirect expense allocations, outside services, other operating expense, and employee benefits
expense, all including the impact of higher noninterest expense associated with the UBS acquisition. Noninterest expense
for 2017 increased $182.3 million, or 9%, from $2.01 billion in 2016. The increase was primarily due to higher indirect
expense allocations, compensation expense, severance-related charges, higher expense associated with the UBS
acquisition, and higher outside services expense, partially offset by lower other operating expenses.
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 $622.9 billion of assets under custody and $278.6 billion of assets under management at December 31,
2018. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 18 U.S. states
and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.
2018 Annual Report | Northern Trust Corporation 53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the results of operations of Wealth Management for the years ended December 31,
2018, 2017, and 2016 on a management-reporting basis.
TABLE 22: WEALTH MANAGEMENT RESULTS OF OPERATIONS
($ 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,
CHANGE
2018
2017
2016
2018 / 2017
2017 / 2016
1,580.6 $
4.2
102.7
816.5
2,504.0
(16.4 )
1,460.0
1,060.4
262.1
798.3 $
51 %
26,163.7 $
1,449.7 $
3.1
103.9
736.2
2,292.9
(31.4 )
1,405.3
919.0
347.2
571.8 $
48 %
26,599.9 $
1,320.3
8.6
105.7
651.4
2,086.0
(27.9 )
1,315.3
798.6
301.1
497.5
48 %
26,525.0
9 %
35
(1 )
11
9
(48 )
4
15
(25 )
40 %
(2 )%
10 %
(64 )
(2 )
13
10
13
7
15
15
15 %
— %
Wealth Management net income increased 40% in 2018, primarily reflecting higher trust, investment and other servicing
fees, a lower provision for income taxes, and higher net interest income, partially offset by higher noninterest expense. The
15% increase in Wealth Management net income in 2017 from 2016 is primarily attributable to higher trust, investment and
other servicing fees and net interest income, partially offset by higher noninterest expense and a higher provision for
income taxes.
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 23: WEALTH MANAGEMENT TRUST, INVESTMENT AND OTHER SERVICING FEES
($ In Millions)
Central
East
West
Global Family Office
Total Trust, Investment and Other Servicing Fees
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2018
607.8 $
401.7
320.0
251.1
1,580.6 $
2017
575.5 $
356.2
291.7
226.3
1,449.7 $
2016
523.8
334.4
268.9
193.2
1,320.3
$
$
2018 / 2017
2017 / 2016
6 %
13
10
11
9 %
10 %
7
8
17
10 %
54 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2018 WEALTH MANAGEMENT FEES
39% Central
25% East
20% West
16% Global Family Office
TABLE 24: WEALTH MANAGEMENT ASSETS UNDER CUSTODY
($ In Billions)
Global Family Office
Central
East
West
Total Assets Under Custody
DECEMBER 31,
CHANGE
$
$
2018
405.5 $
88.2
72.7
56.5
622.9 $
2017
422.9 $
94.8
70.5
57.3
645.5 $
2016
347.7
83.8
61.7
50.4
543.6
2018 / 2017
2017 / 2016
(4 )%
(7 )
3
(1 )
(4 )%
22 %
13
14
14
19 %
2018 Annual Report | Northern Trust Corporation 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2018 WEALTH MANAGEMENT ASSETS UNDER CUSTODY
65% Global Family Office
14% Central
12% East
9% West
TABLE 25: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
($ In Billions)
Central
Global Family Office
East
West
Total Assets Under Management
DECEMBER 31,
CHANGE
$
$
2018
96.2 $
83.5
57.0
41.9
278.6 $
2017
102.1 $
87.1
57.0
43.6
289.8 $
2016
89.7
69.3
50.9
38.5
248.4
2018 / 2017
2017 / 2016
(6 )%
(4 )
—
(4 )
(4 )%
14 %
26
12
13
17 %
56 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2018 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
35% Central
30% Global Family Office
20% East
15% West
2018 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
47% Equities
27% Cash and Other Assets
26% Fixed Income Securities
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 $1.58 billion in 2018, up $130.9 million, or 9%, from $1.45 billion in 2017, which in turn
were up $129.4 million, or 10%, from $1.32 billion in 2016. The results in 2018 benefited from favorable markets, a
2018 Annual Report | Northern Trust Corporation 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
change in presentation of certain fees resulting from the adoption of the new revenue recognition standard, and new
business. The 10% increase in trust, investment and other servicing fees in 2017 compared to 2016 was attributable to
favorable markets and new business.
At December 31, 2018, assets under custody in Wealth Management were $622.9 billion compared with $645.5 billion
at December 31, 2017. Assets under management were $278.6 billion at December 31, 2018 compared to $289.8 billion at
the previous year end.
Wealth Management Foreign Exchange Trading Income
Foreign exchange trading income totaled $4.2 million in 2018, a $1.1 million, or 35%, increase from $3.1 million in 2017.
The increase is attributable to higher client volumes and market volatility. Foreign exchange trading income in 2017
decreased $5.5 million, or 64%, as compared to 2016, reflecting lower volatility and client volumes.
Wealth Management Other Noninterest Income
Other noninterest income for 2018 totaled $102.7 million, a decrease of $1.2 million, or 1%, from $103.9 million in 2017,
due to decreases in treasury management fees. Other noninterest income in 2017 decreased $1.8 million, or 2%, as
compared to 2016, primarily reflecting decreases in banking fees and credit-related service charges.
Wealth Management Net Interest Income
Net interest income on an FTE basis was $816.5 million for 2018, up $80.3 million, or 11%, from $736.2 million in 2017,
primarily attributable to an increase in the net interest margin, partially offset by a decline in earning assets. Net interest
margin on an FTE basis increased to 3.16% from 2.80%, reflecting higher yields on earning assets. Average earning assets
totaled $25.9 billion in 2018, down $469.9 million, or 2%, in the current year from $26.3 billion in 2017. Net interest
income on an FTE basis in 2017 increased $84.8 million, or 13%, from 2016 and the net interest margin on an FTE basis in
2017 of 2.80% increased from the 2016 net interest margin of 2.48%. The higher net interest margin in 2017 as compared
to 2016 was attributable to higher yields on earning assets. Earning assets and funding sources in 2018, 2017, and 2016
were primarily comprised of loans and domestic interest-bearing deposits, respectively.
Wealth Management Provision for Credit Losses
The provision for credit losses was a credit of $16.4 million for 2018, compared to a credit of $31.4 million in 2017, and a
credit of $27.9 million in 2016. The 2018 provision credit was primarily driven by improved credit quality and reductions
in outstanding loans, standby letters of credit, and undrawn commitments, which resulted in a reduction of the inherent
allowance. The 2017 provision credit was primarily driven by improvement in the credit quality of the commercial real
estate and residential real estate portfolios, partially offset by charge-offs. The 2016 provision credit was primarily driven
by improvement in the credit quality of the residential real estate and private client portfolios.
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 $1.46 billion
in 2018, an increase of $54.7 million, or 4%, from $1.41 billion in the prior year. The increase was primarily due to higher
indirect expense allocations and compensation expense. Noninterest expense for 2017 increased $90.0 million, or 7%, from
$1.32 billion in 2016. The increase was primarily due to higher indirect expense allocations, severance-related charges,
compensation expense, and outside services expense in 2017.
58 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Treasury and Other
Treasury and Other includes income and expense associated with the wholesale funding activities and the investment
portfolios of the Corporation and the Bank. Treasury and Other also includes certain corporate-based expense, executive
level compensation and nonrecurring items not allocated to the reporting segments.
The following table summarizes the results of operations of Treasury and Other for the years ended December 31,
2018, 2017, and 2016 on a management-reporting basis.
TABLE 26: TREASURY AND OTHER RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
Net Interest Income (Note)
Revenue (Note)
Noninterest Expense
Income (Loss) before Income Taxes (Note)
Provision (Benefit) for Income Taxes (Note)
Net Income
Percentage of Consolidated Net Income
Average Assets
Note: Stated on an FTE basis.
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
$
2018
60.5
(144.8 )
(84.3 )
135.5
(219.8 )
(74.8 )
(145.0 ) $
(9 )%
13,786.4
$
$
$
$
2017
30.8 $
5.0
35.8
169.6
(133.8 )
(146.0 )
12.2 $
1 %
12,901.9 $
2016
133.1
43.6
176.7
143.2
33.5
(4.3 )
37.8
4 %
12,850.6
2018 / 2017
2017 / 2016
96 %
N/M
N/M
(20 )
64
(49 )
N/M
(77 )%
(89 )
(80 )
18
N/M
N/M
(68 )%
7 %
— %
Treasury and Other noninterest income in 2018 was $60.5 million compared to $30.8 million in 2017. The increase
primarily reflects an increase in foreign exchange trading income, a component of other noninterest income, due to higher
foreign exchange swap activity in Treasury and increased market volatility, partially offset by decreases in various other
operating income categories.
Treasury and Other net interest income on an FTE basis in 2018 was a loss of $144.8 million, down $149.8 million
from $5.0 million in 2017. The decrease reflected a decline in the net interest margin. Net interest income on an FTE basis
in 2017 decreased $38.6 million, or 89%, to $5.0 million from $43.6 million in 2016. The decrease reflected a decline in
the net interest margin and lower levels of earning assets.
Treasury and Other noninterest expense in 2018 equaled $135.5 million, down $34.1 million, or 20%, from $169.6
million in 2017. The decrease is primarily attributable to an increase in indirect expense allocations to C&IS and Wealth
Management and lower compensation expense, partially offset by higher general overhead costs, including equipment and
software expense and outside services expense.
The benefit from income taxes was $74.8 million in 2018, down from $146.0 million in the prior year, primarily due to
the reduction in the U.S. corporate income tax rate from 35% to 21% as a result of the TCJA enacted in the fourth quarter
of 2017, the higher net benefit recorded in the prior year attributable to the Tax Cuts and Jobs Act of $53.1 million
compared to the current year net benefit of $4.8 million, a tax benefit recognized in 2018 resulting from a change in
accounting method regarding the timing of tax deductions for software-related expenses of $24.4 million, Federal and State
research tax credits of $17.6 million recorded in the prior year related to the Corporation’s technology spend between 2013
and 2016, and a reduction in the income tax benefit derived from the vesting of restricted stock units and stock option
exercises compared to the prior year, partially offset by lower income before income taxes.
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 and passive 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.
2018 Annual Report | Northern Trust Corporation 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 2018, Northern Trust managed $1.07 trillion in assets for personal and institutional clients, including
$790.8 billion for C&IS clients and $278.6 billion for Wealth Management clients. The following table presents
consolidated assets under management as of December 31, 2018, 2017 and 2016 by investment type.
TABLE 27: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
($ In Billions)
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
Total Assets Under Management
DECEMBER 31,
CHANGE
2018
534.2 $
178.3
207.0
149.9
1,069.4 $
2017
592.3 $
183.5
217.5
167.7
1,161.0 $
$
$
2016
480.6
160.5
189.3
112.0
942.4
2018 / 2017
2017 / 2016
(10 )%
(3 )
(5 )
(11 )
(8 )%
23 %
14
15
50
23 %
Assets under management decreased $91.6 billion, or 8%, from $1.16 trillion at year-end 2017. The decrease primarily
reflected unfavorable markets and net outflows. The following table presents activity in consolidated assets under
management by investment type during the year ended December 31, 2018.
TABLE 28: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
2018
1,161.0 $
$
2017
942.4 $
174.7
63.7
484.3
165.6
888.3
(179.2 )
(72.5 )
(487.4 )
(183.3 )
192.1
68.1
407.9
132.4
800.5
(185.7 )
(57.2 )
(384.0 )
(76.7 )
2016
875.3
136.0
59.3
383.4
93.8
672.5
(136.1 )
(48.0 )
(363.6 )
(85.7 )
(922.4 )
(703.6 )
(633.4 )
(34.1 )
96.9
39.1
(49.3 )
(8.2 )
(57.5 )
111.6
10.1
121.7
32.0
(4.0 )
28.0
$
1,069.4 $
1,161.0 $
942.4
($ In Billions)
Balance as of January 1,
Inflows by Investment Type
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
Total Inflows
Outflows by Investment Type
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
Total Outflows
Net (Outflows) / Inflows
Market Performance, Currency and Other
Market Performance and Other
Currency
Total Market Performance, Currency and Other
Balance as of December 31,
60 2018 Annual Report | Northern Trust Corporation
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, available for sale, and trading investment
securities by type as of December 31, 2018, 2017 and 2016.
TABLE 29: SECURITIES PORTFOLIO
($ In Millions)
Debt Securities Held to Maturity
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Total Debt Securities Held to Maturity
Debt Securities Available for Sale
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Asset-Backed
Auction Rate
Other
Total Debt Securities Available for Sale
Trading Account
Total Debt Securities at Year-End
Average Total Securities
DECEMBER 31,
2018
2017
2016
101.6 $
18.9
4.5
14,229.0
14,354.0 $
5,185.3 $
655.9
22,424.6
3,244.9
—
5,378.1
36,888.8 $
0.3 $
51,243.1 $
50,281.5 $
35.0 $
34.6
5.8
12,973.6
13,049.0 $
5,700.3 $
746.4
18,676.6
2,726.4
4.3
5,888.1
33,742.1 $
0.5 $
46,791.6 $
44,715.7 $
15.0
63.6
7.4
8,835.1
8,921.1
7,522.6
885.2
17,892.8
2,556.7
4.7
6,717.8
35,579.8
0.3
44,501.2
42,041.3
$
$
$
$
$
$
$
Northern Trust maintains a high quality debt securities portfolio, with 79% of the combined available for sale, held to
maturity, and trading account portfolios at December 31, 2018 composed of U.S. Treasury and government sponsored
agency securities and triple-A rated corporate notes, asset-backed securities, covered bonds, sub-sovereign, supranational,
sovereign & non-U.S. agency bonds, commercial mortgage-backed securities and obligations of states and political
subdivisions. The remaining portfolio was composed of corporate notes, negotiable certificates of deposit, obligations of
states and political subdivisions, and other securities, of which as a percentage of the total securities portfolio, 8% were
rated double-A, 2% were rated below double-A, and 11% were not rated by Moody’s Investors Service or Standard and
Poor’s (primarily non-U.S. sovereign securities whose long-term ratings are at least A).
At December 31, 2018, 26% of corporate debt was rated triple-A, 40% was rated double-A, and 34% was rated below
double-A or not rated. Securities classified as “other asset-backed” at December 31, 2018 had average lives of less than 5
years, and 100% were rated triple-A.
Unrealized losses within the debt securities portfolio at December 31, 2018 were $357.1 million as compared to
$249.4 million at December 31, 2017, primarily reflecting higher market rates since purchase; 37% of the corporate debt
portfolio is backed by guarantees provided by U.S. and non-U.S. governmental entities. There were $0.5 million and $0.2
million of losses recognized in 2018 and 2017, respectively, in connection with the write-down of CRA securities
determined to be OTTI. There were $3.7 million OTTI losses recognized in 2016.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for
as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest.
To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is
monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly
assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities
purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the
repurchase.
2018 Annual Report | Northern Trust Corporation 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and Leases
During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the
consistency of its reporting across various regulatory regimes. As a result, the loan and lease balances for periods ended
prior to January 1, 2017 below have been adjusted to conform to the presentation for periods ended after such date. The
adjustments generally reflected reclassification of loans and leases from the commercial and institutional class to the
residential real estate class. There was no impact on total loans and leases previously reported.
The following table presents the amounts outstanding of loans and leases by segment and class as of December 31, 2018
and the preceding four year-ends.
TABLE 30: COMPOSITION OF LOAN PORTFOLIO
($ In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Non-U.S.
Lease Financing, net
Other
Total Commercial
Personal
Private Client
Residential Real Estate
Other
Total Personal
Total Loans and Leases
DECEMBER 31,
2018
2017
2016
2015
2014
$
$
$
$
$
8,728.1 $
3,228.8
2,701.6
90.7
426.0
15,175.2 $
10,733.3 $
6,514.0
67.5
17,314.8 $
32,490.0 $
9,042.2 $
3,482.7
1,538.5
229.2
265.4
14,558.0 $
10,753.1 $
7,247.6
33.5
18,034.2 $
32,592.2 $
9,287.4 $
4,002.5
1,877.8
293.9
205.1
15,666.7 $
10,052.0 $
8,077.5
25.9
18,155.4 $
33,822.1 $
9,307.5 $
3,848.8
1,137.7
544.4
194.1
15,032.5 $
9,136.4 $
8,974.7
37.3
18,148.4 $
33,180.9 $
8,343.7
3,333.3
1,530.6
916.3
191.5
14,315.4
7,466.9
9,820.8
37.1
17,324.8
31,640.2
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 $6.5 billion at December 31, 2018, or 22% of total U.S.
loans, compared with $7.2 billion, or 23% of total U.S. loans, at December 31, 2017. 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 80% at inception. Appraisals of
supporting collateral for residential real estate loans are obtained at loan origination and upon refinancing or default or
when otherwise considered warranted. Residential real estate collateral appraisals are performed and reviewed by
independent third parties.
Of the total $6.5 billion in residential real estate loans at December 31, 2018, $1.7 billion were in Florida, $1.3 billion
were in California, and $1.2 billion were in the greater Chicago area, 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 $824.0 million and $1.0 billion at December 31, 2018 and
2017, respectively.
Commercial Real Estate
In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower’s
principal business activity is the acquisition or the development of real estate for commercial purposes; (2) the principal
collateral is real estate held for commercial purposes, and loan repayment is expected to flow from the operation of the
property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing
part of the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are
included without regard to the use of loan proceeds. The commercial real estate portfolio consists of commercial mortgages
and construction, acquisition and development loans extended primarily to investors well known to Northern Trust.
Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements.
Recourse to owners through guarantees also is commonly required.
62 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Commercial mortgage financing is provided for the acquisition or refinancing of income-producing properties. Cash
flows from the properties generally are sufficient to amortize the loan. These loans are primarily located in the California,
Illinois, Florida, Texas, and Arizona markets. Construction, acquisition and development loans provide financing for
commercial real estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or
refinance the loan through a commercial mortgage with Northern Trust or another financial institution upon completion.
The table below provides additional detail regarding commercial real estate loan types:
TABLE 31: COMMERCIAL REAL ESTATE LOANS
($ In Millions)
Commercial Mortgages:
Office
Apartment/Multi-family
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,
2018
2017
$
$
811.2 $
490.7
529.7
254.9
426.6
2,513.1
420.6
127.0
168.1
3,228.8 $
825.2
623.3
631.1
311.1
445.6
2,836.3
350.8
164.8
130.8
3,482.7
At December 31, 2018, legally binding commitments to extend credit and standby letters of credit to commercial real estate
borrowers totaled $331.4 million and $8.5 million, respectively. At December 31, 2017, legally binding commitments and
standby letters of credit totaled $312.5 million and $13.8 million, respectively.
Nonperforming Assets and 90 Days Past Due Loans
During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the
consistency of its reporting across various regulatory regimes. As a result, the loan and lease balances for periods ended
prior to January 1, 2017 below have been adjusted to conform to the presentation for periods ended after such date. The
adjustments generally reflected reclassification of loans and leases from the commercial and institutional class to the
residential real estate class. There was no impact on total loans and leases previously reported.
2018 Annual Report | Northern Trust Corporation 63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming assets consist of nonperforming loans and leases and other real estate owned (OREO). OREO is comprised
of commercial and residential properties acquired in partial or total satisfaction of loans. Loans that are delinquent 90 days
or more and still accruing interest can fluctuate widely at any reporting period based on the timing of cash collections,
renegotiations and renewals. The following table presents nonperforming assets and loans that were delinquent 90 days or
more and still accruing at December 31, 2018 and each of the prior four year-ends.
TABLE 32: NONPERFORMING ASSETS
($ In Millions)
Nonperforming Loans and Leases
Commercial
Commercial and Institutional
Commercial Real Estate
Non-U.S.
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
Nonperforming Loans and Leases to Total Loans and Leases
Allowance for Credit Losses Assigned to Loans and Leases to
Nonperforming Loans and Leases
DECEMBER 31,
2018
2017
2016
2015
2014
$
$
$
$
6.8 $
6.9
0.4
14.1
95.0 $
0.2
95.2
109.3
8.4
117.7 $
16.4 $
0.34 %
26.0 $
8.3
—
34.3
116.4 $
—
116.4
150.7
4.6
155.3 $
8.0 $
0.46 %
9.2 $
11.6
—
20.8
139.1 $
0.3
139.4
160.2
5.2
165.4 $
31.0 $
0.47 %
18.1 $
16.7
—
34.8
144.9 $
0.4
145.3
180.1
8.2
188.3 $
7.1 $
0.54 %
15.0
37.1
—
52.1
162.4
1.2
163.6
215.7
16.6
232.3
22.7
0.68 %
1.0 x
0.9 x
1.0 x
1.1 x
1.2 x
Nonperforming assets of $117.7 million as of December 31, 2018 decreased $37.6 million, or 24% from $155.3 million in
December 31, 2017, reflecting improved credit quality in the residential real estate portfolio and the commercial and
institutional portfolio. Changes in the level of nonperforming assets may be indicative of changes in the credit quality of
one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment
of the specific allowance and the quantitative and qualitative factors used in the determination of the inherent allowance
levels within the allowance for credit losses.
Allowance and Provision for Credit Losses
During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the
consistency of its reporting across various regulatory regimes. The allowance for credit losses as of December 31, 2016
remains unadjusted, as the impact of the reclassification on the allowance was immaterial.
TABLE 33: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
($ 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
$
$
2018
153.8 $
(10.1 )
9.0
(1.1 )
(14.5 )
—
138.2 $
2017
192.0 $
(21.5 )
11.3
(10.2 )
(28.0 )
—
153.8 $
2016
233.3
(27.3 )
12.1
(15.2 )
(26.0 )
(0.1 )
192.0
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).
64 2018 Annual Report | Northern Trust Corporation
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, 2018, and at each of the prior four year-ends.
TABLE 34: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
2018
2017
DECEMBER 31,
2016
2015
2014
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
5.4
— % $
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
2.1
— % $
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
3.1
— % $
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
21.1
— % $
PERCENT
OF
LOANS
TO
TOTAL
LOANS
— %
ALLOWANCE
AMOUNT
10.0
$
($ In Millions)
Specific Allowance
Allocated Inherent
Allowance
Commercial
Commercial and
Institutional
Commercial Real
Estate
Lease Financing,
net
Non-U.S.
Other
Total Commercial
Personal
Residential Real
Estate
Private Client
Other
Total Personal
Total Allocated Inherent
Allowance
Total Allowance for
Credit Losses
Allowance Assigned to:
$
$
Loans and Leases $
Undrawn
Commitments and
Standby Letters of
Credit
33.5
35.5
0.1
—
2.7
71.8
45.8
9.2
1.4
56.4
27
10
—
8
2
47
20
33
—
53
34.7
43.3
0.2
—
1.5
79.7
57.3
9.5
1.9
68.7
27
11
1
5
1
45
22
33
—
55
34.7
69.2
0.4
—
0.6
104.9
69.0
13.8
2.2
85.0
27
12
1
5
1
46
24
30
—
54
40.4
69.5
1.9
—
—
111.8
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
128.2
100 % $
148.4
100 % $
189.9
100 % $
230.2
100 % $
274.8
100 %
138.2
100 % $
153.8
100 % $
192.0
100 % $
233.3
100 % $
295.9
100 %
112.6
$
131.2
$
161.0
$
193.8
$
267.0
25.6
22.6
31.0
39.5
28.9
Total Allowance for
Credit Losses
Allowance Assigned to
Loans and Leases to
Total Loans and Leases
$
138.2
$
153.8
$
192.0
$
233.3
$
295.9
0.35 %
0.40 %
0.48 %
0.58 %
0.84 %
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, 2018, the specific allowance component amounted to $10.0 million compared with $5.4 million at
the end of 2017. The $4.6 million increase is primarily attributable to outstanding loans and standby letters of credit in the
residential real estate and commercial and institutional portfolios, respectively.
The increase in the specific component of the allowance from $2.1 million in 2016 to $5.4 million in 2017 was
primarily attributable to additional allowances provided for new nonperforming loans, partially offset by charge-offs and
pay-offs.
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
2018 Annual Report | Northern Trust Corporation 65
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 $20.2 million to $128.2 million at December 31, 2018, compared with
$148.4 million at December 31, 2017, which decreased $41.5 million from $189.9 million at December 31, 2016.
The decrease in 2018 was primarily driven by reductions in outstanding loans and undrawn loan commitments and
standby letters of credit and improved credit quality across the portfolio. The decrease in 2017 was primarily driven by
improvement in the credit quality of the commercial real estate and residential real estate portfolios.
Overall Allowance: The evaluation of the specific component and the inherent component above resulted in a total
allowance for credit losses of $138.2 million at December 31, 2018, compared with $153.8 million at the end of 2017. The
allowance of $112.6 million assigned to loans and leases, as a percentage of total loans and leases, was 0.35% at
December 31, 2018, down from a $131.2 million allowance assigned to loans and leases, representing 0.40% of total loans
and leases at December 31, 2017. Allowances assigned to undrawn loan commitments and standby letters of credit totaled
$25.6 million and $22.6 million at December 31, 2018 and December 31, 2017, respectively, and are included in other
liabilities in the consolidated balance sheets.
Provision: The provision for credit losses was a credit of $14.5 million and net charge-offs totaled $1.1 million in
2018. This compares with a credit provision of $28.0 million and net charge-offs of $10.2 million in 2017, and a $26.0
million credit provision and net charge-offs of $15.2 million in 2016.
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, 2018, impaired loans totaled $116.2 million and included $99.8 million of loans deemed troubled debt
restructurings as compared to total impaired loans of $139.8 million at December 31, 2017, which included $98.4 million
of loans deemed troubled debt restructurings. Impaired loans had $7.2 million and $5.4 million of the allowance for credit
losses allocated to them at December 31, 2018, and December 31, 2017, 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, 2018) homogeneous
loans are collectively evaluated for impairment and excluded from impaired loan disclosures as allowed under applicable
accounting standards.
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 1, “Summary of Significant Accounting Policies,” to the
consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.” 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
and pension plan accounting. Management has discussed the development and selection of each critical accounting
estimate with the Audit Committee of the Board of Directors (Audit Committee).
Allowance for Credit Losses
The allowance for credit losses represents management’s estimate of probable losses which have been incurred 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:
66 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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: The inherent allowance estimation methodology is based on internally developed loss data
specific to the Northern Trust loan and lease portfolio. The estimation methodology and the related qualitative adjustment
framework segregate the loan and lease portfolio into 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.
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 2018 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.
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, of which the majority 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 actuarially-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.
2018 Annual Report | Northern Trust Corporation 67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2018, Northern Trust utilized a discount rate of 3.79% for
both the Qualified Plan and the Nonqualified Plan. The rate of increase in the compensation level is based on a graded
schedule from 9.00% to 2.50% that averaged 4.39%. The expected long-term rate of return on Qualified Plan assets was
6.00%.
In evaluating possible revisions to pension-related assumptions for the U.S. plans as of Northern Trust’s December 31,
2018 measurement date, the following were considered:
• Discount Rate: Northern Trust estimates the discount rate for its U.S. pension plans by applying the projected cash
flows for future benefit payments to the Aon 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 4.47% at December 31, 2018 for the Qualified and Nonqualified plans, an increase from 3.79% at
December 31, 2017.
• Compensation Level: Based on a review of actual and anticipated salary experience, the compensation scale
assumption continues to be based on a graded schedule from 9.00% to 2.50% that averages 4.39%.
• 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 for the Qualified Plan
remains at 6.00% for 2019.
• Mortality Table: Northern Trust uses the aggregate RP-2014 mortality table with adjustment from 2014 to 2006.
Northern Trust’s pension obligations reflect proposed future improvement under scale MP-2018, released by the
Society of Actuaries in October 2018. This assumption was updated at December 31, 2018 from improvement scale
MP-2017. The updated improvement scale applies to annuity payments only and results in generally lower projected
mortality improvements than estimated by the MP-2017 improvement scale. Mortality assumptions on lump sum
payments remain static and continue to be in line with the IRS prescribed table for minimum lump sums in 2019.
Annual net pension expense in 2019 is expected to decrease by approximately $8.2 million, primarily driven by the
increase in discount rate.
In order to illustrate the sensitivity of these assumptions on the expected U.S Plans’ periodic pension expense in 2019 and
the projected benefit obligation as of December 31, 2018, the following table is presented to show the effect of increasing
or decreasing each of these assumptions by 25 basis points.
TABLE 35: SENSITIVITY OF U.S. PENSION PLANS ASSUMPTIONS
($ In Millions)
Increase (Decrease) in 2019 Pension Expense
Discount Rate Change
Compensation Level Change
Rate of Return on Plan Assets Change
Increase (Decrease) in 2018 Projected Benefit Obligation
Discount Rate Change
Compensation Level Change
25 BASIS
POINT INCREASE
25 BASIS
POINT DECREASE
$
(3.8 ) $
1.8
(3.6 )
(42.0 )
6.7
3.9
(1.6 )
3.6
44.3
(6.5 )
Pension Contributions: The deduction limits specified by the Internal Revenue Code for contributions made by sponsors
of defined benefit pension plans are based on a “Target Liability” under the provisions of the Pension Protection Act of
2006. There were no contributions to the Qualified Plan in 2018 plan year. Northern Trust contributed $50.0 million to the
68 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Qualified Plan at the beginning of 2018, retrospectively for the 2017 plan year. The minimum required contribution to the
Qualified Plan is expected to be zero in 2019. The maximum deductible contribution is estimated at $270 million for 2019.
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, 2018, approximately 29% of Northern Trust’s total assets and less than 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
liabilities (Level 1) and the lowest priority to valuation techniques that require significant management judgment because
one or more of the significant inputs are unobservable in the market place (Level 3). Approximately 14% of Northern
Trust’s assets carried at fair value are classified as Level 1. Northern Trust typically does not hold equity securities or other
instruments that are actively traded on an exchange.
Approximately 86% of Northern Trust’s assets and 94% 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 debt securities
classified as available for sale make up 96% of Level 2 assets with the remaining 4% 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, 2018, all derivative assets and liabilities, excluding the swap related to the sale of certain Visa
Class B common shares described below, were classified as Level 2 and approximately 96%, 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, 2018, Northern Trust’s Level 3 liabilities consisted of swaps that Northern Trust entered into with
the purchaser of 1.1 million and 1.0 million shares of Visa Class B common shares previously held by Northern Trust and
sold in June 2016 and 2015, respectively. Pursuant to the swaps, 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 swaps also require 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 swaps are 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 25, “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.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,
“Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet,
with certain specified scope exceptions. Specifically within the lessee model under ASU 2016-02, a lessee is required to
recognize on the balance sheet a liability to make future lease payments, known as the lease liability, and a right-of-use asset
2018 Annual Report | Northern Trust Corporation 69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(ROU asset) representing its right to use the underlying asset over the lease term. Northern Trust has established a complete
inventory of leases and has formalized the future operating model for lease accounting and related internal controls. ASU 2016-
02 is effective for interim and annual reporting periods beginning after December 15, 2018, with certain practical expedients
available. Northern Trust adopted ASU 2016-02 as of January 1, 2019, the date of initial application, and in doing so does not
expect to restate comparative periods for the effects of applying ASU 2016-02. Northern Trust elected the package of practical
expedients available under ASU 2016-02, which allows Northern Trust to forego a reassessment of (1) whether any expired or
existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) the initial direct costs
for any existing leases. As a result of the adoption of ASU 2016-02, Northern Trust will recognize operating lease liabilities of
approximately $530 million, with corresponding ROU assets of approximately $480 million based on the present value of the
remaining minimum rental payments under Accounting Standards Codification 840 - Leases, and adjustments to the ROU assets
for deferred rent required under ASU 2016-02. The adoption of ASU 2016-02 will not impact significantly Northern Trust’s
consolidated results of operations.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 significantly changes the way impairment of financial
instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining
life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred loss” approach under
current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an
allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the
other-than-temporary-impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-
impaired debt securities and loans. ASU 2016-13 is effective for interim and annual reporting periods beginning after December
15, 2019, although early adoption is permitted.
Northern Trust has established a working group across various functions, an overall governance structure, and has finalized
a detailed project plan for its implementation efforts. Further, Northern Trust is finalizing the development activities for its
credit models, focusing initially on its securities credit models. Northern Trust’s internal model validation group has started the
review and validation process for these credit models. In addition, Northern Trust assessed the new disclosure requirements and
evaluated the availability of required new data elements, and is in the process of drafting disclosures required under ASU 2016-
13. Northern Trust continues to evaluate specific application issues and the overall impact of the adoption of ASU 2016-13.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). The primary objective of ASU 2018-13
is to improve the effectiveness of disclosures in the notes to financial statements. ASU 2018-13 is effective for interim and
annual reporting periods beginning after December 15, 2019, although early adoption is permitted. The adoption of ASU 2018-
13 will not impact significantly Northern Trust’s consolidated financial condition or results of operations.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal - Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract (a consensus of the FASB Emerging Issues Task Force)” (ASU 2018-15). ASU 2018-15 aligns the requirements for
capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for
capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an
internal use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years, although early adoption is permitted. ASU 2018-15 is not expected to impact significantly Northern
Trust’s consolidated financial condition or results of operations.
In October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured
Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting
Purposes” (ASU 2018-16). ASU 2018-16 permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for
hedge accounting purposes under Topic 815. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years, although early adoption is permitted. ASU 2018-16 is not expected to impact
significantly Northern Trust’s consolidated financial condition or results of operations.
In October 2018, the FASB issued ASU 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party
Guidance for Variable Interest Entities” (ASU 2018-17). ASU 2018-17 requires that indirect interests held through related
parties in common control arrangements should be considered on a proportional basis (rather than as the equivalent of a direct
interest in its entirety) for determining whether fees paid to decision makers and service providers are variable interests. ASU
2018-17 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, although
early adoption is permitted. ASU 2018-17 is not expected to impact significantly Northern Trust’s consolidated financial
condition or results of operations.
70 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL EXPENDITURES
Capital expenditures in 2018 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 2018 totaled
$506.0 million, of which $408.4 million was for software, $62.0 million was for computer hardware, $29.9 million was for
building and leasehold improvements, and $5.7 million was for furnishings. These capital expenditures principally support,
enhance, and protect Northern Trust’s investment management, asset servicing and asset management capabilities, and
provide relationship management tools to better serve our clients. Additional capital expenditures committed for
technology systems 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 2017 totaled $472.8 million, of which $381.2 million was for software,
$58.3 million was for computer hardware, $27.1 million was for building and leasehold improvements, and $6.2 million
was for furnishings.
OFF-BALANCE-SHEET ARRANGEMENTS
Assets Under Custody/Administration and Assets Under Management
Northern Trust, in the normal course of business, holds assets under custody/administration and management in a fiduciary
or agency capacity for its clients. In accordance with GAAP, these assets are not assets of Northern Trust and are not
included in its consolidated balance sheets.
Commitments, Letters of Credit and Securities Lent with Indemnification
Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to
meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the
potential credit exposure should the instrument be drawn fully upon and the client default. To control the credit risk
associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same
credit quality and monitoring controls as its lending activities. The following table provides details of Northern Trust’s off-
balance-sheet financial instruments as of December 31, 2018 and 2017.
TABLE 36: SUMMARY OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS
($ 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,
2018
2017
$
$
$
7,629.9 $
17,393.1
25,023.0 $
2,486.2 $
32.3
128,904.8
8,617.3
18,205.3
26,822.6
2,970.0
37.7
143,568.2
2018 Annual Report | Northern Trust Corporation 71
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, 2018.
TABLE 37: UNDRAWN COMMITMENTS TO EXTEND CREDIT BY INDUSTRY SECTOR
AS OF DECEMBER 31, 2018
($ 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
$
3,877.6 $
—
6,637.8
723.1
106.0
772.3
5,629.0
308.2
1,265.6
634.7
199.4
20,153.7
331.4
—
1,167.0
130.8
21,782.9
824.0
2,395.4
20.7
3,240.1
1,745.1 $
—
614.1
184.9
106.0
170.0
2,338.2
1.3
—
36.8
152.2
5,348.6
63.9
—
608.6
130.8
6,151.9
194.0
1,263.3
20.7
1,478.0
2,132.5 $
—
6,023.7
538.2
—
602.3
3,290.8
306.9
1,265.6
597.9
47.2
14,805.1
267.5
—
558.4
—
15,631.0
630.0
1,132.1
—
1,762.1
$
25,023.0 $
7,629.9 $
17,393.1 $
1,644.2
20.3
1,604.4
21.1
58.7
134.3
4,274.7
235.4
4.5
387.8
342.7
8,728.1
3,228.8
90.7
2,701.6
426.0
15,175.2
6,514.0
10,733.3
67.5
17,314.8
32,490.0
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 $2.5 billion and $3.0 billion at December 31, 2018 and 2017, respectively, include $72.3 million and $92.5
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 23 months at December 31, 2018 and 24 months at December 31, 2017.
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 Capital Markets Credit 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
$128.9 billion and $143.6 billion at December 31, 2018 and 2017, respectively. Because of the credit quality of the
72 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
borrowers and the requirement to collateralize fully securities borrowed, management believes that the exposure to credit
loss from this activity is not significant and no liability was recorded at December 31, 2018, or 2017 related to these
indemnifications.
Additional information about Northern Trust’s off-balance-sheet financial instruments is included in Note 28, “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 the leveraged lease trust VIEs
given it lacks the power to direct the activities that most significantly impact the economic performance of the leveraged
lease trust 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. The community development projects are formed as limited partnerships and limited liability
companies in which Northern Trust invests as a limited partner/investor member through equity contributions. The
economic performance of the community development projects, some of 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 project VIEs 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 community
development project 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, Northern Trust 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
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, 2018, the Bank had over $38.6 billion of securities and loans readily
available as collateral to support discount window borrowings. The Bank also is 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.
2018 Annual Report | Northern Trust Corporation 73
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 68% of total assets
as of December 31, 2018. The market value of unencumbered securities at the Bank, which include those placed at the
Federal Reserve discount window, totaled $47.3 billion at December 31, 2018. The Corporation and the Bank each satisfied
the U.S. liquidity coverage ratio requirements during 2018.
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. On August 3, 2018, the Corporation issued $500 million of 3.650% senior notes, due August 3,
2028. The Corporation also received $1.2 billion of dividends from the Bank in 2018. Dividends from the Bank are subject
to certain restrictions, as discussed in further detail in Note 31, “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 2018 were $924.3 million of common stock repurchases and
$405.4 million of common stock dividends.
The Corporation’s liquidity, defined as the amount of cash and highly marketable assets, was $866.8 million and $1.0
billion at December 31, 2018 and 2017, respectively. During, and at year-end, 2018 and 2017, 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 2018 and 2017 was $887.0 million and $750.5 million, respectively. The cash flows of the
Corporation are shown in Note 34, “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, 2018, provided below, allow
Northern Trust to access capital markets on favorable terms.
TABLE 38: NORTHERN TRUST CREDIT RATINGS AS OF DECEMBER 31, 2018
Northern Trust Corporation:
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+
A
BBB+
BBB+
Stable
A-1+
AA-
A+
Stable
A2
A2
Baa1
A3
Stable
P-1
Aa2
A2
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 26, “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, 2018, was $7.6 million. Other than these credit-risk-
related contingent derivative counterparty payments, Northern Trust had no long-term debt covenants or other credit-risk-
related payments at December 31, 2018, that would be triggered by a significant downgrade in its debt ratings.
74 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements of Cash Flows
For the year ended December 31, 2018, net cash provided by operating activities was $1.8 billion, primarily
reflecting period earnings and the impact of other operating activities and non-cash charges such as amortization of
computer software, partially offset by higher net collateral deposited with derivative counterparties
Net cash provided by operating activities for the year ended December 31, 2017, was $1.7 billion, primarily reflecting
earnings and the impact of non-cash charges such as amortization of computer software, partially offset by other operating
activities.
Net cash provided by investing activities was $4.3 billion for the year ended December 31, 2018, primarily reflecting
decreased levels of deposits with the Federal Reserve and other central banks and lower interest-bearing deposits with
banks, partially offset by net purchases of debt securities available for sale and held to maturity and the net change in other
investing activities.
Net cash used in investing activities was $14.0 billion for the year ended December 31, 2017, primarily attributable to
an increase in deposits with the Federal Reserve and other central banks as well as net purchases of debt securities held to
maturity.
For the year ended December 31, 2018, net cash used in financing activities totaled $5.8 billion, primarily reflecting
decreased levels of total deposits, the repurchase of common stock pursuant to the Corporation’s share repurchase program,
lower securities sold under agreements to repurchase, dividends paid on common and preferred stock, and repayments of
the 6.50% subordinated notes previously issued by the Bank and due August 2018, partially offset by higher short-term
other borrowings and the proceeds from the issuance by the Corporation of 3.65% senior notes. The decrease in total
deposits was primarily attributable to lower levels of non-interest bearing domestic and non-U.S. office client deposits and
lower domestic interest-bearing client deposits.
For the year ended December 31, 2017, net cash provided by financing activities totaled $11.3 billion, primarily
reflecting higher levels of total deposits, federal funds purchased, increases in short-term other borrowings, and the
proceeds from the issuance by the Corporation of 3.375% fixed-to-floating rate subordinated notes, partially offset by the
repurchase of common stock pursuant to the Corporation’s share repurchase program, dividends paid on common and
preferred stock, and repayments of the 5.85% subordinated notes previously issued by the Bank and due November 2017.
Regulatory Environment
Northern Trust actively follows regulatory developments and regularly evaluates its liquidity risk management framework
against proposed rulemaking and industry best practices in order to comply with applicable regulations and further enhance
its liquidity policies. Please refer to “Liquidity Standards” under “Supervision and Regulation” in Item 1, “Business,” of
this Annual Report on Form 10-K for a discussion of applicable liquidity standards.
Contractual Obligations
The following table shows Northern Trust’s contractual obligations as of December 31, 2018.
TABLE 39: CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2018
($ In Millions)
Senior Notes
(1)
Subordinated Debt
(1)
Floating Rate Capital Debt
(1)
Operating Leases
(2)
Purchase Obligations
(3)
Total Contractual Obligations
PAYMENT DUE BY PERIOD
TOTAL
2,011.3 $
1,112.4
277.6
763.1
715.2
4,879.6 $
ONE YEAR
AND LESS
— $
—
—
98.8
260.9
359.7 $
1-3
YEARS
998.8 $
—
—
183.7
301.8
1,484.3 $
3-5 YEARS
499.2 $
—
—
144.9
140.9
785.0 $
OVER 5
YEARS
513.3
1,112.4
277.6
335.7
11.6
2,250.6
$
$
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, 2018 activity was used as a
base to project future obligations.
2018 Annual Report | Northern Trust Corporation 75
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 both a total Corporation basis and
a legal entity basis. The Capital Committee is responsible for measuring and managing capital metrics against levels set
forth within the Capital Policy approved by the Capital Governance Committee of the Board of Directors. In establishing
the metrics related to 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 2018 as average stockholders’ equity increased $248.3 million, or 2%, reaching
$10.2 billion. Total stockholders’ equity was $10.5 billion at December 31, 2018, as compared to $10.2 billion at
December 31, 2017. In July 2018, the Board increased the quarterly common stock dividend by 31% to $0.55 per common
share. Common dividends totaling $439.1 million were declared in 2018. During the year ended December 31, 2018, the
Corporation repurchased 9.0 million shares of common stock, including 0.5 million shares withheld related to share-based
compensation, at an average price per share of $102.69. Preferred dividends totaling $46.4 million were declared in 2018.
76 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced
approaches. For each ratio, the lower of the result calculated under the standardized approach and the advanced approach
serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of
the Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios, under the
applicable U.S. regulatory rules as of December 31, 2018 and 2017.
TABLE 40: CAPITAL ADEQUACY
($ In Millions)
Common Equity Tier 1 Capital
Common Stockholders’ Equity
$
Net Unrealized (Gains) Losses on Debt 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
December 31, 2018
December 31, 2017
Advanced
Approach
Standardized
Approach
Advanced
Approach
Standardized
Approach
9,626.3 $
—
—
(767.6 )
—
(128.9 )
9,626.3 $
—
—
(767.6 )
—
(128.9 )
8,729.8
8,729.8
882.0
(15.1 )
866.9
882.0
(15.1 )
866.9
9,334.2 $
15.0
(0.9 )
(697.4 )
68.4
(93.0 )
8,626.3
882.0
(34.9 )
847.1
9,334.2
15.0
(0.9 )
(697.4 )
68.4
(93.0 )
8,626.3
882.0
(34.9 )
847.1
9,596.7
9,596.7
9,473.4
9,473.4
—
1,099.4
107.7
1,207.1
138.2
1,099.4
107.7
1,345.3
—
1,099.4
134.6
1,234.0
$
$
10,803.8 $
63,914.8 $
132,212.5
120,402.6
32,490.0
10,942.0 $
67,837.1 $
132,212.5
120,402.6
32,490.0
10,707.4 $
64,018.7 $
138,590.5
121,517.1
32,592.2
153.8
1,099.4
134.6
1,387.8
10,861.2
68,616.4
138,590.5
121,517.1
32,592.2
29.63 %
7.28
29.63 %
7.28
28.64 %
6.74
28.64 %
6.74
13.7 %
15.0
16.9
8.0
7.0
12.9 %
14.1
16.1
8.0
N/A
13.5 %
14.8
16.7
7.8
6.8
12.6 %
13.8
15.8
7.8
N/A
Other
Total Common Equity Tier 1
Additional Tier 1 Capital
Preferred Stock
Other
Total Additional Tier 1 Capital
Total Tier 1 Capital
Tier 2 Capital
Qualifying Allowance for Credit Losses
Qualifying Subordinated Debt
Floating Rate Capital
Total Tier 2 Capital
Total Risk-Based Capital
Risk-Weighted Assets
Total Assets – End of Period (EOP)
(1)
Adjusted Average Fourth Quarter Assets
Total Loans and Leases – EOP
(2)
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
(3)
(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) 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 and Bank are subject to a minimum supplementary leverage ratio of 3 percent.
As of December 31, 2018 and 2017, 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 33, “Regulatory Capital Requirements,” to the
consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.”
2018 Annual Report | Northern Trust Corporation 77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of December 31, 2018, the Corporation’s common equity Tier 1 capital ratio as calculated under the advanced
approaches methodologies would have been 13.7% on a fully phased-in basis, while the Corporation’s common equity
Tier 1 capital ratio under the standardized approach would have been 12.9% on a fully phased-in basis.
RISK MANAGEMENT
Risk Management Overview
Northern Trust employs an integrated risk management framework to support its business decisions and the execution of its
corporate 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 and good conduct across the
organization. Northern Trust’s risk culture encompasses the general awareness, attitude and conduct of employees with
respect to risk and the management of risk across all lines of defense within the organization. Northern Trust cultivates a
culture of effective risk management by defining and embedding risk management accountabilities in all employee
performance expectations and provides training, development and performance rewards to reinforce this culture.
Northern Trust’s risk management framework contains three inter-related elements, designed to support consistent
enterprise risk identification, management and reporting: a comprehensive risk inventory, a static taxonomy of risk
categories and a dynamic taxonomy of risk themes. The risk inventory is a detailed register of the risks inherently faced by
Northern Trust, supporting the consistent identification and classification of risks across the organization. The risk
categories and risk themes are classification systems used for classifying and managing the risk inventory and enabling
different risk profile views. All identified risks inherent in Northern Trust’s business activities are cataloged into the
following risk categories: credit, operational, fiduciary, compliance, market, liquidity, and strategic risk. All material risks
are also dynamically cataloged into various risk themes which are defined groupings that share common characteristics,
focus on business outcomes and span across risk categories.
Northern Trust implements its risk management framework through a “three lines of defense” operating model,
embedding a robust risk management capability within its businesses. The model, used to communicate risk management
expectations across the organization, contains three roles, each a complimentary level of risk management accountability.
Within this operating model, 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. The Risk Management function,
the second line of defense, sets the direction for Northern Trust’s risk management activities and provides aggregate risk
oversight and reporting in support of risk governance. Audit Services, the third line of defense, provides independent
assurance as to the effectiveness of the integrated risk framework.
Risk Governance and Oversight Overview
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 oversight by the
Board of Directors and key risk-related committees.
TABLE 41: RISK GOVERNANCE STRUCTURE
Audit
Committee
Business Risk
Committee
Capital Governance
Committee
Compensation and Benefits
Committee
Northern Trust Corporation Board of Directors
Credit Risk
Committee
Operational Risk
Committee
Fiduciary Risk
Committee
Compliance & Ethics
Oversight Committee
Market & Liquidity
Risk Committee
Model Risk Oversight
Committee
Global Enterprise Risk Committee (GERC)
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 approves Northern Trust’s risk management framework 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
78 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northern Trust’s incentive compensation arrangements and practices in providing incentives that are consistent with
Northern Trust’s safety, soundness, and culture. This assessment includes an evaluation of whether Northern Trust’s
incentive compensation arrangements and practices discourage inappropriate risk-taking behavior by participants. The
Capital Governance Committee of the Board assists the Board in discharging its oversight duties with respect to capital
management and resolution 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, and challenges management, as appropriate, on various elements of such processes and activities.
Accordingly, the Capital Governance Committee provides oversight with respect to Northern Trust’s linkage of material
risks to the capital adequacy assessment process.
The Chief Risk Officer (CRO) oversees Northern Trust’s management of risk and compliance, promotes risk
awareness and fosters a proactive risk management environment wherein risks inherent in the business strategy are
identified, understood, 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
risk management framework, the executive risk management team of Northern Trust, together with the Chief Financial
Officer, Head of Capital and Resolution Planning, General Counsel and Chief Audit Executive, 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 within Northern Trust. Among other risk management responsibilities, GERC
receives reports or recommendations from senior risk committees that are responsible for the management of risk, and from
time to time may delegate responsibility to such committees for risk issues. Senior risk committees include:
The Credit Risk Committee (CRC) establishes and monitors credit-related policies and practices throughout Northern
Trust and promotes their uniform application.
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.
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.
The Compliance & Ethics Oversight Committee (CEOC) 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.
The Market & Liquidity Risk Committee (MLRC) oversees activities relating to the management of market and
liquidity risks by facilitating a focused review of market and liquidity risk exposures and providing rigorous challenge
of related policies, key assumptions, and practices.
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.
In addition to the aforementioned committees, Northern Trust deploys business and regional risk committees that also
report into GERC.
Risk Assessment, Appetite and Reporting Processes
As part of the integrated risk framework, Northern Trust has established key risk identification and risk management
processes, embedded within its businesses to enable a risk-informed profile that supports its business decisions and the
execution of its corporate strategies. Northern Trust’s risk assessment process consists of a series of programs across the
first and second lines of defense that identify, measure, manage and report risks in line with risk appetite and guidelines.
Northern Trust defines its 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 and remain in compliance with applicable capital,
liquidity, and other regulatory requirements. It includes consideration of the likelihood and impact of risks, using both
2018 Annual Report | Northern Trust Corporation 79
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
monetary loss and non-financial measures across risk themes to monitor against tolerance threshold and guideline levels
that trigger escalation to senior management.
Risk Control
Risk Control is an internal, independent review function within the Risk Management function. Risk Control is managed
by the Head of Risk Control and is comprised of Model Risk Management, Credit Review, Global Compliance Testing and
Basel Independent Verification groups, each with its own risk focus and oversight. 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. Credit Review provides an independent, ongoing assessment of
credit exposure and related credit risk management processes across Northern Trust. 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. Lastly, Basel Independent Verification
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 Business Risk Committee oversees Risk Control
generally as well as each of these groups.
Audit Services
Audit Services is an independent control function that assesses and validates controls within Northern Trust’s risk
management framework. Audit Services is managed by the Chief Audit Executive 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 Chief Audit Executive 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 in that 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
programs designed to promote a prudent relationship-based credit culture. This function also monitors adherence to
corporate policies, standards, programs, 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.
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 Capital Markets Credit Committee has sole credit authority for the approval, modification, or renewal of
credit exposure to all wholesale market counterparties.
The CRC establishes and monitors credit-related policies and programs throughout Northern Trust and promotes their
uniform application. The Chief Credit Officer reports directly to the CRO and chairs the CRC. Independent oversight and
review of the credit risk framework also is provided by Risk Control.
80 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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.
The Credit Risk Management function is responsible for the ongoing oversight of each model that supports the internal
risk-rating system. 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 the “Off-Balance-Sheet Arrangements” section and in Note 28, “Off-Balance-Sheet
Financial Instruments,” to the consolidated financial statements provided in Item 8, “Financial Statements and
Supplementary Data.”
As part of Northern Trust’s credit processes, 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. 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. Northern Trust maintains a loan portfolio watch list for adversely classified credit exposures that includes all
nonperforming credits as well as other loans with elevated risk of default. 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.
Counterparty Credit Risk
Counterparty credit risk for Northern Trust primarily arises from a variety of funding, treasury, trading and custody-related
activities, including over-the-counter (OTC) currency and interest rate derivatives, and from indemnified securities lending
transactions. Credit exposure to counterparties is managed by use of a framework for setting limits by product type and
exposure tenor.
To calculate exposure, Northern Trust treats repurchase agreements, reverse repurchase agreements and indemnified
securities lending transactions as repo-style transactions. Foreign exchange exposures and interest rate derivatives are
treated as OTC derivatives. The exposure at default measurement methodology for each eligible type of counterparty credit
exposure, including the use of netting and collateral as risk mitigants, is determined based on operational requirements, the
characteristics of the contract type and the portfolio size and complexity.
Credit Risk Mitigation
Northern Trust considers cash flow to be the primary source of repayment for client-related credit exposures. However,
Northern Trust employs several different types of credit risk mitigants to manage its overall credit risk in the event cash
flow is not sufficient to repay a credit exposure. Northern Trust 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. 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.
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. 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 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.
2018 Annual Report | Northern Trust Corporation 81
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
other catastrophes to result in losses. This includes the potential that continuity of service and resiliency may be impacted.
Operational risk includes compliance, fiduciary and legal risks, which under the Corporation’s risk structure are governed
and managed explicitly.
Operational Risk Framework and Governance
To monitor and control operational risk, Northern Trust maintains a framework consisting of risk management policies,
programs and practices designed to promote a sound operational environment and maintain the Corporation’s operational
risk profile and losses within approved risk appetites and guidelines. 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. 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 enterprise-wide operational risk framework and business-specific risk management programs to identify,
monitor, measure, and manage operational risk and mitigate Northern Trust’s exposure to loss. Several key programs
support the operational risk framework, including:
• Loss Event Data Program - a program that collects internal and external loss data for use in monitoring operational
risk exposure, various business analyses and a Basel Advanced Measurement Approach (AMA) capital quantification.
• 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.
• 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
related significant loss events.
• Outsourcing Risk Management Program - a program that provides processes for appropriate risk assessment,
measurement, monitoring and management of outsourced technology and business process outsourcing.
Information Security and Technology Risk Management - a program that communicates and implements compliance
and risk management processes and controls to address information security, including cyber threats and technology
risks to the organization.
•
• Business Continuity and Disaster Recovery 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.
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.
The ORC is responsible for overseeing the activities of Northern Trust related to the management of operational risk
including establishing the Corporate Operational Risk Policy and approving the operational risk framework and programs.
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.
Operational Risk Measurement
Northern Trust utilizes the 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
capital. Business environment factor information is used to estimate loss frequency. 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 of the aggregate loss distribution over a one-year time
horizon.
Information Security and Technology Management
Effective management of risks related to the confidentiality, integrity and availability of information is crucial in an
environment of increasing cyber threat and requires a structured approach to establish and communicate expectations and
required practices. Northern Trust’s information security and technology risk management framework includes a
comprehensive governance structure and an Information Security and Technology Risk Management Policy and Program
approved by the Business Risk Committee. The framework is supported by an organizational structure that reflects support
from executive management and includes risk committees comprised of members from across the businesses, including the
Information Security and Technology Risk Committee (ISTRC). The ISTRC is chaired by the Chief Information Security
Officer, who regularly reports to the Business Risk Committee on the status of the Information Security and Technology
Risk Management Program.
In addition to a strong governance process, internal controls and risk management practices are 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. Northern Trust employees are responsible for promoting information security 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 ongoing and include
multiple approaches such as mandatory computer-based training, phishing simulations, and the designation of individuals
as Information Security and Privacy Champions within the businesses. 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
businesses, and alerts the organization in accordance with its documented Cyber Incident Response Plan.
The Cyber Incident Response Plan is used to respond to cybersecurity incidents. A cybersecurity incident is defined as
an incident caused by damaging activity, which requires actions to prevent and respond to disruptions, denials,
compromises or exfiltration that impact the confidentiality, integrity and availably of the assets of Northern Trust or its
clients. The plan provides a streamlined approach that can be invoked rapidly to address matters that raise enterprise
concern and to communicate impact, actions and status to senior management, including the Chief Information Security
Officer, and appropriate stakeholders. The plan is designed to work with enterprise-level response plans, and is reviewed,
tested, and updated regularly.
Northern Trust's disclosure controls and procedures also address cybersecurity incidents and include elements to
ensure that there is an analysis of potential disclosure obligations arising from any such incidents. Northern Trust also
maintains compliance programs to address the applicability of restrictions on securities trading while in possession of
material, nonpublic information, including in instances in which such information may relate to cybersecurity incidents.
Business Resiliency and Continuity Management
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 and economic functions and fulfills all regulatory and legal requirements.
Northern Trust’s business resiliency mitigation and preventative measures include sophisticated physical security,
resilient designs and peer capacity for its corporate data centers, a highly redundant global network, robust network
security, resiliency centers that offer alternative workstations, and transfer of work and work-from-home programs that
provide further capability.
All of Northern Trust’s businesses are required to risk-assess their critical functions regularly 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 framework identifies, assesses, measures, monitors and reports on fiduciary risk matters
deemed significant. 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.
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. 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 CEOC 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 CEOC.
Liquidity Risk
Liquidity risk is the risk of not being able to raise sufficient funds or maintain collateral to meet balance sheet and
contingent liability cash flow obligations when due, because of firm-specific or market-wide events.
Liquidity Risk Overview
Northern Trust maintains a strong liquidity position and conservative liquidity risk profile. Northern Trust’s balance sheet
is primarily liability-driven. That is, the main driver of balance sheet changes comes from changing levels of client
deposits, which are generally related to the level of custody assets serviced and commercial and personal deposits. This
liability-driven business model differs from a typical asset-driven business model, where increased levels of deposits and
wholesale borrowings are required to support, for example, increased levels of lending. Northern Trust’s balance sheet is
generally comprised of high-quality assets that are managed to meet anticipated obligations under stress, resulting in low
liquidity risk.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity Risk Framework and Governance
Northern Trust maintains a liquidity risk framework consisting of risk management policies and practices to keep its risk
profile within the Board-approved Corporate Risk Appetite Statement. All liquidity risk activities are overseen by the Risk
Management function, which is independent of the businesses undertaking the activities.
Exposure limits for liquidity 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. Limits are monitored based
on measures such as the liquidity coverage ratio (LCR) and the liquidity stress-testing buffer across a range of time
horizons.
The Asset and Liability Management Committee (ALCO) provides first line management oversight and is responsible
for approving strategies and activities within the risk appetite, overseeing balance sheet resources, and reviewing reporting
such as cash flows and stress test results. The MLRC provides second line oversight and is responsible for reviewing
market and liquidity risk exposures, establishing and monitoring risk metrics, and approving key methodologies and
assumptions that drive liquidity risk measurement.
Liquidity Risk Analysis, Monitoring, and Reporting
Liquidity risk is analyzed and monitored in order to ensure compliance with the approved risk appetite. Various liquidity
analysis and monitoring activities are employed by Northern Trust to understand better the nature and sources of its
liquidity risks, including: liquidity stress testing, liquidity metric monitoring, collateral management, intraday management,
cash flow projections, operational deposit modeling, liquid asset buffer measurement, funds transfer pricing, and
contingency funding planning.
The liquidity risk management process is supported through management and regulatory reporting. Both Northern
Trust’s Treasury and Market and Liquidity Risk Management functions produce management reports that enable oversight
bodies to make informed decisions and support management of liquidity risk within the approved risk appetite. Holistic
liquidity metrics such as LCR and internal liquidity stress testing are actively monitored, along with a suite of other metrics
that provide early warning indicators of changes in the risk profile.
Market Risk
There are two types of market risk, interest rate risk and trading risk. Interest rate risk is the potential for movements in
interest rates to cause changes in net interest income and the market 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 and practices to keep its risk
profile within the Board-approved Corporate Risk Appetite Statement. All market risk activities are overseen by the Risk
Management function, which is independent of the businesses undertaking the activities.
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. Limits are monitored based on
measures such as sensitivity of net interest income (NII), sensitivity of market value of equity (MVE), and Value-at-Risk
(VaR) across a range of time horizons.
ALCO provides first line management oversight and is responsible for approving strategies and activities within the
risk appetite, overseeing balance sheet resources, and reviewing reporting such as stress test results. The MLRC provides
second line oversight and is responsible for reviewing market risk exposures, establishing and monitoring risk metrics, and
approving key methodologies and assumptions that drive market risk measurement.
Interest Rate Risk Overview
Interest rate risk is the risk to NII, associated with the balance sheet, or MVE due to changes in interest rates. Changes in
interest rates can have a positive or negative impact on NII depending on the positioning of assets, liabilities and off-
balance-sheet instruments. Changes in interest rates also can impact the values of assets, liabilities and off-balance-sheet
positions, which indirectly impact the MVE. 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 to manage its interest rate risk within its risk appetite.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
repricing, which arises from differences in the maturity and repricing terms of assets and liabilities;
There are four commonly recognized types of structured interest rate risk:
•
• yield curve, which arises from changes in the shape of the yield curve;
• basis, which arises from imperfect correlation in the adjustment of the rates earned and paid on different financial
instruments with otherwise similar repricing characteristics; and
• behavioral characteristics embedded optionality, which arises from client or counterparty behavior in response to
interest rate changes.
Interest Rate Risk Analysis, Monitoring, and Reporting
Northern Trust uses two primary measurement techniques to manage interest rate risk: NII and MVE sensitivity. NII
sensitivity provides management with a short-term view of the impact of interest rate changes on NII. MVE sensitivity
provides management with a long-term view of interest rate changes on MVE as of the period-end balance sheet. Both
simulation models use the same initial market interest rates and product balances.
Northern Trust limits aggregate interest rate risk (as measured by the NII sensitivity and MVE sensitivity simulation
techniques) to an acceptable level within the context of risk appetite. A variety of actions may be used to implement risk
management strategies to modify interest rate risk including:
• purchase of securities;
•
•
•
• placing and taking Eurodollar time deposits; and
• hedges with various types of derivative financial instruments.
sale of debt securities that are classified as available for sale;
issuance of senior notes and subordinated notes;
collateralized borrowings from the Federal Home Loan Bank;
NII Sensitivity
The modeling of NII sensitivity 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) of a static balance sheet to changes in interest rates.
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 result in their becoming steeper or flatter, and changes to the relationship among the
yield curves (i.e., basis risk).
The NII sensitivity analysis incorporates certain critical assumptions such as interest rates and client behaviors under
changing rate environments. These assumptions are based on a combination of historical analysis and future expected pricing
behavior. The simulation cannot precisely estimate NII sensitivity given uncertainty in the assumptions. The following key
assumptions are incorporated into the NII simulation:
•
the balance sheet size and mix 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 nonmaturity
deposits that are considered short-term in nature and therefore receive a more conservative interest-bearing treatment;
• 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 pricing is projected based on Northern Trust’s actual historical patterns and management
judgment, depending upon the availability of historical data and current pricing strategies/or judgment; and
• new business rates are based on current spreads to market indices.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows the estimated NII impact over the next twelve months of 100 and 200 basis point upward and
100 basis point downward movements in interest rates relative to forward rates. Each rate movement is assumed to occur
gradually over a one-year period.
TABLE 42: NET INTEREST INCOME SENSITIVITY AS OF DECEMBER 31, 2018
($ In Millions)
INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
DECREASE IN INTEREST RATES BELOW MARKET IMPLIED FORWARD RATES
100 Basis Points
INCREASE/(DECREASE)
ESTIMATED IMPACT ON
NEXT TWELVE MONTHS
OF NET INTEREST
INCOME
$
71
109
(86 )
The NII sensitivity analysis does not incorporate certain management actions that may be used to mitigate adverse effects
of actual interest rate movement. For that reason and others, the estimated impacts do not reflect the likely actual results
but serve as estimates of interest rate risk. NII sensitivity is not comparable to actual results disclosed elsewhere or directly
predictive of future values of other measures provided. Further, the estimated impacts presented above are not directly
comparable to those presented in prior periods due to the impact of certain client deposit modeling enhancements.
MVE Sensitivity
MVE 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 MVE 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 MVE sensitivity under various rate scenarios. 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 result in their becoming steeper or flatter, and changes to the relationship among the yield curves (i.e., basis risk).
The MVE sensitivity analysis incorporates certain critical assumptions such as interest rates and client behaviors under
changing rate environments. These assumptions are based on a combination of historical analysis and future expected
pricing behavior. The simulation cannot precisely estimate MVE sensitivity given uncertainty in the assumptions. Many of
the assumptions that apply to NII sensitivity also apply to MVE sensitivity simulations, with the following separate key
assumptions incorporated into the MVE simulation:
•
the present value of nonmaturity deposits are estimated using dynamic decay methodologies or estimated remaining
lives, which are based on a combination of Northern Trust’s actual historical runoff patterns and management
judgment - some balances are assumed to be core and have longer lives while other balances are assumed to be
temporary and have comparatively shorter lives; and
the present values of most noninterest-related balances (such as receivables, equipment, and payables) are the same as
their book values.
•
The following table shows the estimated impact on MVE of 100 and 200 basis point shocks up and a 100 basis point shock
down from current market implied forward rates.
TABLE 43: MARKET VALUE OF EQUITY SENSITIVITY AS OF DECEMBER 31, 2018
($ In Millions)
INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES
100 Basis Points
200 Basis Points
DECREASE IN INTEREST RATES BELOW MARKET IMPLIED FORWARD RATES
100 Basis Points
INCREASE/(DECREASE)
ESTIMATED IMPACT ON
MARKET VALUE OF
EQUITY
$
412
383
(606 )
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The MVE simulations do not incorporate certain management actions that may be used to mitigate adverse effects of actual
interest rate movements. For that reason and others, the estimated impacts do not reflect the likely actual results but serve
as estimates of interest rate risk. MVE sensitivity is not comparable to actual results disclosed elsewhere or directly
predictive of future values of other measures provided. Further, the estimated impacts presented above are not directly
comparable to those presented in prior periods due to the impact of certain client deposit modeling enhancements.
During the year ended December 31, 2018, Northern Trust did not exceed the NII or MVE sensitivity tolerances
established by the Board.
Foreign Currency Risk Overview
Northern Trust's balance sheet is exposed to nontrading 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
Risk Management 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 an 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 Risk Management
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 44: FOREIGN CURRENCY VALUE-AT-RISK
($ In Millions)
FOR THE YEAR ENDED DECEMBER 31,
High
Low
Average
As of December 31,
TOTAL VaR
(SPOT AND FORWARD)
FOREIGN EXCHANGE
SPOT VaR
FOREIGN EXCHANGE
FORWARD VaR
$
2018
0.3 $
0.1
0.1
0.1
2017
1.6 $
0.1
0.6
0.3
2018
0.2 $
—
0.1
0.1
2017
1.6 $
—
0.1
—
2018
0.3 $
—
0.1
0.1
2017
1.2
0.1
0.5
0.3
During 2018 and 2017, Northern Trust did not incur an actual trading loss in excess of the daily value at risk estimate.
88 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $1.2
million for the year ended December 31, 2018.
Northern Trust is also party to interest rate derivative contracts consisting mostly of interest rate swaps entered into to
meet clients’ interest rate management needs, but also including a small number of caps, floors, and swaptions (an option to
enter into an interest rate swap). All interest rate derivative transactions are executed by the Treasury department. When
Northern Trust enters into client transactions, its practice is to mitigate the resulting market risk with offsetting interbank
derivative transactions with matching terms and maturities.
Strategic Risk
Strategic risk is the vulnerability of the organization to internal or external developments that render corporate strategy
ineffective or unachievable. The consequences of strategic risk can be diminished long-term earnings and capital, as well as
reputational damage to the firm. Strategic risk includes the following three subcategories:
• Macroeconomic and geopolitical risk, which centers on events or themes that would have a significant, detrimental
impact on financial markets, and by extension, financial services firms. Episodes of this kind would tend to have
general, as opposed to idiosyncratic, consequences.
• Business risk, which arises from change in the following areas:
•
Internal: situations within Northern Trust that threaten business continuity, profitability, or the achievement of
strategic objectives
• Secular: behavioral or technological change that affects clients and renders a Northern Trust process or
service obsolete
• Competitive: new products or shifts in the industry landscape that challenge Northern Trust’s performance
• Regulatory: changes to prudential or fiscal policy that have an adverse impact on Northern Trust or its clients
• Reputation risk is a residual risk which arises 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. Reputation risk can arise from a range of risk events and is not limited
to strategic risk.
Strategic Risk Framework and Governance
Northern Trust maintains a framework that consists of risk management policies and practices designed to identify,
analyze, and limit (where possible) the impact of strategic risk. The Strategic Risk Management function is responsible for
defining this framework and providing independent oversight of its application across Northern Trust. In furtherance of this
effort, Northern Trust has established governance around its strategic planning processes to review and challenge strategic
decisions.
In addition, Northern Trust maintains a Global Stress Testing Framework which guides stress testing exercises across
the company. Enterprise stress testing, a component of this effort, is specifically designed to look at the prospective impact
of internal and external shocks on the organization. Northern Trust also maintains the Global Emergency Response Plan,
which guides its reaction to adverse external events if they arise.
Both 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 and share repurchase program; accounting
estimates and assumptions; credit quality including allowance levels; future pension plan contributions; effective tax rate;
anticipated expense levels; contingent liabilities; acquisitions; strategies; industry trends; and expectations regarding the
impact of accounting pronouncements and legislation. 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:
2018 Annual Report | Northern Trust Corporation 89
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
financial market disruptions or economic recession in the United States or other countries across the globe resulting
from any of a number of factors, including, for example, actual or potential changes to international trade policy;
• 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 those related to cyber-security, data security, 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;
• uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate
•
•
•
•
•
•
•
•
allowances therefor;
changes in the method pursuant to which the London Interbank Offered Rate (LIBOR) or other interest rate
benchmarks are determined;
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 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 address in the Corporation's resolution plan submitted in December 2017 the “shortcomings” jointly
identified by the Federal Reserve Board and the FDIC in the resolution plan submitted by the Corporation in
December 2015;
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 including with respect to the adoption of the Tax Cuts and Jobs
Act;
• geopolitical risks and the risks of extraordinary events such as natural disasters, terrorist events and war, and the
•
responses of the United States and other countries to those events;
the pending departure of the United Kingdom from the European Union, commonly referred to as “Brexit,” and any
negative effects thereof on global economic conditions, global financial markets, and our business and results of
operations;
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;
90 2018 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• Northern Trust’s success in implementing its expense management initiatives, including its “Value for Spend”
initiative;
• 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 continuing to enhance its 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 possibility that losses may be in
excess of Northern Trust’s recorded liability and estimated range of possible loss for litigation exposures;
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.
RECONCILIATION TO FULLY TAXABLE EQUIVALENT
The following table presents a reconciliation of interest income, net interest income, net interest margin, and total revenue
prepared in accordance with GAAP to such measures on an FTE basis, which are non-GAAP financial measures.
Management believes this presentation provides a clearer indication of these financial measures for comparative purposes.
When adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable; however, the
adjustment to an FTE basis has no impact on net income.
TABLE 45: RECONCILIATION TO FULLY TAXABLE EQUIVALENT
2018
2017
2016
FOR THE YEAR ENDED DECEMBER 31,
($ In Millions)
Interest Income
Interest Expense
Net Interest Income
Net Interest Margin
Total Revenue
REPORTED
$ 2,321.4 $
698.7
$ 1,622.7 $
1.43 %
$ 5,960.2 $
FTE ADJ.
FTE REPORTED
FTE ADJ.
FTE REPORTED
41.2 $ 2,362.6 $ 1,769.4 $
45.8 $ 1,815.2 $ 1,416.9 $
—
698.7
340.2
—
340.2
182.0
41.2 $ 1,663.9 $ 1,429.2 $
1.29 %
1.46 %
41.2 $ 6,001.4 $ 5,375.3 $
45.8 $ 1,475.0 $ 1,234.9 $
1.15 %
1.33 %
45.8 $ 5,421.1 $ 4,961.8 $
FTE ADJ.
FTE
25.1 $ 1,442.0
182.0
25.1 $ 1,260.0
—
1.18 %
25.1 $ 4,986.9
FOR THE YEAR ENDED DECEMBER 31,
2015
2014
($ In Millions)
Interest Income
Interest Expense
Net Interest Income
Net Interest Margin
Total Revenue
REPORTED
$ 1,224.0 $
153.9
$ 1,070.1 $
1.05 %
$ 4,702.6 $
FTE ADJ.
FTE REPORTED
25.3 $ 1,249.3 $ 1,186.9 $
—
153.9
181.4
25.3 $ 1,095.4 $ 1,005.5 $
1.05 %
1.07 %
25.3 $ 4,727.9 $ 4,331.2 $
FTE ADJ.
FTE
29.4 $ 1,216.3
181.4
29.4 $ 1,034.9
—
1.08 %
29.4 $ 4,360.6
2018 Annual Report | Northern Trust Corporation 91
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.
92 2018 Annual Report | Northern Trust Corporation
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
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NORTHERN TRUST CORPORATION:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Northern Trust Corporation and subsidiaries
(the Corporation) as of December 31, 2018 and 2017, 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,
2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2018, 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) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, 2018 based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 26, 2019 expressed an unqualified opinion on the effectiveness of
the Corporation’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Corporation’s auditor since 2002.
CHICAGO, ILLINOIS
FEBRUARY 26, 2019
2018 Annual Report | Northern Trust Corporation 93
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Millions Except Share Information)
ASSETS
Cash and Due from Banks
Federal Reserve and Other Central Bank Deposits
Interest-Bearing Deposits with Banks
Federal Funds Sold and Securities Purchased under Agreements to Resell
Debt Securities
Available for Sale
Held to Maturity (Fair value of $14,267.0 and $13,010.9)
Trading Account
Total Debt Securities
Loans and Leases
Commercial
Personal
Total Loans and Leases (Net of unearned income of $13.2 and $35.5)
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, Money Market and Other Interest-Bearing
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
Series D, outstanding shares of 5,000
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 219,012,050 and 226,126,674
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock (26,159,474 and 19,044,850 shares, at cost)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See accompanying notes to consolidated financial statements on pages 95-166.
94 2018 Annual Report | Northern Trust Corporation
DECEMBER 31,
2018
2017
$
4,581.6 $
30,080.2
4,264.2
1,165.2
4,518.1
40,479.1
5,611.9
1,324.3
36,888.8
14,354.0
0.3
33,742.1
13,049.0
0.5
51,243.1
46,791.6
15,175.2
17,314.8
14,558.0
18,034.2
32,490.0
32,592.2
(112.6 )
428.2
1,646.1
669.3
5,757.2
(131.2 )
464.6
1,647.0
605.6
4,687.3
$ 132,212.5 $ 138,590.5
$
14,508.0 $
14,612.0
688.7
8,220.1
66,468.0
104,496.8
2,594.2
168.3
7,901.7
2,011.3
1,112.4
277.6
3,141.9
18,712.2
16,975.3
1,152.3
9,878.8
65,672.2
112,390.8
2,286.1
834.0
6,051.1
1,497.3
1,449.5
277.5
3,588.0
121,704.2
128,374.3
388.5
493.5
408.6
1,068.5
10,776.8
(453.7 )
(2,173.9 )
388.5
493.5
408.6
1,047.2
9,685.1
(414.3 )
(1,392.4 )
10,508.3
10,216.2
$ 132,212.5 $ 138,590.5
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
Other Security Gains/(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 (Losses) Gains on Debt Securities Available for Sale
Net Unrealized Gains (Losses) on Cash Flow Hedges
Foreign Currency Translation Adjustments
Pension and Other Postretirement Benefit Adjustments
Other Comprehensive Income (Loss)
Comprehensive Income
See accompanying notes to consolidated financial statements on pages 95-166.
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
2016
$
$
$
$
$
$
$
$
3,753.7 $
307.2
51.8
98.3
127.5
(1.0 )
4,337.5
2,321.4
698.7
1,622.7
(14.5 )
1,637.2
1,806.9
356.7
739.4
582.2
201.1
330.6
4,016.9
1,957.8
401.4
1,556.4 $
46.4
1,510.0 $
3,434.3 $
209.9
56.4
89.6
157.5
(1.6 )
3,946.1
1,769.4
340.2
1,429.2
(28.0 )
1,457.2
1,733.7
319.9
668.4
524.0
191.8
331.6
3,769.4
1,633.9
434.9
1,199.0 $
49.8
1,149.2 $
3,108.1
236.6
62.8
81.4
241.2
(3.2 )
3,726.9
1,416.9
182.0
1,234.9
(26.0 )
1,260.9
1,541.1
293.3
627.1
467.4
177.4
364.4
3,470.7
1,517.1
484.6
1,032.5
23.4
1,009.1
6.68 $
6.64
223,148,335
224,488,326
4.95 $
4.92
228,257,664
229,654,401
4.35
4.32
227,580,584
229,151,406
(0.5 ) $
(0.5 )
(1.0 ) $
(0.2 ) $
(1.4 )
(1.6 ) $
(3.7 )
0.5
(3.2 )
FOR THE YEAR ENDED DECEMBER 31,
2018
1,556.4 $
2017
1,199.0 $
2016
1,032.5
(22.3 )
(1.4 )
22.2
(12.6 )
(42.4 )
(1.6 )
16.7
(17.0 )
(14.1 )
1,542.3 $
(44.3 )
1,154.7 $
(1.4 )
9.1
(0.9 )
(4.1 )
2.7
1,035.2
2018 Annual Report | Northern Trust Corporation 95
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Millions)
PREFERRED STOCK
Balance at January 1
Issuance of Preferred Stock, Series D
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
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
Change in Accounting Principle
Net Income
Dividends Declared – Common Stock
Dividends Declared – Preferred Stock
Balance at December 31
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at January 1
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
Net Unrealized (Losses) Gains on Debt Securities Available for Sale
Net Unrealized Gains (Losses) 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,
2018
2017
2016
$
882.0 $
—
882.0
882.0 $
—
882.0
408.6
408.6
1,047.2
(110.2 )
131.5
—
1,068.5
9,685.1
25.3
(4.5 )
1,556.4
(439.1 )
(46.4 )
10,776.8
(414.3 )
(25.3 )
(22.3 )
(1.4 )
22.2
(12.6 )
(453.7 )
1,035.8
(117.1 )
128.5
—
1,047.2
8,908.4
—
—
1,199.0
(372.5 )
(49.8 )
9,685.1
(370.0 )
—
(42.4 )
(1.6 )
16.7
(17.0 )
(414.3 )
388.5
493.5
882.0
408.6
1,072.3
(116.6 )
87.7
(7.6 )
1,035.8
8,242.8
—
—
1,032.5
(343.5 )
(23.4 )
8,908.4
(372.7 )
—
(1.4 )
9.1
(0.9 )
(4.1 )
(370.0 )
(1,392.4 )
142.8
(924.3 )
(1,094.4 )
225.1
(523.1 )
(1,033.6 )
350.3
(411.1 )
(2,173.9 )
(1,392.4 )
(1,094.4 )
Total Stockholders’ Equity at December 31
$
10,508.3 $
10,216.2 $
9,770.4
See accompanying notes to consolidated financial statements on pages 95-166.
96 2018 Annual Report | Northern Trust Corporation
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, 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 and Other Central Bank Deposits
Purchases of Debt Securities – Held to Maturity
Proceeds from Maturity and Redemption of Debt Securities – Held to Maturity
Purchases of Debt Securities – Available for Sale
Proceeds from Sale, Maturity and Redemption of Debt 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
Acquisition of a Business, Net of Cash Received
Other Investing Activities, net
Net Cash Provided by (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
Proceeds from Issuance of Preferred Stock - Series D
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 (Used In) Provided by Financing Activities
Effect of Foreign Currency Exchange Rates on Cash
Change 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 95-166.
$
$
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
2016
$
1,556.4 $
1,199.0 $
1,032.5
1.0
95.9
(14.5 )
108.6
334.9
17.4
(130.0 )
(74.5 )
10.5
(197.0 )
28.5
(699.6 )
729.9
1,767.5
105.7
1,073.8
9,679.6
(21,463.1 )
20,036.7
(12,596.9 )
8,958.7
66.1
(97.6 )
(408.4 )
(49.7 )
(104.2 )
(873.6 )
4,327.1
(6,163.2 )
308.1
(665.2 )
1,860.9
497.9
(314.3 )
—
(924.3 )
32.6
(405.4 )
(46.4 )
1.1
(5,818.2 )
(212.9 )
63.5
4,518.1
4,581.6 $
670.2 $
493.5
11.4
1.6
105.0
(28.0 )
101.2
309.1
11.4
36.2
(14.5 )
(76.1 )
(119.3 )
10.7
486.2
(302.1 )
1,720.4
678.9
(467.7 )
(12,748.7 )
(11,955.2 )
9,924.8
(9,780.0 )
10,103.4
1,451.0
(91.6 )
(381.2 )
(592.6 )
(188.5 )
25.8
(14,021.6 )
8,523.6
2,081.2
360.5
967.7
350.0
(208.7 )
—
(523.1 )
108.0
(356.8 )
(49.8 )
0.1
11,252.7
234.6
(813.9 )
5,332.0
4,518.1 $
328.8 $
441.2
8.2
3.2
100.9
(26.0 )
89.2
275.3
8.8
(129.0 )
(12.8 )
(175.8 )
(129.2 )
(0.1 )
(180.4 )
653.4
1,510.0
(372.9 )
1,906.1
(4,124.2 )
(8,573.2 )
4,026.5
(14,741.9 )
11,317.3
(471.0 )
(111.3 )
(362.1 )
1,105.0
(16.9 )
226.5
(10,192.1 )
6,737.4
(146.7 )
(72.9 )
1,073.5
—
(6.7 )
493.5
(411.1 )
233.8
(333.0 )
(23.4 )
(7.5 )
7,536.9
58.7
(1,086.5 )
6,418.5
5,332.0
181.6
754.2
14.2
2018 Annual Report | Northern Trust Corporation 97
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 to the consolidated financial statements, 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
U.S. 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
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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 Bank of Chicago 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 29, “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. Securities sold under agreements to repurchase are held by the counterparty until the
repurchase.
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 generally include foreign exchange contracts, interest rate contracts, total
return swap contracts 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. These 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 interest income or
interest expense. For substantially all fair value hedges, Northern Trust applies the “shortcut” method of accounting,
available under GAAP. As a result, changes recorded in the fair value of the hedged item are assumed to equal the
offsetting gain or loss on the derivative. For fair value hedges that do not qualify for the “shortcut” method of accounting,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Northern Trust utilizes regression analysis, a “long-haul” method of accounting, in assessing whether these hedging
relationships are highly effective at inception and quarterly thereafter.
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. Changes in the fair value of such
derivatives are 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, and
are reflected in the same line item. 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, foreign currency denominated 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. 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. For cash flow hedges of forecasted foreign currency
denominated revenue and expenditure transactions and investment securities, to the extent all terms are not perfectly
matched, effectiveness is assessed using the dollar-offset method.
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. Changes in the fair value of the hedging instrument are 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. 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, and a description of the method for assessing hedge
effectiveness at inception and on an ongoing basis. 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. 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-U.S. 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. Undrawn
commitments relating to loans that are not held for sale are recorded in other liabilities and are carried at the amount of
unamortized fees with an allowance for credit loss liability recognized for any estimated probable losses.
Recognition of Income. Interest income on loans is recorded on an accrual basis unless, in the opinion of
management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or
principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection.
Loans meeting such criteria are classified as nonperforming and interest income is recorded on a cash basis. Past due status
is based on how long since the contractual due date a principal or interest payment has been past due. For disclosure
purposes, loans that are 29 days past due or less are reported as current. At the time a loan is determined to be
nonperforming, interest accrued but not collected is reversed against interest income in the current period. Interest collected
on nonperforming loans is applied to principal unless, in the opinion of management, collectability of principal is not in
doubt. Management’s assessment of indicators of loan and lease collectability, and its policies relative to the recognition of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. A loan is
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, lease financing, net, non-U.S., 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.
Premium, Discounts, Origination Costs and Fees. 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 Leveraged Leases. Unearned lease income from direct financing and leveraged leases is
recognized using the interest method. This method provides a constant rate of return on the unrecovered investment over
the life of the lease. The rate of return and the allocation of income over the lease term are recalculated from the inception
of the lease if during the lease term assumptions regarding the amount or timing of estimated cash flows change. Lease
residual values are established at the inception of the lease based on in-house valuations and market analyses provided by
outside parties. Lease residual values are reviewed at least annually for OTTI. A decline in the estimated residual value of a
leased asset determined to be other-than-temporary would be recorded in the period in which the decline is identified as a
reduction of interest income.
I. Allowance for Credit Losses. The allowance for credit losses represents management’s estimate of probable losses
which have occurred as of the date of the consolidated financial statements. The loan and lease portfolio and other lending-
related credit exposures are regularly reviewed to evaluate the level of the allowance for credit losses. In determining an
appropriate allowance level, Northern Trust evaluates the allowance necessary for impaired loans and lending-related
commitments and also estimates losses inherent in other lending-related credit exposures. The allowance for credit losses
consists of the following components:
Specific Allowance. The 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
factors that may impact the borrower’s ability to pay. For impaired loans where the amount of specific allowance, if any, is
determined based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and
utilized by management. These appraisals are generally less than twelve months old and are subject to adjustments to
reflect management’s judgment as to the realizable value of the collateral.
Inherent Allowance. The inherent allowance estimation methodology is based on internally developed loss data
specific to the Northern Trust loan and lease portfolio. The 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 fully contemplated in the quantitative methodology to compute an adjustment to the quantitative inherent
allowance for each segment of the loan portfolio.
The results of the inherent allowance estimation methodology are 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 or less than actual net charge-offs.
Northern Trust analyzes its exposure to credit losses from both on-balance-sheet and off-balance-sheet activity using a
consistent methodology.
For purposes of estimating the allowance for credit losses for undrawn loan commitments and standby letters of credit,
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 loan 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
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, software licenses, and allowable internal costs, including compensation relating to software developed
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Fees paid for the use of software licenses that are not hosted by Northern Trust
are expensed as incurred.
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 an
accrual basis, over the period in which the service is provided. Fees are primarily a function of the market value of assets
custodied, managed and serviced, transaction volumes, and securities lending volume and spreads, 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.
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 adjusted for certain awards that do not
accrue dividends while vesting. 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. Compensation expense for performance stock unit awards are recognized on a
straight-line basis over the requisite service period of the award based on expected achievement of the performance
condition. Adjustments are made for employees that meet certain eligibility criteria at the grant date or during the requisite
service period.
Northern Trust does not include an estimate of future forfeitures in its recognition of share-based compensation
expense. Share-based compensation expense is adjusted based on forfeitures as they occur. Dividend equivalents are paid
on a current basis for restricted stock units granted prior to February 21, 2017 that are not yet vested. Dividend equivalents
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are accrued for performance stock unit awards, most restricted stock units granted on or after February 21, 2017 and
director awards not yet vested, and are paid upon vesting. Certain restricted stock units granted on or after February 20,
2018 are not entitled to dividend equivalents during the vesting period. Cash flows resulting from the realization of excess
tax benefits are classified as operating 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 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 unit awards, which are unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents. These units 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
On January 1, 2018, Northern Trust adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU
2014-09). 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. Northern Trust adopted ASU 2014-09 using the modified retrospective method applied to contracts not yet
completed as of the date of adoption. Results for reporting periods beginning January 1, 2018 are presented under ASU 2014-
09, including certain changes to gross versus net presentation, whereas prior period amounts are not adjusted. The impact of
adopting ASU 2014-09 resulted in a $4.0 million reduction in retained earnings. Please refer to Note 17 - “Revenue from
Contracts with Clients” for further information.
On January 1, 2018, Northern Trust adopted 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 disclosure 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 in the accompanying notes to the financial statements. The impact of adopting ASU 2016-
01 resulted in a $0.5 million reduction in retained earnings.
On January 1, 2018, Northern Trust adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments” (ASU 2016-15). ASU 2016-15 provides guidance on eight specific cash flow issues,
thereby reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the
statement of cash flows. Upon adoption of ASU 2016-15, there was no significant impact to Northern Trust’s consolidated
statement of cash flows.
On January 1, 2018, Northern Trust adopted ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of
Assets Other Than Inventory” (ASU 2016-16). ASU 2016-16 requires an entity to recognize the income tax consequences of
intra-entity transfers of assets (excluding inventory) in the period in which the transfer occurs. Upon adoption of ASU 2016-16,
there was no significant impact to Northern Trust’s consolidated financial condition or results of operations.
On January 1, 2018, Northern Trust adopted ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a
consensus of the FASB Emerging Issues Task Force)” (ASU 2016-18). ASU 2016-18 requires an entity to include amounts
generally described as restricted cash and cash equivalents with cash and cash equivalents when reconciling beginning and end
of period total cash balances in the statement of cash flows and as a result, transfers between cash and cash equivalents, and
restricted cash and cash equivalents, will not be presented in the statement of cash flows as cash flow activities. Additionally, if
the balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash and cash
equivalents, an entity is required to disclose a reconciliation between the balance sheet and the statement of cash flows.
Furthermore, if restricted cash and cash equivalents are material, an entity must disclose information about the nature of
restrictions. Upon adoption of ASU 2016-18, there was no significant impact to Northern Trust’s consolidated statement of cash
flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 2018, Northern Trust adopted ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the
Definition of a Business” (ASU 2017-01). ASU 2017-01 clarifies the definition of a business with the objective of adding
guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of
assets or businesses. The amendments in ASU 2017-01 provide a more robust framework to use in determining when a set of
assets and activities is a business. Upon adoption of ASU 2017-01, there was no significant impact to Northern Trust’s
consolidated financial condition or results of operations.
On January 1, 2018, Northern Trust adopted ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition
of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial
Sales of Nonfinancial Assets” (ASU 2017-05). ASU 2017-05 clarifies that an in substance nonfinancial asset is an asset or
group of assets for which substantially all of the fair value consists of nonfinancial assets and the group or subsidiary is not a
business. Transfers of nonfinancial assets to another entity in exchange for a noncontrolling ownership interest in that entity will
be accounted for under Accounting Standards Codification 610-20 - Gains and Losses from the Derecognition of Nonfinancial
Assets. ASU 2017-05 also impacts the accounting for partial sales of nonfinancial assets, and provides that when an entity
transfers its controlling financial interest in a nonfinancial asset, but retains a noncontrolling ownership interest, the entity will
measure the retained interest at fair value. This will result in full gain or loss recognition upon the sale of a controlling interest
in a nonfinancial asset. Upon adoption of ASU 2017-05, there was no significant impact to Northern Trust’s consolidated
financial condition or results of operations.
On January 1, 2018, Northern Trust adopted ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU 2017-07). Under
previous GAAP, net benefit cost on pension and postretirement benefit plans included multiple components, including current-
period employee service cost, interest cost on the obligation, expected return on plan assets, and amortization of various
amounts deferred from previous periods. ASU 2017-07 requires the bifurcation of the net benefit cost by presenting separately
the service cost component from the other components of net benefit cost. Northern Trust provides a detailed breakdown of its
net periodic pension costs components including a reference to the respective income statement line in the footnotes and
therefore there were no changes to the presentation of net periodic pension costs in the results of operations upon adoption of
ASU 2017-07.
On January 1, 2018, Northern Trust adopted ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope
of Modification Accounting” (ASU 2017-09). ASU 2017-09 clarifies which types of changes to share-based payment awards
are in scope of modification accounting. ASU 2017-09 also provides clarification related to the fair value assessment with
respect to determining whether a fair value calculation is required and the appropriate unit of account to apply. Upon adoption
of ASU 2017-09, there was no impact to Northern Trust’s consolidated financial condition or results of operations.
On January 1, 2018, Northern Trust adopted ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02). The
amendments in ASU 2018-02 allow an entity to elect to reclassify from accumulated other comprehensive income to retained
earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for interim and annual
reporting periods beginning after December 15, 2018, however early adoption is permitted. The amendments in ASU 2018-02
may be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in
the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Upon adoption of ASU 2018-02, Northern
Trust elected to reclassify $25.3 million of income tax effects from the Tax Cuts and Jobs Act from accumulated other
comprehensive income to retained earnings. In the normal course, it is Northern Trust’s policy to release income tax effects
from accumulated other comprehensive income on an aggregate portfolio basis. Please refer to Note 15 - “Accumulated Other
Comprehensive Income (Loss)” for further information.
On April 1, 2018, Northern Trust adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities” (ASU 2017-12). The main provisions of ASU 2017-12 are intended to
align better an entity’s risk management activities and financial reporting for hedging relationships through changes to both the
designation and measurement guidance for qualifying hedging relationships. ASU 2017-12 eliminates the requirement to
measure and report hedge ineffectiveness separately and generally requires the entire change in the fair value of a hedging
instrument to be presented in the same income statement line as the hedged item. Further, ASU 2017-12 eases certain
documentation and assessment requirements and modifies the accounting for components excluded from the assessment of
hedge effectiveness. Northern Trust currently applies the “shortcut” method of accounting available under US GAAP for
substantially all fair value hedges and other aspects of Northern Trust’s current hedge accounting program and therefore upon
adoption of ASU 2017-12, there was no significant impact to Northern Trust’s consolidated financial condition or results of
operations.
On December 31, 2018, Northern Trust adopted ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit
Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans”
(ASU 2018-14). ASU 2018-14 improves the effectiveness of disclosures in the notes to financial statements by removing,
2018 Annual Report | Northern Trust Corporation 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
modifying and adding certain disclosures related to defined benefit pension, and other postretirement plans. Upon adoption of
ASU 2018-14, there was no impact to Northern Trust’s consolidated financial condition or results of operations. Please refer to
Note 22 - “Employee Benefits” for further information.
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, 2018, or 2017.
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 debt 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, 2018, Northern Trust’s available for sale debt securities
portfolio included 1,479 Level 2 securities with an aggregate market value of $31.7 billion. All 1,479 debt securities were
valued by external pricing vendors. As of December 31, 2017, Northern Trust’s available for sale debt securities portfolio
included 1,436 Level 2 debt securities with an aggregate market value of $28.0 billion. All 1,436 debt securities were
valued by external pricing vendors. Trading account debt securities, which totaled $0.3 million and $0.5 million as of
December 31, 2018, and December 31, 2017, respectively, were all valued using external pricing vendors.
Northern Trust has established processes and procedures to assess the suitability of valuation methodologies used by
external pricing vendors, including reviews of valuation techniques and assumptions used for selected securities. On a daily
basis, periodic quality control reviews of prices received from vendors are conducted which include comparisons to prices
on similar security types received from multiple pricing vendors and to the previous day’s reported prices for each security.
Predetermined tolerance level exceptions are researched and may result in additional validation through available market
information or the use of an alternate pricing vendor. Quarterly, Northern Trust reviews documentation from third-party
pricing vendors regarding the valuation processes and assumptions used in their valuations and assesses whether the fair
value levels assigned by Northern Trust to each security classification are appropriate. Annually, valuation inputs used
within third-party pricing vendor valuations are reviewed for propriety on a sample basis through a comparison of inputs
used to comparable market data, including security classifications that are less actively traded and security classifications
comprising significant portions of the portfolio.
Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted
income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual
terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts;
credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap
contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust
evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments.
Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of
the instruments, net exposures after giving effect to master netting arrangements or similar agreements, available collateral,
and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation
adjustments have not been considered material.
Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace.
Northern Trust’s Level 3 assets consisted of auction rate securities purchased in 2008 from Northern Trust clients. To
106 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimate the fair value of auction rate securities, Northern Trust uses external pricing vendors that incorporate transaction
details and market-based inputs such as past auction results, trades and bids. The significant unobservable inputs used in
the fair value measurement are the prices of the securities supported by little market activity and for which trading is
limited.
Northern Trust’s Level 3 liabilities consist of swaps that Northern Trust entered into with the purchaser of 1.1 million
and 1.0 million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern
Trust and sold in June 2016 and 2015, respectively. Pursuant to the swaps, 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 25 — “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 determine the appropriate fair value of the asset or liability.
The following table presents the fair values of Northern Trust’s Level 3 assets and liabilities as of December 31, 2018
and 2017, as well as the valuation techniques, significant unobservable inputs, and quantitative information used to develop
significant unobservable inputs for such assets and liabilities as of such dates.
TABLE 46: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF INPUTS
Swaps Related to Sale of Certain
Visa Class B Common Shares
$
32.8 million
Discounted Cash Flow Visa Class A Appreciation
7.0 % – 11.0%
DECEMBER 31, 2018
Conversion Rate
1.62 x – 1.64x
Expected Duration
1.5 – 4.0 years
DECEMBER 31, 2017
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF INPUTS
Auction Rate Securities
Swap Related to Sale of Certain Visa
Class B Common Shares
$
$
4.3 million
29.7 million
Comparables
Discounted Cash Flow
Price
Visa Class A Appreciation
$92 – $100
7.0 % – 11.0%
Conversion Rate
1.63 x – 1.65x
Expected Duration
1.5 – 4.0 years
2018 Annual Report | Northern Trust Corporation 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and
2017, segregated by fair value hierarchy level.
TABLE 47: RECURRING BASIS HIERARCHY LEVELING
DECEMBER 31, 2018
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
ASSETS/
LIABILITIES
AT FAIR
VALUE
(In Millions)
Debt 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
Commercial Mortgage-Backed
Other
Total Available for Sale
Trading Account
Total Available for Sale and Trading Debt Securities
Other Assets
Derivative Assets
Foreign Exchange Contracts
Interest Rate Contracts
Other Financial Derivatives (1)
Total Derivative Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Contracts
Other Financial Derivatives (2)
$
5,185.3 $
—
—
—
—
—
—
—
—
—
— $
655.9
22,424.6
142.2
2,294.7
829.3
2,096.2
2,657.7
587.2
15.7
5,185.3
31,703.5
—
0.3
5,185.3
31,703.8
—
—
—
—
—
—
—
2,466.1
96.1
1.3
2,563.5
2,262.5
93.1
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,185.3
655.9
22,424.6
142.2
2,294.7
829.3
2,096.2
2,657.7
587.2
15.7
36,888.8
0.3
36,889.1
2,466.1
96.1
1.3
(1,357.1 )
1,206.4
—
—
32.8
—
—
—
2,262.5
93.1
32.8
592.1
Total Derivative Liabilities
$
— $
2,355.6 $
32.8 $
(1,796.3 ) $
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, 2018, derivative assets and liabilities shown above also include reductions of $134.5 million and $573.7 million, respectively,
as a result of cash collateral received from and deposited with derivative counterparties.
(1) This line consists of a total return swap contract.
(2) This line consists of swaps related to the sale of certain Visa Class B common shares.
108 2018 Annual Report | Northern Trust Corporation
DECEMBER 31, 2017
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
ASSETS/
LIABILITIES
AT FAIR
VALUE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
Debt 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
$
5,700.3 $
—
—
—
—
—
—
—
—
—
—
5,700.3
—
— $
746.4
18,676.6
177.2
2,993.0
875.6
1,820.0
2,291.3
—
435.1
22.3
28,037.5
0.5
Total Available for Sale and Trading Debt Securities
5,700.3
28,038.0
Other Assets
Derivative Assets
Foreign Exchange Contracts
Interest Rate Contracts
Other Financial Derivative
Total Derivatives Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Contracts
Other Financial Derivative (1)
Total Derivative Liabilities
—
—
—
—
—
—
—
— $
2,557.1
97.0
—
2,654.1
2,715.1
83.5
0.7
2,799.3 $
$
— $
—
—
—
—
—
—
—
4.3
—
—
4.3
—
4.3
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,860.0 )
—
—
29.7
29.7 $
—
—
—
(1,621.4 ) $
5,700.3
746.4
18,676.6
177.2
2,993.0
875.6
1,820.0
2,291.3
4.3
435.1
22.3
33,742.1
0.5
33,742.6
2,557.1
97.0
—
794.1
2,715.1
83.5
30.4
1,207.6
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, 2017, derivative assets and liabilities shown above also include reductions of $427.6 million and $189.0 million, respectively,
as a result of cash collateral received from and deposited with derivative counterparties.
(1) This line consists of swaps related to the sale of certain Visa Class B common shares and a total return swap contract.
The following tables present the changes in Level 3 assets and liabilities for the years ended December 31, 2018 and
2017.
TABLE 48: CHANGES IN LEVEL 3 ASSETS AND LIABILITIES
LEVEL 3 ASSETS
(In Millions)
Fair Value at January 1
Total Gains (Losses):
Included in Other Comprehensive Income (1)
Purchases, Issues, Sales, and Settlements
Settlements
Fair Value at December 31
AUCTION RATE SECURITIES
2018
4.3 $
0.1
(4.4 )
— $
2017
4.7
0.2
(0.6 )
4.3
$
$
2018 Annual Report | Northern Trust Corporation 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Unrealized gains (losses) are included in net unrealized gains (losses) on debt securities available for sale, within the consolidated statements of comprehensive income.
LEVEL 3 LIABILITIES
(In Millions)
Fair Value at January 1
Total (Gains) Losses:
Included in Earnings (1)
Purchases, Issues, Sales, and Settlements
Settlements
Fair Value at December 31
Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at December 31 (1)
(1) Gains (losses) are recorded in other operating income (expense) within the consolidated statements of income.
SWAPS RELATED TO SALE OF
CERTAIN VISA CLASS B
COMMON SHARES
$
$
$
2018
29.7 $
19.8
(16.7 )
32.8 $
13.3 $
2017
25.2
12.7
(8.2 )
29.7
11.4
For the years ended December 31, 2018 and 2017 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, 2018 and 2017, 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 $24.9 million and $0.4
million, respectively, at December 31, 2018, and $12.2 million and $0.3 million, respectively, at December 31, 2017.
Assets measured at fair value on a nonrecurring basis reflect management’s judgment as to realizable value.
The following table presents the fair values of Northern Trust’s Level 3 assets that were measured at fair value on a
nonrecurring basis as of December 31, 2018 and 2017, as well as the valuation technique, significant unobservable inputs,
and quantitative information used to develop the significant unobservable inputs for such assets as of such dates.
TABLE 49: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS
DECEMBER 31, 2018
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF DISCOUNTS
APPLIED
Loans
OREO
$24.9 million Market Approach
$0.4 million Market Approach
Discount to reflect realizable value
Discount to reflect realizable value
15.0% – 30.0%
15.0% – 30.0%
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF DISCOUNTS
APPLIED
Loans
OREO
$12.2 million Market Approach
$0.3 million Market Approach
Discount to reflect realizable value
Discount to reflect realizable value
15.0% – 25.0%
15.0% – 20.0%
DECEMBER 31, 2017
110 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the fair values of all financial instruments.
TABLE 50: FAIR VALUE OF FINANCIAL INSTRUMENTS
(In Millions)
BOOK VALUE
TOTAL
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
DECEMBER 31, 2018
FAIR VALUE
ASSETS
Cash and Due from Banks
Federal Reserve and Other Central Bank Deposits
Interest-Bearing Deposits with Banks
Federal Funds Sold and Securities Purchased under Agreements to Resell
Debt 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
4,581.6 $
30,080.2
4,264.2
1,165.2
4,581.6 $
30,080.2
4,264.2
1,165.2
36,888.8
14,354.0
0.3
32,287.0
—
1,646.1
300.3
606.6
202.3
36,888.8
14,267.0
0.3
32,339.2
—
1,646.1
300.3
606.6
194.5
37,340.1 $
688.7
66,468.0
2,594.2
168.3
7,901.7
2,011.3
37,340.1 $
691.8
66,468.0
2,594.2
168.3
7,904.1
1,994.4
1,112.4
277.6
28.0
139.9
1,089.7
253.5
28.0
139.9
4,581.6 $
—
—
—
5,185.3
101.6
—
—
—
—
—
—
125.0
— $
30,080.2
4,264.2
1,165.2
31,703.5
14,165.4
0.3
—
—
1,646.1
300.3
606.6
69.5
37,340.1 $
— $
691.8
66,468.0
2,594.2
168.3
7,904.1
1,994.4
1,089.7
253.5
—
—
—
—
—
—
—
—
—
—
—
—
28.0
139.9
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
Assets (1)
Liabilities (2)
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
$
306.7 $
72.5
306.7 $
72.5
— $
—
306.7 $
72.5
30.0
24.5
1.3
32.8
30.0
24.5
1.3
32.8
2,159.4
2,190.0
2,159.4
2,190.0
—
—
—
—
—
—
—
—
30.0
24.5
1.3
—
2,159.4
2,190.0
66.1
68.6
2018 Annual Report | Northern Trust Corporation 111
Assets
Liabilities
66.1
68.6
Note: Refer to the table located on page 105 for the disaggregation of available for sale debt securities.
(1) This line consists of a total return swap contract.
(2) This line consists of swaps related to the sale of certain Visa Class B common shares.
66.1
68.6
—
—
—
—
—
—
—
32,339.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
32.8
—
—
—
—
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
BOOK VALUE
TOTAL
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
DECEMBER 31, 2017
FAIR VALUE
ASSETS
Cash and Due from Banks
Federal Reserve and Other Central Bank Deposits
Interest-Bearing Deposits with Banks
Federal Funds Sold and Securities Purchased under Agreements to Resell
Debt 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
Assets
Liabilities (1)
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
4,518.1 $
40,479.1
5,611.9
1,324.3
4,518.1 $
40,479.1
5,611.9
1,324.3
33,742.1
13,049.0
0.5
32,211.1
20.9
1,647.0
223.1
415.3
183.4
33,742.1
13,010.9
0.5
32,375.8
20.9
1,647.0
223.1
415.3
181.5
45,566.3 $
1,152.3
65,672.2
2,286.1
834.0
6,051.1
1,497.3
45,566.3 $
1,153.6
65,672.2
2,286.1
834.0
6,052.9
1,528.4
1,435.1
277.5
1,449.8
260.0
30.3
33.1
30.3
33.1
4,518.1 $
—
—
—
5,700.3
35.0
—
—
—
—
—
—
115.5
— $
40,479.1
5,611.9
1,324.3
28,037.5
12,975.9
0.5
—
—
1,647.0
223.1
415.3
66.0
45,566.3 $
— $
—
—
—
—
—
—
—
—
—
—
1,153.6
65,672.2
2,286.1
834.0
6,052.9
1,528.4
1,449.8
260.0
—
—
$
30.1 $
192.6
30.1 $
192.6
— $
—
30.1 $
192.6
31.9
19.4
—
30.4
31.9
19.4
—
30.4
2,527.0
2,522.5
2,527.0
2,522.5
65.1
64.1
65.1
64.1
—
—
—
—
—
—
—
—
31.9
19.4
—
0.7
2,527.0
2,522.5
65.1
64.1
—
—
—
—
4.3
—
—
32,375.8
20.9
—
—
—
—
—
—
—
—
—
—
—
—
—
30.3
33.1
—
—
—
—
—
29.7
—
—
—
—
Note: Refer to the table located on page 106 for the disaggregation of available for sale debt securities.
(1) This line consists of swaps related to the sale of certain Visa Class B common shares and a total return swap contract.
112 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Securities
Debt Securities Available for Sale. The following tables provide the amortized cost, fair values, and remaining maturities
of debt securities available for sale.
TABLE 51: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF DEBT 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
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
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds
Other Asset-Backed
Auction Rate
Commercial Mortgage-Backed
Other
Total
$
AMORTIZED
COST
5,203.1 $
657.6
22,522.7
143.3
2,312.6
832.7
2,087.8
2,678.9
587.4
15.7
$
37,041.8 $
$
AMORTIZED
COST
5,714.4 $
749.9
18,745.3
179.1
3,013.7
879.0
1,819.8
2,297.7
4.4
439.2
22.3
$
33,864.8 $
DECEMBER 31, 2018
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
21.8 $
2.0
52.4
—
3.2
1.4
11.9
1.7
4.0
—
98.4 $
39.6 $
3.7
150.5
1.1
21.1
4.8
3.5
22.9
4.2
—
251.4 $
DECEMBER 31, 2017
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
18.0 $
—
39.9
—
2.2
1.0
4.0
1.5
—
—
—
66.6 $
32.1 $
3.5
108.6
1.9
22.9
4.4
3.8
7.9
0.1
4.1
—
189.3 $
FAIR
VALUE
5,185.3
655.9
22,424.6
142.2
2,294.7
829.3
2,096.2
2,657.7
587.2
15.7
36,888.8
FAIR
VALUE
5,700.3
746.4
18,676.6
177.2
2,993.0
875.6
1,820.0
2,291.3
4.3
435.1
22.3
33,742.1
TABLE 52: REMAINING MATURITY OF DEBT 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, 2018
DECEMBER 31, 2017
$
AMORTIZED
COST
9,206.2 $
21,012.7
5,774.1
1,048.8
$
37,041.8 $
FAIR
VALUE
9,162.8 $
20,943.9
5,740.8
1,041.3
36,888.8 $
AMORTIZED
COST
6,249.5 $
20,017.2
6,545.3
1,052.8
33,864.8 $
FAIR
VALUE
6,227.0
19,937.8
6,535.1
1,042.2
33,742.1
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
2018 Annual Report | Northern Trust Corporation 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities Held to Maturity. The following tables provide the amortized cost, fair values and remaining
maturities of debt securities held to maturity.
TABLE 53: RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF DEBT SECURITIES HELD TO MATURITY
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Covered Bonds
Non-U.S. Government
Certificates of Deposit
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds
Other Asset-Backed
Other
Total
(In Millions)
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Corporate Debt
Covered Bonds
Non-U.S. Government
Certificates of Deposit
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds
Other Asset-Backed
Other
Total
$
AMORTIZED
COST
101.6 $
18.9
4.5
472.9
2,877.6
6,488.2
45.1
2,966.8
1,146.4
232.0
DECEMBER 31, 2018
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
— $
0.6
0.2
0.4
9.6
2.1
—
5.8
—
—
— $
—
—
1.8
9.3
8.7
—
12.3
4.0
69.6
FAIR
VALUE
101.6
19.5
4.7
471.5
2,877.9
6,481.6
45.1
2,960.3
1,142.4
162.4
$
14,354.0 $
18.7 $
105.7 $
14,267.0
$
AMORTIZED
COST
35.0 $
34.6
5.8
431.5
2,821.5
5,536.2
43.8
2,788.9
1,175.8
175.9
$
13,049.0 $
DECEMBER 31, 2017
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
— $
1.4
0.4
1.0
11.9
1.3
—
5.4
0.6
—
22.0 $
— $
0.1
—
0.4
3.7
6.0
0.1
4.1
0.5
45.2
60.1 $
FAIR
VALUE
35.0
35.9
6.2
432.1
2,829.7
5,531.5
43.7
2,790.2
1,175.9
130.7
13,010.9
TABLE 54: REMAINING MATURITY OF DEBT SECURITIES HELD TO MATURITY
(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, 2018
DECEMBER 31, 2017
$
AMORTIZED
COST
6,638.2 $
7,066.0
567.9
81.9
FAIR
VALUE
6,635.5 $
7,040.0
553.0
38.5
AMORTIZED
COST
5,691.9 $
6,667.8
612.2
77.1
FAIR
VALUE
5,695.8
6,663.9
606.3
44.9
$
14,354.0 $
14,267.0 $
13,049.0 $
13,010.9
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
Debt securities held to maturity consist of securities that management intends to, and Northern Trust has the ability to, hold
until maturity. During the twelve months ended December 31, 2018, approximately $287.9 million of securities reflected in
Other Asset-Backed, Covered Bonds, Sub-Sovereign, Supranational and Non-U.S. Agency Bonds, and Corporate Debt
were transferred from available for sale to held to maturity.
Investment Security Gains and Losses. Net investment security losses of $1.0 million were recognized in 2018, and
include $0.5 million of charges related to the other-than-temporary impairment (OTTI) of certain Community
Reinvestment Act (CRA) eligible held to maturity securities. Net investment security losses of $1.6 million, and $3.2
million were recognized in 2017, and 2016, respectively. There were $0.2 million OTTI losses in 2017 and $3.7 million
114 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTTI losses in 2016. Proceeds of $307.3 million from the sale of securities in 2018 resulted in gross realized gains and
losses of $1.5 million and $2.0 million, respectively. Proceeds of $2.2 billion from the sale of securities in 2017 resulted in
gross realized gains and losses of $0.2 million and $1.6 million, respectively. Proceeds of $828.9 million from the sale of
securities in 2016 resulted in gross realized gains and losses of $0.7 million and $0.2 million, respectively.
Debt Securities with Unrealized Losses. The following tables provide information regarding debt 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, 2018
and 2017.
TABLE 55: DEBT SECURITIES WITH UNREALIZED LOSSES
AS OF DECEMBER 31, 2018
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
Commercial Mortgage-Backed
Other
Total
FAIR
VALUE
UNREALIZED
LOSSES
$
— $
169.6
8,368.8
5,065.2
712.7
646.4
1,105.0
2,507.8
22.8
50.5
— $
2.4
33.5
0.8
4.1
3.7
4.6
15.9
0.1
18.8
FAIR
VALUE
2,862.0 $
279.6
6,822.4
1,274.0
1,097.4
696.9
1,189.2
954.9
274.4
112.6
UNREALIZED
LOSSES
FAIR
VALUE
2,862.0 $
449.2
15,191.2
6,339.2
1,810.1
1,343.3
UNREALIZED
LOSSES
39.6
3.7
150.5
9.8
22.9
14.1
2,294.2
3,462.7
297.2
163.1
15.8
26.9
4.2
69.6
39.6 $
1.3
117.0
9.0
18.8
10.4
11.2
11.0
4.1
50.8
$
18,648.8 $
83.9 $
15,563.4 $
273.2 $
34,212.2 $
357.1
AS OF DECEMBER 31, 2017
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
3,595.0 $
687.8
6,495.6
5,181.8
1,547.3
967.5
1,692.4
2,453.7
43.7
—
233.5
82.9
UNREALIZED
LOSSES
FAIR
VALUE
UNREALIZED
LOSSES
32.1 $
3.3
81.3
7.9
9.3
7.2
7.5
8.3
0.1
—
2.6
27.3
— $
52.0
2,998.9
—
922.3
89.1
235.8
29.9
—
3.1
201.6
48.1
— $
0.3
27.3
—
14.0
0.9
0.4
0.1
—
0.1
1.5
17.9
FAIR
VALUE
3,595.0 $
739.8
9,494.5
5,181.8
2,469.6
1,056.6
UNREALIZED
LOSSES
32.1
3.6
108.6
7.9
23.3
8.1
1,928.2
2,483.6
43.7
3.1
435.1
131.0
7.9
8.4
0.1
0.1
4.1
45.2
$
22,981.2 $
186.9 $
4,580.8 $
62.5 $
27,562.0 $
249.4
As of December 31, 2018, 1,357 debt securities with a combined fair value of $34.2 billion were in an unrealized loss
position, with their unrealized losses totaling $357.1 million. Unrealized losses of $150.5 million and $39.6 million related
to government sponsored agency and U.S. government securities, respectively, are primarily attributable to changes in
market rates since their purchase. Unrealized losses of $22.9 million within corporate debt securities primarily reflect
widened credit spreads and higher market rates since purchase; 37% of the corporate debt portfolio is backed by guarantees
provided by U.S. and non-U.S. governmental entities.
The majority of the $69.6 million of unrealized losses in debt securities classified as “other” at December 31, 2018,
relate to securities primarily purchased at a premium or par by Northern Trust to fulfill its obligations under the CRA.
Unrealized losses on these CRA-related 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, 2018, are attributable to
changes in overall market interest rates, increased credit spreads, or reduced market liquidity. As of December 31, 2018,
2018 Annual Report | Northern Trust Corporation 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Northern Trust does not intend to sell any investment in an unrealized loss position and it is not more likely than not that
Northern Trust will be required to sell any such investment before the recovery of its amortized cost basis, which may be
maturity.
Security impairment reviews are conducted quarterly to identify and evaluate securities that have indications of
possible OTTI. A determination as to whether a security’s decline in market value is other-than-temporary takes into
consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern
Trust considers in determining whether impairment is other-than-temporary include, but are not limited to, the length of
time the security has been impaired; the severity of the impairment; the cause of the impairment and the financial condition
and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions;
Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that it will not be
required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis.
For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is
conducted to determine if OTTI has occurred.
While all securities are considered, the process for identifying credit impairment within CRA-eligible mortgage-
backed securities, a security type for which Northern Trust has recognized OTTI in 2018 and 2017, 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 the pool or similar pools, 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 $0.5 million and $0.2 million of OTTI losses recognized in 2018 and 2017, respectively. There were $3.7
million OTTI losses recognized during the year ended December 31, 2016.
Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily
impaired debt securities, including noncredit-related amounts recognized in other comprehensive income and net
impairment losses recognized in earnings, for the years ended December 31, 2018, 2017, and 2016.
TABLE 56: 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,
2018
(0.5 ) $
—
(0.5 ) $
2017
(0.2 ) $
—
(0.2 ) $
2016
(3.7 )
—
(3.7 )
$
$
(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.
116 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provided in the table below are the cumulative credit-related losses recognized in earnings on debt securities other-
than-temporarily impaired.
TABLE 57: CUMULATIVE CREDIT-RELATED LOSSES ON DEBT SECURITIES HELD
(In Millions)
Cumulative Credit-Related Losses on Debt Securities Held – Beginning of Year
Plus: Losses on Newly Identified Impairments
Additional Losses on Previously Identified Impairments
Less: Current and Prior Period Losses on Debt Securities Sold or Matured During the Year
Cumulative Credit-Related Losses on Debt Securities Held – End of Year
YEAR ENDED DECEMBER 31,
2018
3.6 $
0.4
0.1
—
4.1 $
2017
3.4
0.1
0.1
—
3.6
$
$
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 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.
The following tables summarize information related to securities purchased under agreements to resell and securities
sold under agreements to repurchase.
TABLE 58: 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 59: 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
TABLE 60: REPURCHASE AGREEMENTS ACCOUNTED FOR AS SECURED BORROWINGS
(In Millions)
Repurchase Agreements
U.S. Treasury and Agency Securities
Total Borrowings
Gross Amount of Recognized Liabilities for Repurchase Agreements in Note 27
Amounts related to agreements not included in Note 27
$
$
$
2018
1,031.2 $
1,478.3
2.22 %
1,942.0
2017
1,303.3
1,832.0
1.48 %
2,064.1
2018
168.3 $
525.2
1.48 %
981.3
2017
834.0
738.9
0.81 %
834.0
December 31, 2018
Remaining Contractual
Maturity of the
Agreements
Overnight and
Continuous
168.3
168.3
168.3
—
2018 Annual Report | Northern Trust Corporation 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Loans and Leases
Amounts outstanding for loans and leases, by segment and class, are shown below.
TABLE 61: LOANS AND LEASES
(In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Non-U.S.
Lease Financing, net
Other
Total Commercial
Personal
Private Client
Residential Real Estate
Other
Total Personal
Total Loans and Leases
Allowance for Credit Losses Assigned to Loans and Leases
Net Loans and Leases
DECEMBER 31,
2018
2017
8,728.1 $
3,228.8
2,701.6
90.7
426.0
9,042.2
3,482.7
1,538.5
229.2
265.4
15,175.2
14,558.0
10,733.3
6,514.0
67.5
17,314.8
32,490.0 $
(112.6 )
32,377.4 $
10,753.1
7,247.6
33.5
18,034.2
32,592.2
(131.2 )
32,461.0
$
$
$
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 80% at inception. Northern Trust’s equity credit line products generally have
draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest
only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the
outstanding balance to an amortizing payment loan. As of December 31, 2018 and 2017, equity credit lines totaled $655.5
million and $908.6 million, respectively, and equity credit lines for which first liens were held by Northern Trust
represented 95% and 93%, respectively, of the total equity credit lines as of those dates.
Included within the non-U.S., commercial-other, and personal-other classes are short duration advances, primarily
related to the processing of custodied client investments, that totaled $2.2 billion and $906.4 million at December 31, 2018
and 2017, respectively. Demand deposit overdrafts reclassified as loan balances totaled $152.5 million and $127.6 million
at December 31, 2018 and 2017, respectively. There were no loans or leases classified as held for sale as of December 31,
2018, compared to $20.9 million of loans and $33.1 million of leases classified as held for sale at December 31, 2017
related to the decision to exit a non-strategic loan and lease portfolio.
118 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net investment in direct finance and leveraged leases are as follows:
TABLE 62: 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,
$
2018
9.8 $
23.8
0.3
—
33.9
33.9
33.3
(10.4 )
56.8
$
90.7 $
2017
26.6
72.4
0.7
(1.5 )
98.2
76.1
85.6
(30.7 )
131.0
229.2
The following schedule reflects the future minimum lease payments to be received over the next five years under direct
finance leases.
TABLE 63: FUTURE MINIMUM LEASE PAYMENTS
(In Millions)
2019
2020
2021
2022
2023
$
FUTURE MINIMUM
LEASE PAYMENTS
3.7
3.7
2.1
—
—
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 and management reporting.
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.
2018 Annual Report | Northern Trust Corporation 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan and lease segment and class balances at December 31, 2018 and 2017 are provided below, segregated by
borrower ratings into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.
TABLE 64: BORROWER RATINGS
(In Millions)
Commercial
Commercial and
Institutional
Commercial Real
Estate
Non-U.S.
Lease Financing, net
Other
Total Commercial
Personal
Private Client
Residential Real Estate
Other
Total Personal
DECEMBER 31, 2018
DECEMBER 31, 2017
1 TO 3
CATEGORY
4 TO 5
CATEGORY
6 TO 9
CATEGORY
(WATCH LIST)
TOTAL
1 TO 3
CATEGORY
4 TO 5
CATEGORY
6 TO 9
CATEGORY
(WATCH LIST)
TOTAL
$
5,477.4
$
3,159.8
$
90.9
$ 8,728.1
$
5,832.9
$
3,133.4
$
75.9
$ 9,042.2
1,209.6
1,625.3
78.3
203.3
8,593.9
6,321.1
2,745.0
32.2
9,098.3
1,992.2
1,075.3
12.4
222.7
6,462.4
4,403.2
3,502.3
35.3
7,940.8
27.0
1.0
—
—
3,228.8
2,701.6
90.7
426.0
118.9 15,175.2
9.0 10,733.3
6,514.0
67.5
266.7
—
275.7 17,314.8
1,280.7
606.6
191.4
155.5
8,067.1
6,716.0
2,960.5
19.6
9,696.1
2,187.5
930.5
37.8
109.9
6,399.1
4,027.8
3,978.8
13.9
8,020.5
14.5
1.4
—
—
3,482.7
1,538.5
229.2
265.4
91.8 14,558.0
9.3 10,753.1
7,247.6
33.5
308.3
—
317.6 18,034.2
Total Loans and Leases
$
17,692.2 $
14,403.2 $
394.6 $ 32,490.0 $
17,763.2 $
14,419.6 $
409.4 $ 32,592.2
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 fewer financial resources to
manage through economic downturns. As a result of these characteristics, borrowers within this category exhibit a
moderate likelihood of loss.
Loans and leases in the watch list category have elevated credit risk profiles that are monitored through internal watch
lists, and consist of credits with borrower ratings of “6 to 9”. These credits, which include all nonperforming credits, are
expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default.
Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows
and capital levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse
down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable
likelihood of loss.
120 2018 Annual Report | Northern Trust Corporation
(In Millions)
December 31, 2018
Commercial
Commercial and
Institutional
Commercial Real
Estate
Non-U.S.
Lease Financing, net
Other
Total Commercial
Personal
Private Client
Residential Real
Estate
Other
Total Personal
(In Millions)
December 31, 2017
Commercial
Commercial and
Institutional
Commercial Real
Estate
Non-U.S.
Lease Financing, net
Other
Total Commercial
Personal
Private Client
Residential Real
Estate
Other
Total Personal
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides 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, 2018
and 2017.
TABLE 65: DELINQUENCY STATUS
CURRENT
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PERFORMING
NONPERFORMING
TOTAL LOANS
AND LEASES
$
8,678.2
$
37.4
$
4.5
$
1.2
$
8,721.3
$
6.8
$
8,728.1
3,191.5
2,701.2
90.7
426.0
15,087.6
10,681.1
6,376.8
67.5
17,125.4
8.4
—
—
—
45.8
39.5
27.2
—
66.7
15.6
—
—
—
20.1
12.5
6.2
—
18.7
6.4
—
—
—
7.6
—
8.8
—
8.8
3,221.9
2,701.2
90.7
426.0
15,161.1
10,733.1
6,419.0
67.5
17,219.6
32,380.7 $
16.4 $
Other Real Estate Owned $
Total Nonperforming Assets $
3,228.8
2,701.6
90.7
426.0
15,175.2
10,733.3
6,514.0
67.5
17,314.8
32,490.0
6.9
0.4
—
—
14.1
0.2
95.0
—
95.2
109.3 $
8.4
117.7
CURRENT
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PERFORMING
NONPERFORMING
TOTAL LOANS
AND LEASES
$
8,999.4
$
13.3
$
3.1
$
0.4
$
9,016.2
$
26.0
$
9,042.2
Total Loans and Leases
$
32,213.0 $
112.5 $
38.8 $
3,455.3
1,538.3
229.2
265.4
14,487.6
10,687.5
7,059.4
33.5
17,780.4
14.1
0.2
—
—
27.6
55.3
53.8
—
109.1
4.1
—
—
—
7.2
9.7
11.9
—
21.6
Total Loans and Leases
$
32,268.0 $
136.7 $
28.8 $
0.9
—
—
—
1.3
0.6
6.1
—
6.7
3,474.4
1,538.5
229.2
265.4
14,523.7
10,753.1
7,131.2
33.5
17,917.8
8.0 $
32,441.5 $
Other Real Estate Owned $
Total Nonperforming Assets $
8.3
—
—
—
34.3
3,482.7
1,538.5
229.2
265.4
14,558.0
—
10,753.1
7,247.6
33.5
18,034.2
32,592.2
116.4
—
116.4
150.7 $
4.6
155.3
2018 Annual Report | Northern Trust Corporation 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information related to impaired loans by segment and class.
TABLE 66: IMPAIRED LOANS
(In Millions)
With no related specific allowance
Commercial and Institutional
Commercial Real Estate
Residential Real Estate
Private Client
With a related specific allowance
Commercial and Institutional
Commercial Real Estate
Residential Real Estate
Total
Commercial
Personal
Total
(In Millions)
With no related specific allowance
Commercial and Institutional
Commercial Real Estate
Residential Real Estate
Private Client
With a related specific allowance
Commercial and Institutional
Commercial Real Estate
Residential Real Estate
Total
Commercial
Personal
Total
AS OF DECEMBER 31, 2018
AS OF DECEMBER 31, 2017
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
SPECIFIC
ALLOWANCE
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
SPECIFIC
ALLOWANCE
$
0.2 $
5.8
76.7
1.7
6.4
2.6
22.8
15.0
101.2
0.4 $
7.6
104.7
1.7
7.3
2.8
26.1
18.1
132.5
— $
—
—
—
3.0
1.1
3.1
4.1
3.1
24.9 $
5.7
90.9
0.7
0.5
2.8
14.3
33.9
105.9
30.3 $
7.6
124.9
0.7
5.4
2.8
14.9
46.1
140.5
$
116.2 $
150.6 $
7.2 $
139.8 $
186.6 $
—
—
—
—
0.5
0.6
4.3
1.1
4.3
5.4
YEAR ENDED DECEMBER 31, 2018
YEAR ENDED DECEMBER 31, 2017
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
$
$
6.8 $
6.4
94.9
0.6
4.6
2.1
9.2
19.9
104.7
124.6 $
— $
0.2
1.9
0.1
—
—
—
0.2
2.0
2.2 $
8.7 $
9.2
105.0
0.2
6.5
2.6
17.0
27.0
122.2
149.2 $
—
0.1
1.5
—
—
—
—
0.1
1.5
1.6
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 $8.0 million in 2018, $9.1 million in 2017, and $8.5 million in 2016.
There were $12.6 million and $9.4 million of aggregate undrawn loan commitments and standby letters of credit at
December 31, 2018 and 2017, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.
Troubled Debt Restructurings (TDRs). Included within impaired loans were $64.6 million and $72.5 million of
nonperforming TDRs and $35.2 million and $25.9 million of performing TDRs as of December 31, 2018 and 2017,
respectively.
122 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide, by segment and class, the number of loans and leases modified in TDRs during the years
ended December 31, 2018, and 2017, and the recorded investments and unpaid principal balances as of December 31, 2018
and 2017.
TABLE 67: TROUBLED DEBT RESTRUCTURINGS
($ In Millions)
December 31, 2018
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, 2017
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
1 $
2
3
48
1
49
52 $
0.3 $
2.8
3.1
27.7
—
27.7
30.8 $
0.5
2.8
3.3
30.8
0.1
30.9
34.2
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
3 $
2
5
66
3
69
74 $
0.4 $
1.8
2.2
22.1
0.2
22.3
24.5 $
1.4
1.8
3.2
22.8
0.5
23.3
26.5
Note: Period-end balances reflect all paydowns and charge-offs during the year.
TDR modifications primarily involve extensions of term, deferrals of principal, interest rate concessions, 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, 2018, the TDR modifications of loans within residential real estate were
primarily extensions of term, deferrals of principal, other modifications, and interest rate concessions. During the year
ended December 31, 2018, TDR modifications of loans within commercial and institutional, commercial real estate, and
private client classes were extensions of term, deferrals of principal, and other modifications. During the year ended
December 31, 2017, the TDR modifications of loans within residential real estate loans were primarily extensions of term,
deferrals of principal, interest rate concessions and other modifications; modification within commercial and institutional,
commercial real estate, and private client classes were primarily extensions of term or deferrals of principal.
There were four loans or leases modified in TDRs during the previous twelve-month periods which subsequently
became nonperforming during the year ended December 31, 2018. There were two loans or leases modified in TDRs
during the previous twelve-month periods which subsequently became nonperforming during the year ended
December 31, 2017.
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 real estate via foreclosure. As of December 31, 2018 and 2017,
Northern Trust held foreclosed real estate properties with a carrying value of $8.4 million and $4.6 million, respectively, as
2018 Annual Report | Northern Trust Corporation 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a result of obtaining physical possession. In addition, as of December 31, 2018 and 2017, Northern Trust had loans with a
carrying value of $10.9 million and $14.1 million, respectively, 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.
Changes in the allowance for credit losses by segment were as follows:
TABLE 68: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
2018
2017
2016
(In Millions)
Balance at Beginning of Year $
Charge-Offs
Recoveries
COMMERCIAL PERSONAL TOTAL COMMERCIAL PERSONAL TOTAL COMMERCIAL PERSONAL TOTAL
118.5 $ 233.3
(27.3 )
(10.7 )
12.1
7.3
87.1 $ 192.0 $
(21.5 )
(10.1 )
11.3
5.8
73.0 $ 153.8 $
(10.1 )
(9.2 )
9.0
7.3
104.9 $
(11.4 )
5.5
114.8 $
(16.6 )
4.8
80.8 $
(0.9 )
1.7
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
$
$
0.8
(2.9 )
—
(1.9 )
(1.1 )
(11.6 )
(14.5 )
(5.9 )
(18.2 )
(4.3 )
(10.2 )
(9.8 )
(28.0 )
—
—
—
—
—
(11.8 )
2.0
(0.1 )
(3.4 )
(15.2 )
(28.0 )
(26.0 )
—
(0.1 )
78.7 $
59.5 $ 138.2 $
80.8 $
73.0 $ 153.8 $
104.9 $
87.1 $ 192.0
57.6 $
55.0 $ 112.6 $
63.5 $
67.7 $ 131.2 $
83.7 $
77.3 $ 161.0
21.1
4.5
25.6
17.3
5.3
22.6
21.2
9.8
31.0
Total Allowance for Credit
Losses
$
The following table provides information regarding the recorded investments in loans and leases and the allowance for
credit losses by segment as of December 31, 2018 and 2017.
$ 138.2
$ 153.8
104.9
87.1
73.0
80.8
59.5
78.7
$
$
$
$
$
$ 192.0
TABLE 69: RECORDED INVESTMENTS IN LOANS AND LEASES
(In Millions)
December 31, 2018
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
124 2018 Annual Report | Northern Trust Corporation
COMMERCIAL
PERSONAL
TOTAL
$
$
15.0 $
15,160.2
15,175.2
101.2 $
17,213.6
17,314.8
116.2
32,373.8
32,490.0
4.1
53.5
57.6
21.1
78.7 $
3.1
51.9
55.0
4.5
59.5 $
7.2
105.4
112.6
25.6
138.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
December 31, 2017
Loans and Leases
Specifically Evaluated for Impairment
Evaluated for Inherent Impairment
Total Loans and Leases
Allowance for Credit Losses on Credit Exposures
Specifically Evaluated for Impairment
Evaluated for Inherent Impairment
Allowance Assigned to Loans and Leases
Allowance for Undrawn Exposures
Commitments and Standby Letters of Credit
Total Allowance for Credit Losses
Note 8 – Concentrations of Credit Risk
COMMERCIAL
PERSONAL
TOTAL
$
$
33.9 $
14,524.1
14,558.0
105.9 $
17,928.3
18,034.2
139.8
32,452.4
32,592.2
1.1
62.4
63.5
17.3
80.8 $
4.3
63.4
67.7
5.3
73.0 $
5.4
125.8
131.2
22.6
153.8
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. At December 31, 2018, on-balance-sheet credit risk to banks and bank holding
companies, both U.S. and non-U.S., consisted primarily of interest-bearing deposits with banks of $4.3 billion, federal
funds sold and securities purchased under agreements to resell of $1.2 billion, and demand balances maintained at
correspondent banks of $4.5 billion. At December 31, 2017, on-balance-sheet credit risk to banks and bank holding
companies, both U.S. and non-U.S., consisted primarily of interest-bearing deposits with banks of $5.6 billion, federal
funds sold and securities purchased under agreements to resell of $1.3 billion, and demand balances maintained at
correspondent banks of $4.3 billion. 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 Capital Markets Credit 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.
Residential Real Estate. At December 31, 2018, residential real estate loans totaled $6.5 billion, or 22% of total U.S.
loans and leases at December 31, 2018, compared with $7.2 billion, or 23% of total U.S. loans and leases at December 31,
2017. Residential real estate loans consist of traditional first lien mortgages and equity credit lines, which generally require
a loan-to-collateral value ratio of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained
upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed
by independent third parties. Of the total $6.5 billion in residential real estate loans, $1.7 billion were in Florida, $1.3
billion were in California, and $1.2 billion were in the greater Chicago area, 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 $824.0 million and $1.0 billion at
December 31, 2018 and 2017, 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 California, Illinois, Florida, 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.
2018 Annual Report | Northern Trust Corporation 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below provides additional detail regarding commercial real estate loan types.
TABLE 70: COMMERCIAL REAL ESTATE LOANS
(In Millions)
Commercial Mortgages
Office
Apartment/ Multi-family
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 71: BUILDINGS AND EQUIPMENT
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Total Buildings and Equipment
DECEMBER 31,
2018
2017
$
811.2 $
490.7
529.7
254.9
426.6
2,513.1
420.6
127.0
168.1
$
3,228.8 $
825.2
623.3
631.1
311.1
445.6
2,836.3
350.8
164.8
130.8
3,482.7
DECEMBER 31, 2018
ORIGINAL
COST
15.4 $
245.7
649.9
406.0
ACCUMULATED
DEPRECIATION
1.1 $
148.2
457.6
281.9
NET BOOK
VALUE
14.3
97.5
192.3
124.1
1,317.0 $
888.8 $
428.2
$
$
The charge for depreciation, which includes depreciation of assets that were recorded under capital leases and is included
within occupancy expense in the consolidated statements of income, amounted to $108.6 million in 2018, $101.2 million in
2017, and $89.2 million in 2016.
Note 10 – Lease Commitments
At December 31, 2018, 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, 2018, for all non-cancelable operating leases with a term of one
year or more are as follows:
126 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 72: MINIMUM LEASE PAYMENTS
(In Millions)
2019
2020
2021
2022
2023
Later Years
Total Minimum Lease Payments
Less: Sublease Rentals
Net Minimum Lease Payments
FUTURE MINIMUM
LEASE PAYMENTS
98.8
97.8
85.9
77.2
67.7
335.7
763.1
(23.4 )
739.7
$
$
Operating lease rental expense, net of rental income, is recorded in occupancy expense and amounted to $79.0 million in
2018, $76.7 million in 2017, and $76.1 million in 2016.
Note 11 – Goodwill and Other Intangibles
Goodwill. Changes by reporting segment in the carrying amount of goodwill for the years ended December 31, 2018 and
2017, including the effect of foreign exchange rates on non-U.S.-dollar-denominated balances, were as follows:
TABLE 73: GOODWILL
(In Millions)
Balance at December 31, 2016
Goodwill Acquired
Measurement Period Adjustments
Foreign Exchange Rates
Balance at December 31, 2017
Goodwill Acquired
Foreign Exchange Rates
Balance at December 31, 2018
CORPORATE &
INSTITUTIONAL
SERVICES
WEALTH
MANAGEMENT
$
$
$
448.4 $
78.3
(1.3 )
9.1
534.5 $
71.4
(7.7 )
598.2 $
71.0 $
—
—
0.1
71.1 $
—
—
71.1 $
TOTAL
519.4
78.3
(1.3 )
9.2
605.6
71.4
(7.7 )
669.3
Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other
intangible assets subject to amortization as of December 31, 2018 and 2017 were as follows:
TABLE 74: OTHER INTANGIBLE ASSETS
(In Millions)
Gross Carrying Amount
Less: Accumulated Amortization
Net Book Value
DECEMBER 31,
$
$
2018
211.1 $
72.5
138.6 $
2017
222.7
61.3
161.4
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 $17.4 million, $11.4 million,
and $8.8 million for the years ended December 31, 2018, 2017, and 2016, respectively. Amortization for the years 2019,
2020, 2021, 2022, and 2023 is estimated to be $16.8 million, $16.8 million, $14.4 million, $9.8 million, and $9.5 million
respectively.
In November 2018, Northern Trust completed its acquisition of BEx LLC, a provider of foreign exchange software
solutions, for a total purchase price of $37.6 million, inclusive of cash consideration of $31.2 million paid in the fourth
quarter of 2018. The related purchase accounting is expected to be completed in the first quarter of 2019.
Since its acquisition of Omnium LLC in 2011, Northern Trust has made various investments in Citadel Technology
LLC’s Omnium technology platform. In June 2018, Northern Trust completed its acquisition of such platform, along with
2018 Annual Report | Northern Trust Corporation 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
associated development resources, for a total purchase price of $73.0 million. Goodwill and incremental software
intangible assets associated with the acquisition in 2018 totaled $71.4 million and $1.6 million, respectively.
On October 1, 2017, Northern Trust completed its acquisition of UBS Asset Management’s fund administration
servicing business in Luxembourg and Switzerland. The purchase price recorded in connection with the closing of the
acquisition, which was subject to adjustment through May 2018, totaled $191.3 million. Goodwill and other intangible
assets associated with the acquisition totaled $78.3 million and $126.0 million, respectively.
Note 12 – Senior Notes and Long-Term Debt
Senior Notes. A summary of senior notes outstanding at December 31, 2018 and 2017 is presented below.
TABLE 75: SENIOR NOTES
($ In Millions)
Corporation-Senior Notes
(1)(4)
Fixed Rate Due Nov. 2020
(5)
Fixed Rate Due Aug. 2021
(6)
Fixed Rate Due Aug. 2022
(7)
Fixed Rate Due Aug. 2028
(8)(11)
Total Senior Notes
DECEMBER 31,
RATE
2018
2017
3.45 % $
3.38
2.38
3.65
$
499.7 $
499.1
499.2
513.3
2,011.3 $
499.6
498.8
498.9
—
1,497.3
Long-Term Debt. A summary of long-term debt outstanding at December 31, 2018 and 2017 is presented below.
TABLE 76: LONG-TERM DEBT
($ In Millions)
Bank-Subordinated Debt
(1)(3)(4)(11)
6.50% Notes due Aug. 2018
(9)
Corporation-Subordinated Debt
(4)
3.95% Notes due Oct. 2025
(1)(10)(11)
3.375% Fixed-to-Floating Rate Notes due May 2032
(2)
Total Corporation Subordinated Debt
Capital Lease Obligations
Total Long-Term Debt
Long-Term Debt Qualifying as Risk-Based Capital
DECEMBER 31,
2018
2017
$
— $
305.5
763.1
349.3
1,112.4
—
1,112.4 $
1,099.5 $
780.4
349.2
1,129.6
14.4
1,449.5
1,099.4
$
$
(1) Not redeemable prior to maturity, except for senior notes due Aug. 2028, which are redeemable within three months of maturity.
(2) The subordinated notes will bear interest from the date they were issued to, but excluding, May 8, 2027, at an annual rate of 3.375%, payable semi-annually in arrears.
From, and including, May 8, 2027, the subordinated notes will bear interest at an annual rate equal to three-month LIBOR plus 1.131%, payable quarterly in arrears. The
subordinated notes are unsecured and may be redeemed, in whole but not in part, on, and only on, May 8, 2027, at a redemption price equal to 100% of the principal amount of
the subordinated notes to be redeemed, plus accrued and unpaid interest, if any, up to but excluding the redemption date.
(3) 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 15 years, and
each subordinated note will mature from 5 years to 15 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.
(4) As of December 31, 2018, debt issue costs of $1.6 million and $1.4 million are included as a direct deduction from the carrying amount of Senior Notes and Long-Term
Debt, respectively. Debt issue costs are 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 0.125%
(9) Notes issued at a discount of 0.02%
(10) Notes issued at a discount of 0.114%
(11) Interest rate swap contracts were entered into to modify the interest expense on these senior and subordinated notes from fixed rates to floating rates. The swaps are
recorded as fair value hedges and at December 31, 2018, increases in the carrying values of the senior and subordinated notes outstanding of $29.3 million were recorded. As
of December 31, 2017, net adjustments in the carrying values of subordinated notes outstanding of $37.4 million were recorded.
128 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Under the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the regulatory capital
treatment of these securities is required to be phased out over a period that began on January 1, 2013. In 2018, 40% 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.
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, 2018 and 2017.
TABLE 77: 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,
$
$
2018
154.2 $
123.4
277.6 $
2017
154.2
123.3
277.5
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 designations, preferences and relative, participating, optional and other
special rights and qualifications, limitations or restrictions for each series of preferred stock issued.
As of December 31, 2018, the Corporation had issued and outstanding 500,000 depositary shares, each representing a
1/100th ownership interest in a share of Series D Non-Cumulative Perpetual Preferred Stock (the “Series D Preferred
Stock”) issued in August 2016. Equity related to Series D Preferred Stock as of December 31, 2018 and 2017 was $493.5
million. Shares of the Series D Preferred Stock have no par value and a liquidation preference of $100,000 (equivalent to
$1,000 per depositary share).
Dividends on the Series D Preferred Stock, which are not mandatory, accrue and are payable on the liquidation
preference amount, on a non-cumulative basis, at a rate per annum equal to (i) 4.60% from the original issue date of the
Series D Preferred Stock to but excluding October 1, 2026; and (ii) a floating rate equal to Three-Month LIBOR plus
3.202% from and including October 1, 2026. Fixed rate dividends are payable in arrears on the 1st day of April and
October of each year, through and including October 1, 2026, and floating rate dividends will be payable in arrears on the
1st day of January, April, July and October of each year, commencing on January 1, 2027.
2018 Annual Report | Northern Trust Corporation 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018, the Corporation also had issued and outstanding 16 million depositary shares, each
representing 1/1000th ownership interest in a share of Series C Non-Cumulative Perpetual Preferred Stock (“Series C
Preferred Stock”), issued in August 2014. Equity related to Series C Preferred Stock as of December 31, 2018 and 2017
totaled $388.5 million. Series C Preferred Stock has no par value and has a liquidation preference of $25,000 (equivalent to
$25 per depositary share).
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, at a rate per annum equal to 5.85%.
Common Stock. Stock repurchases through July 17, 2018 were made pursuant to the repurchase program announced
by the Corporation on July 18, 2017, under which the Corporation’s Board of Directors authorized the Corporation to
repurchase up to 9.5 million shares of the Corporation’s common stock. This program was terminated and replaced with a
new repurchase program, announced on July 17, 2018, under which the Corporation’s Board of Directors authorized the
Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. Repurchases after July 17, 2018
were made pursuant to the new repurchase program. Shares are repurchased by the Corporation to, among other things,
manage the Corporation's capital levels. Repurchased shares are used for general purposes, including the issuance of shares
under stock option and other incentive plans. The new repurchase authorization approved by the Board of Directors has no
expiration date.
Under the Corporation’s 2018 Capital Plan, which was reviewed without objection by the Federal Reserve, the
Corporation may repurchase up to $529.5 million of common stock after December 31, 2018 through June 30, 2019.
The average price paid per share for common stock repurchased in 2018, 2017, and 2016 was $102.69, $90.25, and
$67.91, respectively.
An analysis of changes in the number of shares of common stock outstanding follows:
TABLE 78: SHARES OF COMMON STOCK
Balance at January 1
Incentive Plan and Awards
Stock Options Exercised
Treasury Stock Purchased
Balance at December 31
2018
226,126,674
1,310,778
575,662
(9,001,064 )
219,012,050
2017
228,605,485
1,320,129
1,997,362
(5,796,302 )
226,126,674
2016
229,293,783
1,209,124
4,156,728
(6,054,150 )
228,605,485
Note 15 – Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of accumulated other comprehensive income (loss) (AOCI) at
December 31, 2018, 2017, and 2016, and changes during the years then ended.
TABLE 79: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
BALANCE AT
DECEMBER 31,
2018
NET
CHANGE
RECLASSIFICATIO
N OF CERTAIN
TAX EFFECTS
FROM AOCI
BALANCE AT
DECEMBER 31,
2017
NET
CHANGE
BALANCE AT
DECEMBER 31,
2016
NET
CHANGE
BALANCE AT
DECEMBER 31,
2015
$
(114.9 ) $
(22.3 ) $
(17.8 ) $
(74.8 ) $
(42.4 ) $
(32.4 ) $
(1.4 ) $
(31.0 )
4.0
(1.4 )
67.9
22.2
0.9
47.5
4.5
(1.6 )
6.1
9.1
(3.0 )
(1.8 )
16.7
(18.5 )
(0.9 )
(17.6 )
(In Millions)
Net Unrealized (Losses)
Gains on Debt Securities
Available for Sale*
Net Unrealized Gains
(Losses) on Cash Flow
Hedges
Net Foreign Currency
Adjustments
Net Pension and Other
Postretirement Benefit
Adjustments
Total
$
(453.7 ) $
(14.1 ) $
(25.3 ) $
(414.3 ) $
(44.3 ) $
(370.0 ) $
2.7 $
(410.7 )
(12.6 )
(55.9 )
(342.2 )
(17.0 )
(325.2 )
(4.1 )
(321.1 )
(372.7 )
* Includes net unrealized gains on debt securities transferred from available for sale to held to maturity during the years ended December 31, 2018 and
2017.
130 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 80: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
2016
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
$
(31.9 ) $
9.2
$
(22.7 ) $
(70.2 ) $
26.9
$
(43.3 ) $
(1.8 ) $
0.7
$
(1.1 )
(In Millions)
Unrealized Gains (Losses) on Debt
Securities Available for Sale
Unrealized (Losses) Gains on Debt
Securities Available for Sale
Reclassification Adjustment for (Gains)
Losses Included in Net Income
Net Change
$
(31.4 ) $
9.1 $
(22.3 ) $
(68.8 ) $
0.5
(0.1 )
0.4
1.4
(0.5 )
26.4 $
0.9
(0.5 )
(42.4 ) $
(2.3 ) $
0.2
0.9 $
(0.3 )
(1.4 )
Unrealized (Losses) Gains on Cash Flow
Hedges
Foreign Exchange Contracts
Interest Rate Contracts
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)
$
70.5
$
(17.6 ) $
52.9
$
32.5
$
(19.5 ) $
13.0
$
3.1
$
4.2
$
(1.2 )
0.3
(0.9 )
1.3
(0.8 )
0.5
1.3
(71.1 )
17.7
(53.4 )
(24.5 )
9.4
(15.1 )
(1.9 )
1.7
0.7
$
(1.8 ) $
0.4 $
(1.4 ) $
9.3 $
(10.9 ) $
(1.6 ) $
2.5 $
6.6 $
7.3
3.0
(1.2 )
9.1
$
(107.8 ) $
1.5
$
(106.3 ) $
156.5
$
(3.1 ) $
153.4
$
(126.5 ) $
(3.1 ) $
(129.6 )
(1.8 )
173.0
0.5
(43.2 )
(1.3 )
129.8
2.0
(223.2 )
(0.7 )
85.2
1.3
(138.0 )
(5.3 )
212.4
2.0
(80.4 )
(3.3 )
132.0
Net Change
$
63.4 $
(41.2 ) $
22.2 $
(64.7 ) $
81.4 $
16.7 $
80.6 $
(81.5 ) $
(0.9 )
Pension and Other Postretirement Benefit
Adjustments
Net Actuarial Gains (Losses)
$
(54.9 ) $
9.6 $
(45.3 ) $
(58.4 ) $
25.4 $
(33.0 ) $
(31.1 ) $
11.2 $
(19.9 )
Reclassification Adjustment for Losses
Included in Net Income
36.3
(3.6 )
32.7
25.9
(9.9 )
16.0
25.4
(9.6 )
15.8
Net Change
$
(18.6 ) $
6.0 $
(12.6 ) $
(32.5 ) $
15.5 $
(17.0 ) $
(5.7 ) $
1.6 $
(4.1 )
2018 Annual Report | Northern Trust Corporation 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the location and before-tax amounts of reclassifications out of AOCI during the years ended
December 31, 2018, 2017 and 2016.
TABLE 81: RECLASSIFICATION ADJUSTMENT OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(In Millions)
Debt Securities Available for Sale
Realized Losses (Gains) on Debt Securities Available for
Sale
Realized (Gains) Losses on Cash Flow Hedges
Foreign Exchange Contracts
Interest Rate Contracts
Total Realized (Gains) on Cash Flow Hedges
Pension and Other Postretirement Benefit Adjustments
Amortization of Net Actuarial Losses
Amortization of Prior Service Cost
Gross Reclassification Adjustment
LOCATION OF
RECLASSIFICATION ADJUSTMENTS
RECOGNIZED IN INCOME
AMOUNT OF RECLASSIFICATION
ADJUSTMENTS RECOGNIZED
IN INCOME
YEAR ENDED DECEMBER 31,
2018
2017
2016
Investment Security Losses, net
$
0.5 $
1.4 $
(0.5 )
Other Operating Income
Interest Income
Other Operating Expense
Interest Income
Employee Benefits
Employee Benefits
(3.9 )
(67.4 )
—
0.2
(71.1 )
36.6
(0.3 )
(5.0 )
(19.3 )
0.1
(0.3 )
(24.5 )
26.0
(0.1 )
$
36.3 $
25.9 $
6.4
(6.4 )
0.9
(2.8 )
(1.9 )
25.6
(0.2 )
25.4
Note 16 – Net Income per Common Share
The computations of net income per common share are presented below.
TABLE 82: 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,
2018
2017
2016
$
$
$
223,148,335
228,257,664
1,556.4 $
46.4
1,510.0 $
20.1
1,489.9
6.68
1,199.0 $
49.8
1,149.2 $
18.8
1,130.4
4.95
227,580,584
1,032.5
23.4
1,009.1
18.7
990.4
4.35
223,148,335
1,339,991
228,257,664
1,396,737
227,580,584
1,570,822
224,488,326
229,654,401
229,151,406
1,490.0 $
6.64
1,130.5 $
4.92
990.4
4.32
Note: For the year ended December 31, 2018, there were no common stock equivalents excluded in the computation of diluted net income per share. Common stock equivalents
of 115,491, and 1,108,067 for the years ended December 31, 2017 and 2016, respectively, were not included in the computation of diluted net income per common share
because their inclusion would have been antidilutive.
132 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Revenue from Contracts with Clients
Trust, Investment, and Other Servicing Fees. Custody and fund administration income is comprised of revenues
received from our core asset servicing business for providing custody, fund administration, and middle-office-related
services, primarily to C&IS clients. Investment management and advisory income contains revenue received from
providing asset management and related services to Wealth Management and C&IS clients and to Northern Trust sponsored
funds. Securities lending income represents revenues generated from securities lending arrangements that Northern Trust
enters into as agent, mainly with C&IS clients. Other income largely consists of revenues received from providing
employee benefit, investment risk and analytic and other services to C&IS and Wealth Management clients.
Other Noninterest Income. Treasury management income represents revenues received from providing cash and liquidity
management services to C&IS and Wealth Management clients. The portion of securities commissions and trading income
that relates to revenue from contracts with clients is primarily comprised of commissions earned from providing securities
brokerage services to Wealth Management and C&IS clients. The portion of other operating income that relates to revenue
from contracts with clients is mainly comprised of service fees for banking-related services provided to Wealth
Management and C&IS clients.
Performance Obligations. Clients are typically charged monthly or quarterly in arrears based on the fee arrangement
agreed to with each client; payment terms will vary depending on the client and services offered.
Substantially all revenues generated from contracts with clients for asset servicing, asset management, securities
lending, treasury management and banking-related services are recognized on an accrual basis, over the period in which
services are provided. The nature of Northern Trust’s performance obligations is to provide a series of distinct services in
which the customer simultaneously receives and consumes the benefits of the promised services as they are performed. Fee
arrangements are mainly comprised of variable amounts based on market value of client assets managed and serviced,
transaction volumes, number of accounts, and securities lending volume and spreads. Revenue is recognized using the
output method in an amount that reflects the consideration to which Northern Trust expects to be entitled in exchange for
providing each month or quarter of service. For contracts with multiple performance obligations, revenue is allocated to
each performance obligation based on the price agreed to with the client, representing its relative standalone selling price.
Security brokerage revenue is primarily represented by securities commissions received in exchange of providing trade
execution related services. Control is transferred at a point in time, on the trade date of the transaction, and fees are
typically variable based on transaction volumes and security types.
Northern Trust’s contracts with its clients are typically open ended arrangements and are therefore considered to have
an original duration of less than one year. Northern Trust has elected the practical expedient to not disclose the value of
remaining performance obligations for contracts with an original expected duration of one year or less.
2018 Annual Report | Northern Trust Corporation 133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenues disaggregated by major revenue source.
TABLE 83: REVENUE DISAGGREGATION
(In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Custody and Fund Administration
Investment Management and Advisory
Securities Lending
Other
Total Trust, Investment and Other Servicing Fees
Other Noninterest Income
Foreign Exchange Income
Treasury Management
Securities Commissions and Trading Income
Other Operating Income
Investment Security Losses, net
Total Other Noninterest Income
Total Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
2018
$
$
$
$
$
1,589.1
1,862.6
102.8
199.2
3,753.7
307.2
51.8
98.3
127.5
(1.0 )
583.8
4,337.5
Trust, investment and other servicing fees and treasury management fees represent revenue from contracts with clients.
Revenue from contracts with clients also includes $86.7 million of the $98.3 million total securities commissions and
trading income and $44.0 million of the $127.5 million total other operating income in 2018.
Receivables Balances. The table below represents receivables balances from contracts with clients, which are included in
other assets in the consolidated balance sheets, at December 31, 2018 and December 31, 2017.
TABLE 84: CLIENT RECEIVABLES
(In Millions)
Trust Fees Receivable, net (1)
Other
Total Client Receivables
DECEMBER 31,
$
$
2018
742.5 $
90.1
832.6 $
2017
629.7
79.0
708.7
(1) The net trust fees receivable balance at December 31, 2017 does not reflect the reduction for the estate settlement revenue transition adjustment of $2.7 million, which was
recorded with an effective date of January 1, 2018.
134 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 – Net Interest Income
The components of net interest income were as follows:
TABLE 85: 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 and Other Central Bank 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,
2018
2017
2016
1,098.8 $
905.2
7.0
70.0
240.4
2,321.4 $
384.6 $
50.3
7.8
150.1
53.4
45.0
7.5
698.7 $
919.1 $
594.1
9.8
63.8
182.6
806.5
428.8
7.5
64.3
109.8
1,769.4 $
1,416.9
182.1 $
10.4
6.0
50.7
46.9
39.2
4.9
340.2 $
83.5
1.5
2.3
18.0
46.8
26.4
3.5
182.0
1,234.9
1,622.7 $
1,429.2 $
(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 19 – Other Operating Income
The components of other operating income were as follows:
TABLE 86: OTHER OPERATING INCOME
(In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
FOR THE YEAR ENDED DECEMBER 31,
$
$
2018
48.9 $
46.4
32.2
127.5 $
2017
50.7 $
48.6
58.2
157.5 $
2016
56.6
50.6
134.0
241.2
Other income totaled $32.2 million in 2018, down from $58.2 million in 2017, primarily due to the impairment of a
community development equity investment previously held at cost, expenses related to existing swap agreements related to
Visa Inc. Class B common shares, and the net impact of various other operating income categories. Other income in 2016
included a $123.1 million net gain on the sale of 1.1 million Visa Class B common shares.
2018 Annual Report | Northern Trust Corporation 135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 – Other Operating Expense
The components of other operating expense were as follows:
TABLE 87: 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,
$
$
2018
98.3 $
27.4
33.6
17.4
153.9
330.6 $
2017
95.4 $
34.7
42.8
11.4
147.3
331.6 $
2016
83.6
31.7
43.0
8.8
197.3
364.4
Other expenses in 2016 included a charge in connection with an agreement to settle certain securities lending litigation of
$50.0 million and charges related to contractual modifications associated with existing C&IS clients of $18.6 million.
Note 21 – 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 for the periods presented below.
TABLE 88: INCOME TAXES
(In Millions)
Federal Rate
Tax at Statutory Rate
Tax Exempt Income
Foreign Tax Rate Differential
Excess Tax Benefit Related to Share-Based Compensation
State Taxes, net
Impact of Tax Cuts and Jobs Act
Change in Accounting Method
Other
Provision for Income Taxes
FOR THE YEAR ENDED DECEMBER 31,
$
2018
21.0 %
411.1 $
(6.9 )
(7.3 )
(16.8 )
65.5
(4.8 )
(24.4 )
(15.0 )
2017
35.0 %
571.9 $
(9.6 )
(50.0 )
(31.6 )
41.0
(53.1 )
—
(33.7 )
$
401.4 $
434.9 $
2016
35.0 %
531.0
(7.2 )
(50.9 )
(12.3 )
31.1
—
—
(7.1 )
484.6
The current year includes tax benefits primarily attributable to the reduction in the U.S. corporate income tax rate from 35% to
21% as a result of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017, a tax benefit recognized in 2018
resulting from a change in accounting method regarding the timing of tax deductions for software-related expenses, and
adjustments recorded in the current year associated with the implementation of the TCJA as outlined below.
These decreases to the provision for income taxes in the current year were partially offset by the impact of an increase in
income before income taxes, tax accounting changes in 2018 brought about by the TCJA including the tax accounting
associated with additional non-deductible expenses, and a reduction in the income tax benefit derived from the vesting of
restricted stock units and stock option exercises. Additionally, the 2017 provision for income taxes included a net benefit
attributable to the implementation of the TCJA of $53.1 million and Federal and State research tax credits of $17.6
million related to the Corporation’s technology spend between 2013 and 2016, each resulting in a reduction of the effective tax
rate.
136 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The TCJA was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%. It
also required companies to pay a mandatory deemed repatriation tax on earnings of foreign subsidiaries that were
previously tax deferred. At December 31, 2017, Northern Trust made a reasonable estimate as to the impact of the TCJA.
During 2018, Northern Trust completed the related calculations and additional analyses associated with the implementation
of the TCJA, resulting in a number of adjustments to the 2018 tax provision as follows:
TABLE 89: IMPACT OF TAX CUTS AND JOBS ACT
(In Millions)
Federal Taxes on Mandatory Deemed Repatriation
Impact Related to Federal Deferred Taxes
Other Adjustments
Provision (Benefit) for Income Taxes
$
$
2018
(16.8 ) $
12.7
(0.7 )
(4.8 ) $
2017
150.0
(210.0 )
6.9
(53.1 )
Adjustments in the above table include a tax benefit of $16.8 million resulting from an adjustment to the Corporation’s
2017 income tax provision for mandatory deemed repatriation with respect to the pre-2018 earnings of its non-US
subsidiaries, offset by a $12.7 million net provision associated with the repricing of deferred taxes.
For tax years beginning after December 31, 2017, the TCJA introduces new provisions for U.S. taxation of certain
global intangible low-taxed income (GILTI). Northern Trust has made the policy election to record any current year tax
expense associated with GILTI in the period in which it is incurred.
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 authorities before 2013, U.S. state or local tax authorities for
years before 2011, or non-U.S. tax authorities for years before 2010.
Included in other liabilities within the consolidated balance sheets at December 31, 2018 and 2017 were $21.9 million
and $27.7 million of unrecognized tax benefits, respectively. If recognized, 2018 and 2017 net income would have
increased by $19.8 million and $21.7 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 90: UNRECOGNIZED TAX BENEFITS
(In Millions)
Balance at January 1
Additions for Tax Positions Taken in the Current Year
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
$
$
2018
27.7 $
0.5
1.7
(7.8 )
(0.2 )
21.9 $
2017
17.2
9.9
6.2
(5.4 )
(0.2 )
27.7
Unrecognized tax benefits had net decreases of $5.8 million, resulting in a remaining balance of $21.9 million at
December 31, 2018, compared to net increases of $10.5 million resulting in a remaining balance of $27.7 million at
December 31, 2017. 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 $0.3 million, net of tax, was included in the provision for income taxes for the
year ended December 31, 2018. This compares to a provision for interest and penalties of $0.1 million, net of tax, for the
year ended December 31, 2017. As of December 31, 2018 and 2017, the liability for the potential payment of interest and
penalties totaled $9.2 million and $10.3 million, net of tax, respectively.
2018 Annual Report | Northern Trust Corporation 137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the consolidated provision for income taxes for each of the three years ended December 31 are
as follows:
TABLE 91: PROVISION FOR INCOME TAXES
(In Millions)
Current Tax Provision:
Federal
State
Non-U.S.
Total
Deferred Tax Provision:
Federal
State
Non-U.S.
Total
Provision for Income Taxes
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
2016
$
$
$
132.8 $
95.4
162.7
390.9
33.8 $
(13.8 )
(9.5 )
10.5
401.4 $
347.3 $
38.3
125.4
511.0
(96.4 ) $
24.6
(4.3 )
(76.1 )
434.9 $
495.8
65.3
99.3
660.4
(159.0 )
(18.9 )
2.1
(175.8 )
484.6
In addition to the amounts shown above, tax charges and benefits have been recorded directly to stockholders’ equity for
the following:
TABLE 92: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY
(In Millions)
Current Tax Benefit (Charge) for Employee Stock Options and Other Stock-Based Plans
Tax Effect of Other Comprehensive Income
$
FOR THE YEAR ENDED DECEMBER 31,
2018
— $
25.7
2017
— $
(112.4 )
2016
(7.6 )
72.4
138 2018 Annual Report | Northern Trust Corporation
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. As a result of the TCJA being enacted on December 22, 2017, deferred tax assets
and liabilities as of December 31, 2018 and 2017 were measured at 21%, compared to 35% as of December 31, 2016,
based on the federal tax rate at which they are expected to reverse in the future. Deferred tax assets and liabilities have
been computed as follows:
TABLE 93: NET 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
Compensation and Benefits
Other Assets
Gross Deferred Tax Assets
Valuation Reserve
Deferred Tax Assets, net of Valuation Reserve
Net Deferred Tax Liabilities
DECEMBER 31,
2018
2017
43.3 $
193.2
129.5
10.9
58.9
114.5
550.3
29.0
—
120.6
149.6
(0.3 )
149.3
401.0 $
85.8
187.8
41.0
—
59.4
145.7
519.7
32.3
35.5
88.3
156.1
(1.1 )
155.0
364.7
$
$
Northern Trust had various state net operating loss carryforwards as of December 31, 2018 and 2017. The income tax
benefits associated with these loss carryforwards were approximately $0.3 million as of December 31, 2018 and $1.1
million as of December 31, 2017. A valuation allowance of $0.3 million was recorded at December 31, 2018 and $1.1
million as of December 31, 2017, 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, 2018 and 2017, as management
believes it is more likely than not that the deferred tax assets will be fully realized.
Note 22 – 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 certain European subsidiaries retain benefits in local defined benefit plans, although those plans are
closed to new participants and to future benefit accruals. Employees continue to accrue benefits under the Swiss pension
plan, which is accounted for as a defined benefit plan under U.S. GAAP.
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, 2018 and 2017 amounted to $129.9 million and $116.7 million, respectively. Contributions
of $21.9 million and $11.5 million were made to the “Rabbi” Trust in 2018 and 2017, respectively.
2018 Annual Report | Northern Trust Corporation 139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. plan,
non-U.S. plans, and supplemental plan for 2018, 2017, and 2016. Prior service costs are being amortized on a straight-line
basis over 11 years for the U.S. plan and 9 years for the supplemental plan.
TABLE 94: EMPLOYEE BENEFIT PLAN STATUS
($ 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
2018
980.6 $
2017
1,088.4 $
2018
178.4 $
2017
192.2 $
2018
120.9 $
$
1,092.0
1,380.1
1,209.9
1,506.4
183.5
166.7
198.3
178.7
135.6
—
2017
129.0
144.5
—
$
288.1 $
296.5 $
(16.8 ) $
(19.6 ) $
(135.6 ) $
(144.5 )
4.47 %
4.39
6.00
3.79 %
4.39
6.00
2.16 %
1.75 %
2.39
2.08 %
1.75
2.61
4.47 %
4.39
N/A
3.79 %
4.39
N/A
TABLE 95: 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 96: NET PERIODIC PENSION EXPENSE
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
$
2018
435.4 $
(1.4 )
434.0
108.5
2017
399.0 $
(1.8 )
397.2
151.6
2018
41.2 $
3.6
44.8
6.0
2017
44.2 $
2.5
46.7
5.3
2018
65.8 $
0.4
66.2
16.4
2017
83.2
0.6
83.8
31.9
$
325.5
$
245.6
$
38.8
$
41.4
$
49.8
$
51.9
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
($ In Millions)
Service Cost
Interest Cost
Expected Return on Plan Assets
Settlement Expense
Amortization:
Net Loss
Prior Service Cost
Net Periodic Pension Expense
$
Weighted-Average Assumptions:
Discount Rates
Rate of Increase in Compensation
Level
Expected Long-Term Rate of
Return on Assets
$
2018
41.4 $
44.3
(88.2 )
—
2017
38.3 $
45.9
(93.8 )
—
2016
37.4 $
45.8
(94.4 )
—
28.2
(0.4 )
25.3 $
19.0
(0.4 )
9.0 $
18.8
(0.4 )
7.2 $
2018
1.7 $
4.0
(4.4 )
0.5
0.9
0.2
2.9 $
2017
0.4 $
4.0
(4.5 )
1.1
1.3
0.1
2.4 $
2016
— $
4.7
(4.6 )
3.7
2018
4.3 $
5.3
N/A
—
2017
3.7 $
5.2
N/A
—
2016
3.5
5.1
N/A
—
1.0
—
4.8 $
7.4
0.2
17.2 $
5.7
0.2
14.8 $
5.8
0.2
14.6
3.79 %
4.46 %
4.71 %
2.08 %
2.33 %
3.39 %
3.79 %
4.46 %
4.71 %
4.39
4.39
4.25
1.75
1.75
N/A
4.39
4.39
4.25
6.00
6.75
7.00
2.61
3.13
3.73
N/A
N/A
N/A
The components of net periodic pension expense are included in the line item “Employee Benefits” expense in the
consolidated statements of income.
140 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 97: CHANGE IN PROJECTED BENEFIT OBLIGATION
U.S. PLAN
NON-U.S. PLANS
SUPPLEMENTAL PLAN
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Employee Contributions
Plan Amendment
Actuarial (Gain) Loss
Settlement
Acquisitions/Divestitures
Benefits Paid
Foreign Exchange Rate Changes
Ending Balance
$
$
2018
1,209.9 $
41.4
44.3
—
—
(112.4 )
—
—
(91.2 )
—
1,092.0 $
2017
1,062.7 $
38.3
45.9
—
—
142.6
—
—
(79.6 )
—
1,209.9 $
2018
198.3 $
1.7
4.0
0.4
1.3
(9.3 )
(2.7 )
—
(1.1 )
(9.1 )
183.5 $
2017
155.9 $
0.4
4.0
0.1
2.5
0.4
(6.8 )
27.0
(3.0 )
17.8
198.3 $
2018
144.5 $
4.3
5.3
—
—
(9.7 )
—
—
(8.8 )
—
135.6 $
2017
121.1
3.7
5.2
—
—
21.5
—
—
(7.0 )
—
144.5
Actuarial gains of $131.4 million in 2018 were primarily caused by increases in discount rates, while actuarial losses of
$164.5 million in 2017 were mostly a result of decreases in discount rates and an update to the U.S. IRS lump sum
mortality assumption to reflect longer life expectancies.
TABLE 98: ESTIMATED FUTURE BENEFIT PAYMENTS
(In Millions)
2019
2020
2021
2022
2023
2024-2028
TABLE 99: CHANGE IN PLAN ASSETS
(In Millions)
Fair Value of Assets at Beginning of Period
Actual Return on Assets
Employer Contributions
Employee Contributions
Settlement
Acquisitions/Divestitures
Benefits Paid
Foreign Exchange Rate Changes
Fair Value of Assets at End of Period
$
U.S.
PLAN
74.0 $
76.8
75.1
73.4
77.1
368.9
NON-U.S.
PLANS
SUPPLEMENTAL
PLAN
12.0
11.5
14.4
16.2
14.9
63.6
3.4 $
3.8
4.1
3.9
4.3
26.4
U.S. PLAN
NON-U.S. PLANS
2018
1,506.4 $
$
(85.1 )
50.0
—
—
—
(91.2 )
—
$
1,380.1 $
2017
1,393.5 $
192.5
—
—
—
—
(79.6 )
—
1,506.4 $
2018
178.7 $
(2.3 )
2.6
0.4
(2.7 )
—
(1.1 )
(8.9 )
166.7 $
2017
139.3
12.4
3.0
0.1
(6.8 )
18.5
(3.0 )
15.2
178.7
The minimum required and maximum remaining deductible contributions for the U.S. qualified plan in 2019 are estimated
to be zero and $270.0 million, respectively.
During 2017, the investment strategy employed for Northern Trust's U.S. pension plan was changed to utilize a
dynamic glide path based on a set of pre-approved asset allocations to return-seeking and liability-hedging assets that vary
in accordance with the plan's projected benefit obligation funded ratio. In general, as the plan’s projected benefit obligation
funded ratio increases beyond an established threshold, the plan’s allocation to liability-hedging assets will increase while
the allocation to return-seeking assets will decrease. Conversely, a decrease in the plan’s projected benefit obligation
funded ratio beyond an established threshold will result in a decrease in the plan’s allocation to liability-hedging assets and
increase in the allocation to return-seeking assets. Liability-hedging assets include U.S. long credit bonds, U.S. long
government bonds, and a custom completion strategy used to hedge more closely the liability duration of projected plan
benefits with bond duration across all durations. Return-seeking assets include: U.S. equity, international developed equity,
2018 Annual Report | Northern Trust Corporation 141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
emerging markets equity, real estate, high yield bonds, global listed infrastructure, emerging market debt, private equity
and hedge funds.
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 2017 is 45% U.S. long credit bonds, 10% U.S. long government bonds,
10% custom completion, 8% U.S. equities, 5% international developed equity, 3% emerging markets equity, 3% real estate,
4% high yield bonds, 3% global listed infrastructure, 4% emerging market debt, 2% private equity, and 3% hedge funds.
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 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; the custom
completion strategy uses U.S. treasury securities and interest rate futures (or similar instruments) to align more closely with
the target hedge ratio across maturities. Diversifying investments, including private equity, hedge funds, listed real estate,
emerging market debt, high yield bonds, and global listed 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 2% of the total limited
partnership and the maximum allowable loss cannot exceed the commitment amount. The plan holds two investments in
hedge funds of funds, which invest, either directly or indirectly, in diversified portfolios of funds or other pooled
investment vehicles.
Investment in listed real estate, high yield bonds, emerging market debt, and global listed infrastructure are designed to
provide income and added diversification.
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 four derivatives held by the
plan at December 31, 2018. There were four derivatives held by the plan at December 31, 2017.
Investment risk is measured and monitored on an ongoing basis through monthly 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 Plan’s Level 1 investments are
comprised of a mutual fund and domestic common stocks. The Plan’s Level 1 investments that are exchange traded are
valued at the closing price reported by the respective exchanges on the day of valuation.
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 Plan’s Level 2 assets are comprised of U.S. government
obligations and collective trust funds. The investments in collective trust funds fair values are calculated on a scheduled
basis using the closing market prices and accruals of securities in the funds (total value of the funds) divided by the number
of fund shares currently issued and outstanding. Redemptions of the collective trust funds 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
Plan’s Level 3 assets are comprised of 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
142 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the estimated fair values.
The following table presents the fair values of Northern Trust’s U.S. pension plan assets, by major asset category, and
their level within the fair value hierarchy defined by GAAP as of December 31, 2018 and 2017.
TABLE 100: FAIR VALUE OF U.S. PENSION PLAN ASSETS
(In Millions)
Domestic Common Stock
Foreign Common Stock
U.S. Government Obligations
Northern Trust Mutual Fund
Exchange Traded Fund
Northern Trust Collective Trust Funds
Northern Trust Private Equity Funds
Northern Trust Hedge Funds
Cash and Other
Total Assets at Fair Value
(In Millions)
Domestic Common Stock
Foreign Common Stock
U.S. Government Obligations
Northern Trust Mutual Fund
Exchange Traded Fund
Northern Trust Collective Trust Funds
Northern Trust Private Equity Funds
Northern Trust Hedge Funds
Cash and Other
Total Assets at Fair Value
December 31, 2018
LEVEL 1
LEVEL 2
LEVEL 3
36.3 $
—
—
39.9
0.1
—
—
—
12.4
88.7 $
— $
—
1,010.2
—
—
226.5
—
—
—
1,236.7 $
— $
—
—
—
—
—
25.5
29.2
—
54.7 $
December 31, 2017
LEVEL 1
LEVEL 2
LEVEL 3
38.6 $
—
—
44.5
0.1
—
—
—
8.7
91.9 $
— $
—
1,072.0
—
—
268.6
—
—
—
1,340.6 $
— $
—
—
—
—
—
29.3
44.6
—
73.9 $
$
$
$
$
TOTAL
36.3
—
1,010.2
39.9
0.1
226.5
25.5
29.2
12.4
1,380.1
TOTAL
38.6
—
1,072.0
44.5
0.1
268.6
29.3
44.6
8.7
1,506.4
The following table presents the changes in Level 3 assets for the years ended December 31, 2018 and 2017.
TABLE 101: 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
$
$
2018
29.3 $
(1.5 )
—
0.3
(2.6 )
25.5 $
2017
35.7 $
(5.4 )
—
0.8
(1.8 )
29.3 $
2018
44.6 $
(2.7 )
2.4
—
(15.1 )
29.2 $
2017
64.8
(3.1 )
5.0
—
(22.1 )
44.6
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
2018 Annual Report | Northern Trust Corporation 143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018, measurement date was set at 6.00%.
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.
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 2018 and 2017, and the change in the accumulated
postretirement benefit obligation during 2018 and 2017.
TABLE 102: 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 103: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
(In Millions)
Net Actuarial Loss / (Gain)
Prior Service Cost
Gross Amount in Accumulated Other Comprehensive Income
Income Tax Effect
Net Amount in Accumulated Other Comprehensive Income
TABLE 104: NET PERIODIC POSTRETIREMENT (BENEFIT) EXPENSE
DECEMBER 31,
2018
23.5 $
4.6
28.1 $
2017
27.7
6.7
34.4
DECEMBER 31,
2018
(6.5 ) $
—
(6.5 )
(2.2 )
(4.3 ) $
2017
3.9
—
3.9
1.5
2.4
$
$
$
$
(In Millions)
Service Cost
Interest Cost
Expected Return on Plan Assets
Amortization
Net Gain
Prior Service Benefit
Net Periodic Postretirement Expense
FOR THE YEAR ENDED DECEMBER 31,
$
$
2018
— $
1.3
—
—
—
1.3 $
2017
0.1 $
1.4
—
—
—
1.5 $
2016
0.1
1.5
—
—
—
1.6
144 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 105: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss / (Gain)
Net Claims Paid
Medicare Subsidy
Ending Balance
FOR THE YEAR ENDED
DECEMBER 31,
$
$
2018
34.4 $
—
1.3
(6.7 )
(6.3 )
5.4
28.1 $
2017
34.1
0.1
1.4
(0.2 )
(1.0 )
—
34.4
Northern Trust uses the aggregate RP-2014 mortality table with adjustment from 2014 to 2006. Northern Trust’s pension
obligations reflect proposed future improvement under scale MP-2018, released by the Society of Actuaries in October
2018. This assumption was updated at December 31, 2018 from improvement scale MP-2017.
TABLE 106: ESTIMATED FUTURE BENEFIT PAYMENTS
(In Millions)
2019
2020
2021
2022
2023
2024-2028
$
TOTAL
POSTRETIREMENT
MEDICAL
BENEFITS
2.5
2.5
2.4
2.3
2.2
10.1
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 4.47% at
December 31, 2018, and 3.79% at December 31, 2017. For measurement purposes, a 6.5% annual increase in the cost of
pre-age 65 medical benefits and post-age 65 medical benefits were assumed for 2018. For drug claims, an 8.50% annual
increase in cost was assumed for 2018. These rates are both assumed to gradually decrease until they reach 4.5% in 2026
and 2027, respectively. The health care cost trend rate assumption has an effect on the amounts reported.
Defined Contribution Plans. The Corporation and its subsidiaries maintain various defined contribution plans covering
substantially all employees. The Corporation’s contribution to the U.S. plan and to certain European-based plans includes a
matching component. The expense associated with defined contribution plans is charged to employee benefits and totaled
$54.4 million in 2018, $53.4 million in 2017, and $50.0 million in 2016.
Note 23 – Share-Based Compensation Plans
Northern Trust recognizes expense for the grant-date fair value of 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 107: 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,
$
$
$
2018
96.3 $
2.6
32.0
130.9 $
32.5 $
2017
87.3 $
9.0
31.7
128.0 $
48.7 $
2016
60.2
9.0
17.6
86.8
32.8
2018 Annual Report | Northern Trust Corporation 145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018, there was $84.5 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 2017 Long-Term Incentive Plan (2017 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 2017 Plan. The 2017 Plan provides for the grant of
nonqualified and incentive stock options; tandem and free-standing stock appreciation rights; stock awards in the form of
restricted stock, restricted stock units and other stock awards; and performance awards.
Beginning with grants made on February 21, 2017 under the Northern Trust Corporation 2012 Stock Plan (2012 Plan),
restricted stock unit and performance stock unit grants continue to vest in accordance with the original terms of the award
if the applicable employee retires after satisfying applicable age and service requirements. For all applicable periods, stock
option grants continue to vest in accordance with the original terms of the award if the employee meets applicable age and
service requirements upon separation from service.
Grants are outstanding under the 2017 Plan, the 2012 Plan, and the Amended and Restated Northern Trust Corporation
2002 Stock Plan (2002 Plan). The 2017 Plan was approved by stockholders in April 2017. Upon approval of the 2017 Plan,
no additional shares have been or will be granted under the 2012 Plan or 2002 Plan. The total number of shares of the
Corporation’s common stock authorized for issuance under the 2017 Plan is 20,000,000 plus shares forfeited under the
2012 Plan and 2002 Plan. As of December 31, 2018, shares available for future grant under the 2017 Plan, including shares
forfeited under the 2012 Plan and 2002 Plan, totaled 19,314,935.
The following describes Northern Trust’s share-based payment arrangements and applies to awards under the 2017
Plan, 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. All options terminate at such time as determined by the Committee
and as provided in the terms and conditions of the respective option grants.
There were no options granted during the year ended December 31, 2018. The weighted-average assumptions used for
options granted during the years ended December 31, 2017 and 2016 are as follows:
TABLE 108: WEIGHTED-AVERAGE ASSUMPTIONS USED FOR OPTIONS GRANTED
Expected Term (in Years)
Dividend Yield
Expected Volatility
Risk-Free Interest Rate
2017
6.9
1.81 %
23.2
2.11
2016
7.0
2.57 %
32.3
1.45
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, 2018, 2017, and 2016.
TABLE 109: 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
146 2018 Annual Report | Northern Trust Corporation
FOR THE YEAR ENDED DECEMBER 31,
2018
— $
8.1
28.5
32.6
27.7
2017
19.18 $
7.3
74.7
108.0
73.1
2016
14.84
9.6
83.9
233.8
80.0
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of changes in nonvested stock options for the year ended December 31, 2018.
TABLE 110: CHANGES IN NONVESTED STOCK OPTIONS
NONVESTED OPTIONS
Nonvested at December 31, 2017
Granted
Vested
Forfeited or Cancelled
Nonvested at December 31, 2018
WEIGHTED-
AVERAGE
GRANT-
DATE FAIR
VALUE
PER SHARE
17.25
—
17.07
19.18
17.36
SHARES
1,246,505 $
—
(483,605 )
(5,162 )
757,738 $
A summary of the status of stock options at December 31, 2018, and changes during the year then ended, are presented in
the table below.
TABLE 111: STATUS OF STOCK OPTIONS AND CHANGES
($ In Millions Except Per Share Information)
Options Outstanding, December 31, 2017
Granted
Exercised
Forfeited, Expired or Cancelled
Options Outstanding, December 31, 2018
Options Exercisable, December 31, 2018
WEIGHTED
AVERAGE
EXERCISE
PRICE
PER SHARE
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC
VALUE
60.99
—
56.55
79.78
61.90
56.82
5.1 $
4.2 $
55.8
46.6
SHARES
3,073,098 $
—
(575,662 )
(16,375 )
2,481,061 $
1,723,323 $
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 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 2018 predominately vest at a rate equal to 25% each year for four years
on the anniversary of the grant. Restricted stock unit grants totaled 815,314, 863,308, and 1,301,693, with weighted
average grant-date fair values of $103.74, $88.19, and $59.17 per share, for the years ended December 31, 2018, 2017, and
2016, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2018, 2017,
and 2016, was $66.4 million, $88.7 million, and $52.3 million, respectively.
A summary of the status of outstanding restricted stock unit awards at December 31, 2018, and changes during the
year then ended, is presented in the table below.
TABLE 112: OUTSTANDING RESTRICTED STOCK UNIT AWARDS
($ In Millions)
Restricted Stock Unit Awards Outstanding, December 31, 2017
Granted
Distributed
Forfeited
Restricted Stock Unit Awards Outstanding, December 31, 2018
Units Convertible, December 31, 2018
NUMBER
3,399,438 $
815,314
(1,016,846 )
(76,064 )
3,121,842 $
144,722 $
AGGREGATE
INTRINSIC
VALUE
339.6
261.0
12.1
2018 Annual Report | Northern Trust Corporation 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of nonvested restricted stock unit awards at December 31, 2018, and changes during the year
then ended.
TABLE 113: NONVESTED RESTRICTED STOCK UNIT AWARDS
NONVESTED RESTRICTED
STOCK UNITS
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
WEIGHTED
AVERAGE
GRANT-
DATE FAIR
VALUE
PER UNIT
69.67
103.74
66.82
73.18
79.92
WEIGHTED
AVERAGE
REMAINING
VESTING
TERM
(YEARS)
1.9
1.9
NUMBER
3,231,327 $
815,314
(993,457 )
(76,064 )
2,977,120 $
Performance Stock Units. Each performance stock unit provides the recipient the opportunity to receive one share of the
Corporation’s common 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. For performance stock units outstanding as of December 31, 2018, and granted in 2016, the number of such 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. For performance stock units outstanding at December 31, 2018, and granted in 2017
or 2018, the number of such units that may vest ranges from 0% to 150% 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.
Performance stock unit grants totaled 242,232, 231,269, and 354,606 for the years ended December 31, 2018, 2017,
and 2016, respectively, with weighted average grant-date fair values of $104.72, $69.80, and $62.67. Performance stock
units outstanding at target level performance totaled 797,531, 817,432, and 859,502 at December 31, 2018, 2017, and
2016, respectively. Performance stock units had aggregate intrinsic values of $66.7 million, $81.7 million, and $76.5
million, and weighted average remaining vesting terms of 1.0 year, 1.1 years, and 1.5 years, at December 31, 2018, 2017,
and 2016, respectively.
Non-employee Director Stock Awards. Stock units with total values of $1.2 million (11,363 units), $1.2 million (13,354
units), and $1.3 million (18,001 units) were granted to non-employee directors in 2018, 2017, and 2016, 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 $1.3 million, $1.3 million, and $1.3 million in 2018, 2017, and 2016, 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. For compensation deferred prior to January 1, 2018, 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. For compensation deferred on or after January 1, 2018, distributions of the stock unit accounts that relate to
cash-based compensation are made in stock.
Note 24 – 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 $326.5 million in 2018, $289.8
million in 2017, and $250.7 million in 2016.
Note 25 – Contingent Liabilities
Legal Proceedings. In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or
parties to pending and threatened legal actions, and are subject to regulatory examinations, information-gathering requests,
investigations, and proceedings, both formal and informal. In certain legal actions, claims for substantial monetary
148 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
damages are asserted. In regulatory matters, claims for disgorgement, restitution, penalties and/or other remedial actions or
sanctions may be sought.
Based on current knowledge, after consultation with legal counsel and after taking into account current accruals,
management does not believe that losses, fines or penalties, if any, arising from pending litigation or threatened legal
actions or regulatory matters either individually or in the aggregate, after giving effect to applicable reserves and insurance
coverage 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.”
The outcome of litigation and regulatory matters is inherently difficult to predict and/or the range of loss often cannot
be reasonably estimated, particularly for 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 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, 2018, the Corporation has estimated the range of reasonably possible loss for these matters to be from
zero to approximately $20 million in the aggregate. The Corporation’s estimate with respect to the aggregate range 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 may vary significantly from the current estimate.
In certain other pending matters, there may be a range of reasonably possible loss (including reasonably possible loss
in excess of amounts accrued) that cannot be reasonably estimated for the reasons described above. Such matters are not
included in the estimated range of reasonably possible loss discussed above.
In 2015 Northern Trust Fiduciary Services (Guernsey) Limited (NTFS), an indirect subsidiary of the Corporation, was
charged by a French investigating magistrate judge with complicity in estate tax fraud in connection with the
administration of two trusts for which it serves as trustee. Charges also were brought against a number of other persons and
entities related to this matter. In 2017 a French court found no estate tax fraud had occurred and NTFS and all other
persons and entities charged were acquitted. The Public Prosecutor’s Office of France appealed the court decision and in
June 2018 a French appellate court issued its opinion on the matter, acquitting all persons and entities charged, including
NTFS. The Public Prosecutor’s Office of France has appealed the appellate court’s decision to the Cour de Cassation, the
highest court in France. As trustee, NTFS provided no tax advice and had no involvement in the preparation or filing of the
challenged estate tax filings.
In the first quarter of 2018, Northern Trust received a document request from the U.S. Commodity Futures Trading
Commission (CFTC), Division of Enforcement, seeking the production of documents related to the Bank’s activities as a
swap dealer provisionally registered with the CFTC. Northern Trust has responded to the CFTC’s document request. In
addition, the National Futures Association (NFA) provided the Bank with a letter dated April 30, 2018, summarizing
certain findings related to the Bank’s swap dealer compliance program identified during a then-recently completed
examination. Northern Trust is addressing the findings identified by the NFA in its examination and cooperating with both
the NFA and the CFTC.
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. On June 28, 2018,
Visa deposited an additional $600 million into the escrow account previously established with respect to the covered
litigation. As a result, the rate at which Visa Class B common shares will convert into Visa Class A common shares was
2018 Annual Report | Northern Trust Corporation 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reduced. In September 2018, Visa announced that a proposed class settlement agreement covering damage claims but not
injunctive relief claims regarding the covered litigation was reached, with Visa’s share of the proposed settlement amount
to be satisfied through funds previously deposited with the court and the $600 million placed into escrow in June 2018. The
agreement has been preliminarily approved by the district court, and, if final approval is granted, objecting parties may
appeal. Further, individual merchants may opt out of the proposed settlement and pursue claims separately. For these and
other reasons, the ultimate resolution of the covered litigation, the timing for removal of the selling restrictions on the Visa
Class B common shares and the rate at which such shares will ultimately convert into Visa Class A common shares are
uncertain.
In June 2016 and 2015, Northern Trust recorded a $123.1 million and $99.9 million net gain on the sale of 1.1 million
and 1.0 million of its Visa Class B common shares, respectively. These sales do 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. Northern Trust continued to hold approximately 4.1 million Visa Class B common shares, which are recorded at
their original cost basis of zero as of both December 31, 2018 and 2017.
Clearing and Settlement Organizations. The Bank is a participating member of various cash, securities, and foreign
exchange clearing and settlement organizations. 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.
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. At December 31, 2018 and 2017, we have not recorded any
material liabilities under these arrangements. Controls related to these clearing transactions are closely monitored by
management to protect the assets of Northern Trust and its clients.
Note 26 – 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 may include foreign exchange contracts, interest rate contracts, total return swap contracts, credit default
swap contracts, and swaps related to the sale of certain Visa Class B common shares.
Foreign exchange contracts are agreements to exchange specific amounts of currencies at a future date, at a specified
rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients.
Foreign exchange contracts are also used for trading and risk management purposes. 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, including debt securities 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 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.
150 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the notional and fair values of all derivative financial instruments as of December 31, 2018
and December 31, 2017.
TABLE 114: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
(In Millions)
Derivatives Designated as Hedging under GAAP
Interest Rate Contracts
Fair Value Hedges
Cash Flow Hedges
Foreign Exchange Contracts
Cash Flow Hedges
Net Investment Hedges
Total Derivatives Designated as Hedging under GAAP
$
Derivatives Not Designated as Hedging under GAAP
Non-Designated Risk Management Derivatives
Foreign Exchange Contracts
Other Financial Derivatives 3
Total Non-Designated Risk Management Derivatives
Client-Related and Trading Derivatives
Foreign Exchange Contracts
Interest Rate Contracts
Total Client-Related and Trading Derivatives
Total Derivatives Not Designated as Hedging under GAAP
Total Gross Derivatives
Less: Netting 4
$
$
$
$
$
$
DECEMBER 31, 2018
DECEMBER 31, 2017
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
ASSET 1 LIABILITY 2
NOTIONAL
VALUE
ASSET 1
LIABILITY 2
$
4,590.4 $
600.0
2,648.2
3,475.1
11,313.7 $
29.8 $
0.2
13.8
292.4
336.2 $
122.2 $
483.4
605.6 $
0.5 $
1.3
1.8 $
23.3 $
1.2
57.8
14.5
96.8 $
0.2 $
32.8
33.0 $
4,473.1 $
925.0
3,289.0
3,011.3
11,698.4 $
214.1 $
404.7
618.8 $
31.7 $
0.2
28.4
0.6
60.9 $
1.1 $
—
1.1 $
18.2
1.2
13.0
179.5
211.9
0.1
30.4
30.5
281,864.4 $
7,711.2
289,575.6 $
2,159.4 $
66.1
2,225.5 $
2,190.0 $
68.6
2,258.6 $
317,882.5 $
7,418.0
325,300.5 $
2,527.0 $
65.1
2,592.1 $
2,522.5
64.1
2,586.6
290,181.2
$
2,227.3
$
2,291.6
$
325,919.3
$
2,593.2
$
2,617.1
301,494.9 $
2,563.5 $
1,357.1
1,206.4 $
2,388.4 $
1,796.3
592.1
337,617.7 $
$
2,654.1 $
1,860.0
794.1 $
2,829.0
1,621.4
1,207.6
Total Derivative Financial Instruments
$
(1)
(2)
(3)
(4)
Derivative assets are reported in other assets on the consolidated balance sheets.
Derivative liabilities are reported in other liabilities on the consolidated balance sheets.
This line includes swaps related to sales of certain Visa Class B common shares and total return swap contracts.
See further detail in Note 27 - Offsetting of Assets and Liabilities.
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, net of any collateral received, which is significantly less than
the notional amount.
Hedging Derivative Instruments Designated Under GAAP. Northern Trust uses derivative instruments to hedge its
exposure to foreign currency, interest rate, equity price, and credit risk. Certain hedging relationships are formally
designated and qualify for hedge accounting under GAAP as fair value, cash flow or net investment hedges. Other
derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges
and changes in fair value are recognized currently in other operating income (see below section “Derivative Instruments
Not Designated as Hedging under GAAP”).
Fair Value Hedges. 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.
Cash Flow Hedges. 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 were no material gains or losses reclassified into earnings during the years ended December 31, 2018, 2017, and
2016 as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated
2018 Annual Report | Northern Trust Corporation 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that net gains of $3.1 million and $1.4 million will be reclassified into net income within the next twelve months relating to
cash flow hedges of foreign-currency-denominated transactions and cash flow hedges of foreign-currency-denominated
debt securities, respectively. It is estimated that a net loss of $1.2 million will be reclassified into net income upon the
receipt of interest payments on earning assets within the next twelve months relating to cash flow hedges of available for
sale debt securities. As of December 31, 2018, 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. There was no
ineffectiveness recognized in earnings for cash flow hedges during the years ended December 31, 2017 and 2016.
The following table provides fair value and cash flow hedge derivative gains and losses recognized in income during
the years ended December 31, 2018, 2017 and 2016.
TABLE 115: LOCATION AND AMOUNT OF FAIR VALUE AND CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECORDED
IN INCOME
(in Millions)
For the Year Ended
December 31,
Total amounts on the
consolidated statements
of income
Gains/(Losses) on
fair value hedges
recognized on
Interest Rate
Contracts
Recognized on
derivatives
Recognized on
hedged items
Amounts related
to interest
settlements on
derivatives
Total gain/(loss)
recognized on fair
value hedges
Gains/(Losses) on
cash flow hedges
recognized on
Foreign Exchange
Contracts
Net gain/(loss)
reclassified from
AOCI to net
income
Interest Rate
Contracts
Net gain/(loss)
reclassified from
AOCI to net
income
Total gain/(loss)
reclassified from
AOCI to net income
on cash flow hedges
Interest Income
Interest Expense
Other Operating Income
Other Operating Expense
Location and Amount of Derivative Gain/(Loss) Recognized in Income
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
$ 2,321.4
$ 1,769.4
$ 1,416.9
$ 698.7
$ 340.2
$ 182.0
$ 127.5
$ 157.5
$ 241.2
$ 330.6
$ 331.6
$ 364.4
13.9
8.8
80.6
(9.5 )
(24.3 )
(33.9 )
(13.9 )
(8.8 )
(80.6 )
9.5
24.3
33.9
—
—
—
—
—
—
—
—
—
—
—
—
17.8
(9.6 )
(16.9 )
7.9
27.7
38.9
—
—
—
—
—
—
$
17.8
$
(9.6 ) $
(16.9 ) $
7.9
$
27.7
$
38.9
$ —
$ —
$ —
$ —
$ —
$ —
67.4
19.3
6.4
—
—
—
3.9
5.0
(6.4 )
—
(0.1 )
(0.9 )
(0.2 )
0.3
2.8
—
—
—
—
—
—
—
—
—
$
67.2
$
19.6
$
9.2
$ —
$ —
$ —
$
3.9
$
5.0
$
(6.4 ) $ —
$
(0.1 ) $
(0.9 )
152 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged
items as of December 31, 2018.
TABLE 116: HEDGED ITEMS IN FAIR VALUE HEDGES
(In Millions)
Available for Sale Debt Securities 2
Senior Notes and Long-Term Subordinated Debt
$
Total
(1)
(2)
$
There are no amounts related to discontinued hedging relationships.
Carrying value represents amortized cost.
CARRYING VALUE OF THE HEDGED
DECEMBER 31, 2018
ITEMS
3,831.6 $
1,248.8
5,080.4 $
CUMULATIVE HEDGE ACCOUNTING
BASIS ADJUSTMENT 1
99.4
29.3
128.7
Net Investment Hedges. Certain foreign exchange contracts and qualifying non-derivative 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, 2017 and 2016. Net investment hedge gains of $173.0 million and
losses of $223.2 million were recognized in AOCI related to foreign exchange contracts for the years ended December 31,
2018 and December 31, 2017, respectively.
Derivative Instruments Not Designated as Hedging under GAAP. Northern Trust’s derivative instruments that are not
designated as hedging under GAAP include derivatives for purposes of client-related and trading activities, as well as other
risk management purposes. 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.
Non-designated risk management derivatives include foreign exchange contracts 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. Swaps related to the sale of certain Visa
Class B common shares were entered into which retain 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 provides the location and amount of gains and losses recorded in the consolidated statements of
income for the years ended December 31, 2018, 2017, and 2016 for derivative instruments not designated as hedges under
GAAP.
TABLE 117: LOCATION AND AMOUNT OF GAINS AND LOSSES RECORDED IN INCOME FOR DERIVATIVES NOT DESIGNATED AS
HEDGING UNDER GAAP
(In Millions)
Non-designated risk management derivatives
Foreign Exchange Contracts
Other Financial Derivatives (1)
Gains/(Losses) from non-designated risk management
derivatives
Client-related and trading derivatives
Foreign Exchange Contracts
Interest Rate Contracts
Gains/(Losses) from client-related and trading derivatives
Total gains/(losses) from derivatives not designated as hedging
under GAAP
LOCATION OF DERIVATIVE GAIN /
(LOSS) RECOGNIZED IN INCOME
AMOUNT OF DERIVATIVE GAIN / (LOSS)
RECOGNIZED IN INCOME
2018
2017
2016
Other Operating Income
Other Operating Income
Foreign Exchange Trading Income
Security Commissions and Trading
Income
$
$
$
$
(4.1 ) $
(19.2 )
8.2 $
(13.3 )
(6.7 )
(6.1 )
(23.3 ) $
(5.1 ) $
(12.8 )
307.2
209.9
7.7
314.9 $
10.7
220.6 $
236.6
11.4
248.0
291.6
$
215.5
$
235.2
(1) This line includes swaps related to the sale of certain Visa Class B common shares, credit default swap contracts, and total return swap contracts.
2018 Annual Report | Northern Trust Corporation 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 27 – Offsetting of Assets and Liabilities
The following table provides information regarding the offsetting of derivative assets and of securities purchased under
agreements to resell within the consolidated balance sheets as of December 31, 2018 and 2017.
TABLE 118: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
December 31, 2018
(In Millions)
Derivative Assets(1)
GROSS
RECOGNIZED
ASSETS
GROSS
AMOUNTS
OFFSET IN THE
BALANCE
SHEET
NET AMOUNTS
PRESENTED IN
THE BALANCE
SHEET
GROSS
AMOUNTS
NOT OFFSET IN
THE BALANCE
SHEET
NET
AMOUNT(3)
Foreign Exchange Contracts Over the Counter (OTC)
$
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Other Financial Derivative
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
Securities Purchased under Agreements to Resell(2)
$
$
1,902.3
71.6
24.5
1.3
—
—
1,999.7
563.8
2,563.5
1,031.2 $
$
1,175.3
19.0
24.4
—
3.9
134.5
1,357.1
—
1,357.1
$
727.0
52.6
0.1
1.3
—
—
642.6
563.8
1,206.4
$
12.7
—
—
—
—
—
12.7
2.7
15.4
— $
1,031.2 $
1,031.2 $
714.3
52.6
0.1
1.3
—
—
629.9
561.1
1,191.0
—
December 31, 2017
(In Millions)
Derivative Assets(1)
GROSS
RECOGNIZED
ASSETS
GROSS
AMOUNTS
OFFSET IN THE
BALANCE SHEET
NET AMOUNTS
PRESENTED IN
THE BALANCE
SHEET
GROSS
AMOUNTS
NOT OFFSET IN
THE BALANCE
SHEET
NET
AMOUNT(3)
Foreign Exchange Contracts Over the Counter (OTC)
$
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Cross Product Netting Adjustment
Cross Product Collateral Adjustment
Total Derivatives Subject to a Master Netting Arrangement
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
Securities Purchased under Agreements to Resell(2)
$
$
2,106.3
86.9
10.1
—
—
2,203.3
450.8
2,654.1
1,303.3 $
$
1,397.7
14.2
10.1
10.4
427.6
1,860.0
—
1,860.0
$
708.6
72.7
—
—
—
343.3
450.8
794.1
$
2.1
—
—
—
—
2.1
2.5
4.6
— $
1,303.3 $
1,303.3 $
706.5
72.7
—
—
—
341.2
448.3
789.5
—
(1) Derivative assets are reported in other assets in the consolidated balance sheets. Other assets (excluding derivative assets) totaled $4.6 billion and $3.9 billion as of
December 31, 2018 and 2017, 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 $134.0 million and $21.0 million as of December 31, 2018 and 2017, 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, 2018 and 2017.
154 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information regarding the offsetting of derivative liabilities and of securities sold under
agreements to repurchase within the consolidated balance sheets as of December 31, 2018 and 2017.
TABLE 119: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
December 31, 2018
(In Millions)
Derivative Liabilities(1)
GROSS
RECOGNIZED
LIABILITIES
GROSS
AMOUNTS
OFFSET IN THE
BALANCE
SHEET
NET AMOUNTS
PRESENTED IN
THE BALANCE
SHEET
GROSS
AMOUNTS
NOT OFFSET IN
THE BALANCE
SHEET
NET
AMOUNT(2)
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
1,821.0 $
68.8
24.4
32.8
—
—
1,947.0
441.4
2,388.4
1,175.3 $
19.0
24.4
—
3.9
573.7
1,796.3
—
1,796.3
Securities Sold under Agreements to Repurchase
$
168.3 $
— $
645.7 $
49.8
—
32.8
—
—
150.7
441.4
592.1
168.3 $
— $
—
—
—
—
—
—
—
—
168.3 $
645.7
49.8
—
32.8
—
—
150.7
441.4
592.1
—
December 31, 2017
(In Millions)
Derivative Liabilities(1)
GROSS
RECOGNIZED
LIABILITIES
GROSS
AMOUNTS
OFFSET IN THE
BALANCE SHEET
NET AMOUNTS
PRESENTED IN
THE BALANCE
SHEET
GROSS
AMOUNTS
NOT OFFSET IN
THE BALANCE
SHEET
NET
AMOUNT(2)
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
1,889.2 $
69.2
14.3
30.4
—
—
2,003.1
825.9
2,829.0
1,397.7 $
14.2
10.1
—
10.4
189.0
1,621.4
—
1,621.4
491.5 $
55.0
4.2
30.4
—
—
381.7
825.9
1,207.6
— $
—
—
—
—
—
—
—
—
Securities Sold under Agreements to Repurchase
$
834.0 $
— $
834.0 $
834.0 $
491.5
55.0
4.2
30.4
—
—
381.7
825.9
1,207.6
—
(1) Derivative liabilities are reported in other liabilities in the consolidated balance sheets. Other liabilities (excluding derivative liabilities) totaled $2.5 billion and $2.4
billion as of December 31, 2018 and 2017, 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, 2018 and 2017.
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. However, Northern Trust’s repurchase agreements and reverse
repurchase agreements do not meet the requirements to net.
2018 Annual Report | Northern Trust Corporation 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative asset and liability positions with a single counterparty can be offset against each other in cases where
legally enforceable master netting arrangements or similar agreements exist. Derivative assets and liabilities can be further
offset by cash collateral received from, and deposited with, the transacting counterparty. The basis for this view is that,
upon termination of transactions subject to a master netting arrangement or similar agreement, the individual derivative
receivables do not represent resources to which general creditors have rights and individual derivative payables do not
represent claims that are equivalent to the claims of general creditors.
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 on these instruments, net of any 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.
Additional cash collateral received from and deposited with derivative counterparties totaling $27.6 million and $91.5
million, respectively, as of December 31, 2018, and $67.0 million and $143.1 million, respectively, as of December 31,
2017, was not offset against derivative assets and liabilities on the consolidated balance sheets as the amounts exceeded the
net derivative positions with those counterparties.
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 $324.1 million and $223.7 million at December 31, 2018 and 2017, respectively. Cash collateral
amounts deposited with derivative counterparties on those dates included $316.5 million and $35.8 million, respectively,
posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required
at December 31, 2018 and 2017 of $7.6 million and $187.9 million, respectively. Accelerated settlement of these liabilities
would not have a material effect on the consolidated financial position or liquidity of Northern Trust.
Note 28 – 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
and other similar instruments. Commercial letters of credit are issued primarily to facilitate international trade.
156 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the contractual amounts of commitments and letters of credit.
TABLE 120: 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,
2018
25,023.0 $
2,486.2
32.3
2017
26,822.6
2,970.0
37.7
(1)These amounts exclude $242.3 million and $385.5 million of commitments participated to others at December 31, 2018 and 2017, respectively.
(2)These amounts include $72.3 million and $92.5 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2018 and 2017,
respectively. The weighted average maturity of standby letters of credit was 23 months at December 31, 2018 and 22 months at December 31, 2017.
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 Capital Markets Credit 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 as of December 31, 2018 and 2017 subject to indemnification was $128.9 billion and $143.6 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.
Note 29 – 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 the leveraged lease trust VIEs
given it lacks the power to direct the activities that most significantly impact the economic performance of the leveraged
lease trust VIEs.
Northern Trust’s maximum exposure to loss as a result of its involvement with leveraged lease trust VIEs is limited to
the carrying amounts of its leveraged lease investments. As of December 31, 2018 and 2017, the carrying amounts of these
investments, which are included in loans and leases in the consolidated balance sheets, were $56.8 million and $131.0
million, respectively. Northern Trust’s funding requirements relative to the leveraged lease trust VIEs are limited to its
invested capital. Northern Trust has no other liquidity arrangements or obligations to purchase assets of the leveraged lease
trust 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 limited liability
companies in which Northern Trust invests as a limited partner/investor member through equity contributions. The
economic performance of the community development projects, some of which are VIEs, is subject to the performance of
2018 Annual Report | Northern Trust Corporation 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 project VIEs 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 community
development project 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, 2018 and
2017, the carrying amounts of these investments in community development projects that generate tax credits, included in
other assets in the consolidated balance sheets, totaled $602.4 million and $415.3 million, respectively, of which $549.8
million and $386.1 million are VIEs as of December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017,
liabilities related to unfunded commitments on investments in tax credit community development projects, included in
other liabilities in the consolidated balance sheets, totaled $321.0 million and $241.1 million, respectively, of which $279.5
million and $215.2 million related to undrawn commitments on VIEs as of December 31, 2018 and 2017, respectively.
Northern Trust’s funding requirements are limited to its invested capital and undrawn 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.
Tax credits and other tax benefits attributable to community development projects totaled $63.0 million and $57.9
million, respectively, as of December 31, 2018 and 2017.
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, Northern Trust 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.
Some of the funds for which Northern Trust acts as asset manager comply or operate in accordance with requirements
that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds and
therefore the funds are exempt from the consolidation requirements in Accounting Standards Codification 810-10. For the
year ended December 31, 2018, Northern Trust did not waive any money market mutual fund fees. For the year ended
December 31, 2017, Northern Trust voluntarily waived $1.0 million of money market mutual fund fees. Northern Trust
does not have any contractual obligations to provide financial support to the funds. Any potential future support of the
funds will be at the discretion of Northern Trust after an evaluation of the specific facts and circumstances.
Periodically, Northern Trust makes seed capital investments to certain funds. As of December 31, 2018, Northern Trust
had $29.2 million of investments valued using net asset value per share and included in other assets and had no unfunded
commitments related to seed capital investments. As of December 31, 2017, Northern Trust had $10.0 million of
investments valued using net asset value per share and included in other assets and had no unfunded commitments related
to seed capital investments.
Note 30 – 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 and Federal Home Loan Bank borrowings, as well as for other purposes, including support for
securities settlement, primarily related to client activities, for potential Federal Reserve Bank discount window borrowings,
and for derivative contracts. As of December 31, 2018, securities and loans totaling $39.6 billion ($30.9 billion of
government-sponsored agency and other securities, $640.4 million of obligations of states and political subdivisions and
$8.1 billion of loans) were pledged. This compares to $40.1 billion ($30.8 billion of government-sponsored agency and
other securities, $684.3 million of obligations of states and political subdivisions and $8.6 billion of loans) at December 31,
2017. Collateral required for these purposes totaled $9.3 billion and $8.9 billion at December 31, 2018 and December 31,
2017, respectively. Included in the total pledged assets are available for sale debt securities with a total fair value of $151.5
million and $833.4 million, as of December 31, 2018 and December 31, 2017, respectively, which were pledged as
collateral for agreements to repurchase securities sold transactions, and available for sale debt securities with a total fair
value of $29.0 million and $39.9 million, as of December 31, 2018 and December 31, 2017, respectively, which were
pledged as collateral for derivative contracts. The secured parties to these transactions have the right to repledge or sell the
securities as it relates to $151.5 million and $833.4 million of the pledged collateral as of December 31, 2018 and
December 31, 2017, respectively.
158 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Northern Trust is not permitted, by contract or custom, to repledge or sell securities accepted as collateral under certain
repurchase agreements. The total fair value of securities accepted as collateral was $605.0 million as of December 31, 2018
and $1.2 billion as of December 31, 2017.
Northern Trust has the right to repledge or sell securities accepted as collateral under certain repurchase agreements.
The fair value of these securities accepted as collateral was $426.2 million as of December 31, 2018 and $78.3 million as
of December 31, 2017. There was no repledged or sold collateral as of December 31, 2018 or December 31, 2017.
Northern Trust has the right to repledge or sell securities accepted as collateral under derivative contracts. The total
fair value of securities accepted as collateral was $15.3 million as of December 31, 2018. There were $4.6 million
securities accepted as collateral under derivative contracts as of December 31, 2017.
Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $1.7 billion in 2018 as compared to
$3.1 billion in 2017.
Note 31 – 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).
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 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 32 – 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.
2018 Annual Report | Northern Trust Corporation 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.”
The following tables show the earnings contribution of Northern Trust’s reporting segments for the years ended
December 31, 2018, 2017, and 2016.
TABLE 121: CORPORATE AND INSTITUTIONAL SERVICES RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
2016
2,173.1 $
233.4
183.0
992.2
3,581.7
1.9
2,421.4
1,158.4
255.3
1,984.6 $
197.9
176.1
733.8
3,092.4
3.4
2,194.5
894.5
279.5
903.1 $
615.0 $
1,787.8
224.4
147.0
565.0
2,724.2
1.9
2,012.2
710.1
212.9
497.2
58 %
51 %
48 %
82,996.5 $
80,105.6 $
76,194.7
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
2016
1,580.6 $
4.2
102.7
816.5
2,504.0
(16.4 )
1,460.0
1,060.4
262.1
1,449.7 $
3.1
103.9
736.2
2,292.9
(31.4 )
1,405.3
919.0
347.2
798.3 $
571.8 $
1,320.3
8.6
105.7
651.4
2,086.0
(27.9 )
1,315.3
798.6
301.1
497.5
51 %
48 %
48 %
26,163.7 $
26,599.9 $
26,525.0
$
$
$
$
$
$
(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 122: 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.
160 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 123: 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.
TABLE 124: 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
FOR THE YEAR ENDED DECEMBER 31,
2018
$
60.5
(144.8 )
(84.3 )
135.5
(219.8 )
(74.8 )
(145.0 ) $
(9 )%
2017
30.8 $
5.0
35.8
169.6
(133.8 )
(146.0 )
12.2 $
1 %
2016
133.1
43.6
176.7
143.2
33.5
(4.3 )
37.8
4 %
13,786.4
$
12,901.9 $
12,850.6
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
2016
3,753.7 $
307.2
276.6
1,663.9
6,001.4
(14.5 )
4,016.9
1,999.0
442.6
3,434.3 $
209.9
301.9
1,475.0
5,421.1
(28.0 )
3,769.4
1,679.7
480.7
1,556.4 $
1,199.0 $
3,108.1
236.6
382.2
1,260.0
4,986.9
(26.0 )
3,470.7
1,542.2
509.7
1,032.5
122,946.6 $
119,607.4 $
115,570.3
$
$
$
$
$
$
Note: Stated on an FTE basis. The consolidated figures include $41.2 million, $45.8 million, and $25.1 million, of FTE adjustments for 2018, 2017, and 2016, respectively.
Further discussion of reporting segment results is provided within the “Reporting Segments and Related Information”
section of Item 7, “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, when made, are based on various methods such as time, space, and number of employees.
2018 Annual Report | Northern Trust Corporation 161
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 125: DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE
(In Millions)
2018
Non-U.S.
U.S.
Total
2017
Non-U.S.
U.S.
Total
2016
Non-U.S.
U.S.
Total
TOTAL ASSETS
TOTAL
REVENUE
INCOME BEFORE
INCOME TAXES
NET INCOME
$
$
$
$
$
$
32,712.9 $
99,499.6
132,212.5 $
30,325.3 $
108,265.2
138,590.5 $
24,944.0 $
98,982.9
123,926.9 $
2,018.1 $
3,942.1
5,960.2 $
1,709.7 $
3,665.6
5,375.3 $
1,221.2 $
3,740.6
4,961.8 $
786.4 $
1,171.4
1,957.8 $
613.5 $
1,020.4
1,633.9 $
284.3 $
1,232.8
1,517.1 $
625.7
930.7
1,556.4
430.0
769.0
1,199.0
225.1
807.4
1,032.5
Note: Total revenue is comprised of net interest income and noninterest income.
Note 33 – 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 risk-based and leverage ratios 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, 2018 and 2017, 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, 2018 and 2017, 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, 2018, that management
believes have adversely affected the capital categorization of any Northern Trust subsidiary bank.
162 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below provides capital ratios for the Corporation and the Bank determined by Basel III phased in
requirements.
TABLE 126: RISK-BASED AND LEVERAGE 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 (1)
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
December 31, 2018
December 31, 2017
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
BALANCE
RATIO BALANCE
RATIO BALANCE
RATIO BALANCE
RATIO
$ 8,729.8
8,722.5
13.7 % $ 8,729.8
8,722.5
14.1
12.9 % $ 8,626.3
8,517.8
13.1
13.5 % $ 8,626.3
8,517.8
13.7
12.6 %
12.6
N/A
4,007.4
9,596.7
8,722.5
3,834.9
4,932.2
10,803.8
9,732.5
6,391.5
6,165.3
9,596.7
8,722.5
N/A
5,998.6
9,596.7
8,722.5
N/A
4,077.2
N/A
6.5
N/A
4,335.9
N/A
6.5
N/A
4,032.7
N/A
6.5
N/A
4,406.8
N/A
6.5
15.0
14.1
6.0
8.0
16.9
15.8
10.0
10.0
8.0
7.3
9,596.7
8,722.5
4,070.0
5,336.4
10,942.0
9,870.7
6,783.7
6,670.6
9,596.7
8,722.5
14.1
13.1
6.0
8.0
16.1
14.8
10.0
10.0
8.0
7.3
9,473.4
8,517.8
3,841.1
4,963.3
10,707.4
9,527.8
6,401.9
6,204.2
9,473.4
8,517.8
14.8
13.7
6.0
8.0
16.7
15.4
10.0
10.0
7.8
7.0
9,473.4
8,517.8
4,117.0
5,423.8
10,861.2
9,681.6
6,861.6
6,779.7
9,473.4
8,517.8
N/A
5.0
N/A
5,998.6
N/A
5.0
N/A
6,057.9
N/A
5.0
N/A
6,057.9
7.0
6.4
N/A
3.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
9,473.4
8,517.8
N/A
N/A
6.8
6.1
N/A
N/A
N/A
N/A
N/A
N/A
13.8
12.6
6.0
8.0
15.8
14.3
10.0
10.0
7.8
7.0
N/A
5.0
N/A
N/A
N/A
N/A
(1) Effective January 1, 2018, a minimum supplementary leverage ratio of 3 percent became applicable.
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 and the Bank are required to calculate and publicly disclose risk-based
capital ratios using two methodologies: an advanced approach and a standardized approach. Under the advanced approach,
credit risk weighted assets (RWA) are based on internal credit models and parameters. Additionally, the advanced approach
incorporates operational risk RWA. Under the standardized approach, RWA are based on supervisory prescribed risk
weights that are primarily dependent on counterparty type and asset class.
Pursuant to the Federal Reserve Board's implementation in the final Basel III rules of a provision of the Dodd-Frank
Act, the capital adequacy of the Corporation and the Bank is assessed based on the lower of the advanced approach or
standardized approach capital ratios.
2018 Annual Report | Northern Trust Corporation 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 34 – Northern Trust Corporation (Corporation only)
Condensed financial information is presented below. Investments in wholly-owned subsidiaries are carried on the equity
method of accounting.
DECEMBER 31,
2018
2017
866.8 $
—
2,910.0
—
9,585.2
182.9
803.1
14,348.0 $
2,011.3 $
1,112.4
277.6
438.5
3,839.8
882.0
408.6
1,068.4
10,776.8
(453.7 )
(2,173.9 )
10,508.2
14,348.0 $
1,002.5
0.9
2,460.0
13.5
9,223.9
212.9
706.4
13,620.1
1,497.3
1,129.6
277.5
499.5
3,403.9
882.0
408.6
1,047.2
9,685.1
(414.3 )
(1,392.4 )
10,216.2
13,620.1
$
$
$
$
TABLE 127: CONDENSED BALANCE SHEETS
(In Millions)
ASSETS
Cash on Deposit with Subsidiary Bank
Debt 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 Income (Loss)
Treasury Stock
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
164 2018 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 128: 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,
2018
2017
2016
$
$
$
1,200.9 $
—
91.9
(8.7 )
1,284.1
97.3
17.0
114.3
1,169.8
24.6
1,194.4
336.7
25.3
1,556.4 $
46.4
1,510.0 $
525.0 $
—
58.2
18.1
601.3
76.5
25.9
102.4
498.9
43.7
542.6
632.6
23.8
1,199.0 $
49.8
1,149.2 $
300.0
3.4
39.8
7.5
350.7
63.5
19.9
83.4
267.3
28.3
295.6
708.3
28.6
1,032.5
23.4
1,009.1
2018 Annual Report | Northern Trust Corporation 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 129: 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:
Proceeds from Sale, Maturity and Redemption of Debt Securities – Available for Sale
Change in Capital Investments in Subsidiaries
Advances to Wholly-Owned Subsidiaries
Acquisition of a Subsidiary, net of cash acquired
Other, net
Net Cash Used in Investing Activities
FINANCING ACTIVITIES:
Proceeds from Senior Notes and Long-Term Debt
Proceeds from Issuance of Preferred Stock – Series D
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
FOR THE YEAR ENDED DECEMBER 31,
2018
2017
2016
$
1,556.4 $
1,199.0 $
1,032.5
(362.0 )
(0.6 )
(141.8 )
125.6
1,177.6
1.0
—
(436.5 )
(31.2 )
(3.1 )
(469.8 )
497.9
—
(924.3 )
32.6
(405.4 )
(46.4 )
2.1
(843.5 )
(656.4 )
(0.3 )
17.2
55.7
615.2
—
—
100.0
—
1.9
101.9
350.0
—
(523.1 )
108.0
(356.8 )
(49.8 )
0.1
(471.6 )
245.5
757.0
1,002.5 $
(736.9 )
3.0
(17.9 )
55.7
336.4
0.2
(3.0 )
(295.0 )
—
1.2
(296.6 )
—
493.5
(411.1 )
233.8
(333.0 )
(23.4 )
(0.1 )
(40.3 )
(0.5 )
757.5
757.0
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
(135.7 )
1,002.5
866.8 $
$
166 2018 Annual Report | Northern Trust Corporation
SUPPLEMENTAL ITEM – SELECTED STATISTICAL AND SUPPLEMENTAL FINANCIAL DATA
TABLE 130: QUARTERLY FINANCIAL DATA (UNAUDITED)
STATEMENTS OF INCOME
2018
2017
($ In Millions Except Per Share Information)
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
Trust, Investment and Other Servicing Fees
Other Noninterest Income
$
933.9 $
152.7
939.2 $
126.9
942.9 $
149.9
937.7 $
154.3
910.0 $
134.5
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
Cash and Due from Banks
Federal Reserve and Other Central Bank
Deposits
Interest-Bearing Due from and Deposits with
Banks(1)
Federal Funds Sold and Securities Purchased
under Agreements to Resell
Securities(2)
Loans and Leases
Allowance for Credit Losses Assigned to Loans
and Leases
Other Assets
Total Assets
LIABILITIES AND STOCKHOLDERS’
EQUITY
Deposits
Demand and Other Noninterest-Bearing
Savings, Money Market, and Other
Savings Certificates and Other Time
Non-U.S. Offices – Interest-Bearing
Total Deposits
Short-Term Borrowings
Senior Notes
Long-Term Debt
Floating Rate Capital Debt
Other Liabilities
Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
ANALYSIS OF NET INTEREST INCOME
Earning Assets
Interest-Related Funds
Noninterest-Related Funds
Net Interest Income (Fully Taxable Equivalent)
Net Interest Margin (Fully Taxable Equivalent)
648.6
231.4
417.2
(4.0 )
1,021.9
76.0
409.9 $
5.9
404.0 $
599.2
191.0
408.2
(9.0 )
1,002.3
106.5
374.5 $
17.3
357.2 $
567.7
154.4
413.3
1.5
997.4
116.8
390.4 $
5.9
384.5 $
505.9
121.9
384.0
(3.0 )
995.3
102.1
381.6 $
17.3
364.3 $
488.1
108.1
380.0
(13.0 )
1,001.9
79.0
356.6 $
5.9
350.7 $
1.81 $
1.80
1.59 $
1.58
1.69 $
1.68
1.59 $
1.58
1.52 $
1.51
$
$
$
867.9 $
123.1
453.8
99.6
354.2
(7.0 )
935.6
118.2
298.4 $
17.3
281.1 $
1.21 $
1.20
848.2 $
131.5
417.2
75.7
341.5
(7.0 )
937.4
122.9
267.9 $
5.9
262.0 $
1.12 $
1.12
FIRST
QUARTER
808.2
122.7
410.3
56.8
353.5
(1.0 )
894.5
114.8
276.1
20.7
255.4
1.10
1.09
$
2,400.9 $
2,702.9 $
2,440.5 $
2,593.2 $
2,838.8 $
2,666.8 $
2,701.1 $
2,116.6
21,762.6
22,889.6
24,512.8
26,495.1
25,995.8
25,182.9
22,570.0
21,806.9
5,228.9
5,410.3
6,556.9
6,920.4
7,084.7
7,145.8
7,653.9
6,684.3
1,334.3
52,228.6
31,623.8
1,775.2
50,820.8
31,798.9
1,417.1
49,692.4
32,235.4
1,467.1
48,335.7
32,468.0
1,389.8
45,601.9
33,235.6
1,945.8
44,742.3
33,468.2
2,059.4
43,731.8
33,891.4
2,011.7
44,777.7
33,671.2
(120.3 )
6,855.4
(160.8 )
5,568.8
$ 121,314.2 $ 122,155.6 $ 123,866.7 $ 124,493.3 $ 122,312.0 $ 121,159.4 $ 118,400.7 $ 116,476.4
(149.1 )
6,314.5
(162.3 )
5,955.4
(155.1 )
6,162.7
(127.6 )
6,885.5
(131.0 )
6,344.8
(126.4 )
7,138.0
$ 19,211.2 $ 19,430.5 $ 21,484.7 $ 22,022.9 $
25,712.5
15,446.7
1,338.5
52,435.9
94,933.6
5,659.1
1,496.7
1,324.9
277.4
2,993.3
9,791.4
$ 121,314.2 $ 122,155.6 $ 123,866.7 $ 124,493.3 $ 122,312.0 $ 121,159.4 $ 118,400.7 $ 116,476.4
21,385.5 $
15,996.1
1,189.2
58,632.0
97,202.8
8,411.9
1,497.2
1,540.1
277.5
3,271.7
10,110.8
23,518.1 $
15,236.1
1,312.7
56,672.3
96,739.2
5,412.0
1,496.9
1,536.1
277.4
2,963.1
9,976.0
21,736.4 $
15,617.1
1,255.1
58,503.4
97,112.0
7,264.5
1,497.0
1,672.5
277.5
3,295.7
10,040.2
14,349.1
721.1
58,873.9
93,155.3
10,987.9
1,996.5
1,099.6
277.6
3,498.5
10,298.8
15,565.0
896.6
57,684.5
95,630.8
11,336.2
1,497.6
1,410.8
277.5
3,511.7
10,202.1
14,787.6
810.5
58,473.2
93,501.8
11,380.7
1,818.0
1,254.4
277.6
3,648.5
10,274.6
15,916.4
1,058.5
59,199.7
98,197.5
9,405.3
1,497.4
1,426.5
277.5
3,551.4
10,137.7
88,802.0
88,305.7
$ 112,178.2 $ 112,694.8 $ 114,414.6 $ 115,686.3 $ 113,307.8 $ 112,485.0 $ 109,906.5 $ 108,951.8
77,979.2
30,972.6
362.4
1.35 %
$ 23,872.5 $ 23,892.8 $ 25,746.4 $ 26,904.9 $
87,544.0
25,763.8 $
396.0
1.39 %
81,943.5
27,963.0 $
350.4
1.28 %
86,087.1
26,397.9 $
366.2
1.29 %
422.6
1.48 %
418.5
1.47 %
430.1
1.52 %
392.7
1.38 %
88,668.2
88,781.4
(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, 2018, and December 31, 2017.
2018 Annual Report | Northern Trust Corporation 167
TABLE 131: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE
ON A FULLY TAXABLE EQUIVALENT BASIS)
($ In Millions)
AVERAGE EARNING ASSETS
2018
AVERAGE
BALANCE
INTEREST
RATE(4)
INTEREST
2017
AVERAGE
BALANCE
RATE(4)
INTEREST
2016
AVERAGE
BALANCE
RATE(4)
Federal Reserve and Other Central Bank Deposits
$
207.1 $ 23,899.3
0.87 % $
155.1 $ 23,903.9
0.65 % $
91.4 $ 20,434.4
0.45 %
Interest-Bearing Due from and Deposits with
Banks(1)
Federal Funds Sold and Securities Purchased under
Agreements to Resell
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, Money Market, and Other
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
$
$
$
$
$
$
70.0
6,022.8
1.16
63.8
7,143.3
0.89
64.3
8,742.7
0.73
33.3
1,498.8
2.22
27.5
1,850.2
1.48
18.4
1,775.7
1.04
108.3
13.9
456.0
367.5
945.7
5,737.1
725.2
20,682.7
23,136.5
50,281.5
1,106.5
32,028.6
2,362.6 113,731.0
—
—
—
—
—
—
(126.3 )
2,534.3
438.5
1,002.0
642.5
4,724.6
1.89
1.91
2.20
1.59
1.88
3.45
2.08
—
—
—
—
—
—
89.4
13.1
283.2
253.3
639.0
929.8
6,342.5
887.3
17,987.0
19,498.9
44,715.7
33,565.2
1,815.2 111,178.3
—
—
—
—
—
—
(156.8 )
2,583.1
466.0
891.6
544.0
4,101.2
1.41
1.48
1.57
1.30
1.43
2.77
1.63
—
—
—
—
—
78.1
11.3
177.2
189.9
456.5
811.4
7,073.1
585.8
17,421.0
16,961.4
42,041.3
34,043.5
1,442.0 107,037.6
—
—
—
—
—
—
(192.9 )
2,035.3
445.5
1,136.6
524.9
4,583.3
1.10
1.94
1.02
1.12
1.09
2.38
1.35
—
—
—
—
—
—
— $ 122,946.6
— % $
— $ 119,607.4
— % $
— $ 115,570.3
— %
82.0 $ 15,149.3
870.6
7.8
58,556.6
294.8
0.54 % $
0.90
0.50
24.3 $ 15,575.6
1,273.4
9.4
56,583.2
148.4
0.16 % $
0.74
0.26
11.9 $ 15,142.4
1,432.0
8.3
50,808.2
63.3
0.08 %
0.58
0.12
384.6
208.2
53.4
45.0
7.5
698.7
—
—
—
—
74,576.5
10,783.5
1,704.0
1,296.8
277.6
88,638.4
—
20,526.6
3,552.7
10,228.9
0.52
1.93
3.13
3.47
2.72
0.79
1.29
—
—
—
182.1
67.1
46.9
39.2
4.9
340.2
—
—
—
—
73,432.2
6,696.0
1,496.9
1,519.4
277.5
83,422.0
—
23,072.6
3,132.2
9,980.6
0.25
1.00
3.13
2.58
1.75
0.41
1.22
—
—
—
83.5
21.8
46.8
26.4
3.5
67,382.6
6,337.0
1,496.6
1,392.4
277.4
182.0
76,886.0
—
—
—
—
—
26,231.3
3,367.7
9,085.3
— $ 122,946.6
— % $
— $ 119,607.4
— % $
— $ 115,570.3
1,663.9 $
1,622.7 $
—
—
1.46 % $ 1,475.0 $
1.43 % $ 1,429.2 $
—
—
1.33 % $ 1,260.0 $
1.29 % $ 1,234.9 $
—
—
1,079.9 $ 88,717.0
25,014.0
584.0
1.22 % $ 1,076.4 $ 90,090.3
21,088.0
398.6
2.33
1.19 % $
1.89 %
959.5 $ 88,514.4
18,523.2
300.5
$
1,663.9 $ 113,731.0
1.46 % $ 1,475.0 $ 111,178.3
1.33 % $ 1,260.0 $ 107,037.6
0.12
0.34
3.13
1.90
1.25
0.24
1.11
—
—
—
— %
1.18 %
1.15 %
1.08 %
1.62 %
1.18 %
(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.
(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.
(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 24.9%.
Total taxable equivalent interest adjustments amounted to $41.2 million in 2018, $45.8 million in 2017 and 25.1 million in 2016. Interest revenue on cash collateral positions is reported above
within interest-bearing due from and 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.
168 2018 Annual Report | Northern Trust Corporation
TABLE 132: CHANGES IN NET INTEREST INCOME
(INTEREST AND RATE ON A FULLY TAXABLE
EQUIVALENT BASIS)
(In Millions)
Increase (Decrease) in Interest Income
Money Market Assets
2018/2017 CHANGE DUE TO
2017/2016 CHANGE DUE TO
AVERAGE
BALANCE
RATE
TOTAL
AVERAGE
BALANCE
RATE
TOTAL
Federal Reserve and Other Central Bank Deposits
$
Interest-Bearing Due from and Deposits with Banks
Federal Funds Sold and Securities Purchased under
Agreements to Resell
— $
(6.7 )
52.0 $
12.9
52.0 $
6.2
17.6 $
2.5
46.1 $
(3.0 )
(3.5 )
9.3
5.8
0.8
8.3
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Loans and Leases
Total
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 in Net Interest Income
(7.3 )
(1.4 )
47.0
52.0
(20.5 )
26.2
2.2
125.8
62.2
197.2
18.9
0.8
172.8
114.2
176.7
(6.5 )
3.4
6.1
30.6
20.5
17.8
(1.6 )
99.9
32.8
97.9
59.6 $
487.8 $
547.4 $
75.0 $
298.2 $
(0.7 ) $
(4.8 )
5.3
55.9
6.5
(5.8 )
—
56.4 $
3.2 $
58.4 $
3.2
141.1
85.2
—
11.6
2.6
302.1 $
185.7 $
57.7 $
(1.6 )
146.4
141.1
6.5
5.8
2.6
358.5 $
188.9 $
0.3 $
(0.7 )
7.5
1.3
—
10.3
—
18.7 $
56.3 $
12.1 $
1.8
77.6
44.0
0.1
2.5
1.4
139.5 $
158.7 $
$
$
$
$
63.7
(0.5 )
9.1
11.3
1.8
106.0
63.4
118.4
373.2
12.4
1.1
85.1
45.3
0.1
12.8
1.4
158.2
215.0
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.
2018 Annual Report | Northern Trust Corporation 169
Investment Debt Securities Portfolio
TABLE 133: REMAINING MATURITY AND AVERAGE YIELD OF DEBT SECURITIES HELD TO MATURITY AND AVAILABLE FOR
SALE
($ in Millions)
BOOK
YIELD
BOOK
YIELD
BOOK
YIELD
BOOK
YIELD
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
December 31, 2018
AVERAGE
MATURITY
$
101.6
2.37 % $
—
— % $
—
— % $
Debt Securities Held to Maturity
U.S. Government
Obligations of States and Political
Subdivisions
Government Sponsored Agency
Other – Fixed
– Floating
9.3
0.9
6,276.5
249.9
5.11
4.66
1.05
1.85
9.6
2.1
5,517.4
1,536.9
4.85
4.81
0.82
1.84
Total Debt Securities Held to Maturity
$ 6,638.2
1.11 % $ 7,066.0
1.05 % $
Debt Securities Available for Sale
—
1.1
194.7
372.1
567.9
—
4.74
0.64
0.34
0.45 % $
—
—
0.4
81.5
—
81.9
— %
2 mo.
—
4.68
2.25
—
14 mos.
52 mos.
19 mos.
48 mos.
2.27 %
23 mos.
U.S. Government
$ 1,287.1
1.46 % $ 3,898.2
1.63 % $
—
— % $
—
— %
29 mos.
Obligations of States and Political
Subdivisions
Government Sponsored Agency
Asset-Backed – Fixed
Asset-Backed – Floating
Other – Fixed
– Floating
208.0
5,725.4
547.7
319.2
812.6
262.8
1.13
2.54
1.53
3.10
1.50
2.67
140.4
10,727.3
966.6
1,097.1
2,754.2
1,360.1
1.88
2.59
2.29
3.32
2.42
2.91
307.5
4,963.2
234.2
49.4
94.9
91.6
3.37
2.59
3.68
1.70
1.82
2.74
—
1,008.7
6.6
24.1
—
1.9
—
2.67
3.88
1.78
—
2.94
53 mos.
43 mos.
25 mos.
45 mos.
31 mos.
30 mos.
Total Debt Securities Available for Sale $ 9,162.8
2.23 % $ 20,943.9
2.43 % $ 5,740.8
2.66 % $ 1,041.3
2.66 %
39 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, 2018, 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, government-sponsored
agencies, and non-U.S. sovereign securities. See Note 4, “Securities,” to the consolidated financial statements provided in
Item 8, “Financial Statements and Supplementary Data,” for more information on securities.
170 2018 Annual Report | Northern Trust Corporation
Loans and Leases Portfolio
TABLE 134: REMAINING MATURITY OF SELECTED LOANS AND LEASES
(In Millions)
U.S. (Excluding Residential Real Estate and Private Client Loans):
December 31, 2018
TOTAL
ONE YEAR
OR LESS
ONE TO FIVE
YEARS
OVER FIVE
YEARS
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
$
$
$
$
$
$
8,728.1 $
3,228.8
90.7
426.0
67.5
12,541.1 $
2,701.6 $
15,242.7 $
8,909.2 $
6,333.5
15,242.7 $
5,229.7 $
635.2
4.3
255.2
2.6
6,127.0 $
2,616.0 $
8,743.0 $
6,505.2 $
2,340.9
8,846.1 $
TABLE 135: DISTRIBUTION OF NON-U.S. LOANS BY TYPE
(In Millions)
Commercial
Non-U.S. Governments and Official Institutions
Banks
Other
Total
2018
117.4 $
—
—
2,584.2
2,701.6 $
$
$
DECEMBER 31,
2017
289.5 $
—
—
1,249.0
1,538.5 $
2016
318.0 $
—
26.2
1,533.6
1,877.8 $
Note: Non-U.S. loans primarily include short duration advances related to the processing of custodied client investments.
TABLE 136: ALLOWANCE FOR CREDIT LOSSES RELATING TO NON-U.S. OPERATIONS
2,111.4 $
2,101.9
33.0
103.1
4.1
4,353.5 $
47.7 $
4,401.2 $
1,344.1 $
3,023.9
4,368.0 $
2015
335.2 $
—
8.5
794.0
1,137.7 $
1,387.0
491.7
53.4
67.7
60.8
2,060.6
37.9
2,098.5
1,059.9
968.7
2,028.6
2014
154.0
—
—
1,376.6
1,530.6
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
$
$
2018
2017
2016
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
—
—
— $
2015
3.3 $
—
—
(3.3 )
— $
2014
2.1
—
—
1.2
3.3
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.
2018 Annual Report | Northern Trust Corporation 171
Summary of Loans and Leases Loss Experience
TABLE 137: 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
Total Personal
Total Charge-Offs
Recoveries
Commercial
Commercial and Institutional
Commercial Real Estate
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
172 2018 Annual Report | Northern Trust Corporation
2018
153.8 $
2017
192.0 $
2016
233.3 $
2015
295.9 $
2014
307.9
$
0.1
0.8
0.9
7.3
1.9
9.2
10.1
1.5
0.2
1.7
6.7
0.6
7.3
9.0
1.1
(14.5 )
—
(15.6 )
138.2
10.3
1.1
11.4
8.0
2.1
10.1
21.5
3.7
1.8
5.5
5.4
0.4
5.8
11.3
10.2
(28.0 )
—
(38.2 )
153.8
15.8
0.8
16.6
10.4
0.3
10.7
27.3
3.3
1.5
4.8
6.6
0.7
7.3
12.1
15.2
(26.0 )
(0.1 )
(41.3 )
192.0
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
112.6 $
25.6
138.2 $
131.2 $
22.6
153.8 $
161.0 $
31.0
192.0 $
193.8 $
39.5
233.3 $
5.4
7.5
12.9
21.2
2.0
23.2
36.1
1.3
9.8
11.1
5.6
1.4
7.0
18.1
18.0
6.0
—
(12.0 )
295.9
267.0
28.9
295.9
32,490.0 $
32,028.6 $
32,592.2 $
33,565.2 $
33,822.1 $
34,043.5 $
33,180.9 $
33,016.1 $
31,640.2
30,215.6
— %
(0.04 )
0.35
— %
0.35
0.03 %
(0.09 )
0.40
0.03 %
0.39
0.04 %
(0.08 )
0.48
0.04 %
0.47
0.06 %
(0.13 )
0.58
0.06 %
0.59
0.06 %
0.02
0.84
0.06 %
0.88
$
$
$
$
Deposits
TABLE 138: AVERAGE DEPOSITS BY TYPE
(In Millions)
U.S. Offices
Demand and Noninterest-Bearing
Individuals, Partnerships, Corporations, and Other
Correspondent Banks
Total Demand and Noninterest-Bearing
Interest-Bearing
Savings, Money Market, and Other
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 139: 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 140: 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,
2018
2017
2016
$
14,303.4 $
58.2
14,361.6
16,412.0 $
60.3
16,472.3
15,149.3
109.3
434.2
327.1
16,019.9
30,381.5
6,165.0
58,556.6
64,721.6
15,575.6
130.1
717.3
426.0
16,849.0
33,321.3
6,600.3
56,583.2
63,183.5
$
95,103.1 $
96,504.8 $
DECEMBER 31,
2018
69,899.2 $
4,612.7
161.9
—
14.3
74,688.1 $
2017
70,987.1 $
4,246.0
305.5
6.3
6.1
75,551.0 $
20,841.1
58.0
20,899.1
15,142.4
150.9
672.0
609.1
16,574.4
37,473.5
5,332.2
50,808.2
56,140.4
93,613.9
2016
57,354.0
3,971.8
276.6
9.4
8.8
61,620.6
DECEMBER 31, 2018
U.S. OFFICES
NON-U.S. OFFICES
CERTIFICATES
OF DEPOSIT
214.1 $
92.9
153.2
120.7
580.9 $
OTHER
TIME
— $
—
—
—
— $
16,786.3
10.5
8.5
—
16,805.3
2018 Annual Report | Northern Trust Corporation 173
TABLE 141: AVERAGE RATES PAID ON INTEREST-RELATED DEPOSITS BY TYPE
Interest-Related Deposits – U.S. Offices
Savings, Money Market, and Other
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,
2018
0.54 %
0.17
0.76
1.80
0.56
0.50
0.52
2017
0.16 %
0.15
0.46
1.38
0.20
0.26
0.25
2016
0.08 %
0.15
0.35
0.94
0.12
0.12
0.12
Non-U.S. Operations (Based on Obligor’s Domicile)
See also Note 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and
Supplementary Data.”
TABLE 142: SELECTED AVERAGE ASSETS AND LIABILITIES ATTRIBUTABLE TO NON-U.S. OPERATIONS
(In Millions)
Total Assets
Time Deposits with Banks
Loans
Non-U.S. Investments
Total Liabilities
Deposits
$
2018
30,781.3 $
3,943.2
2,054.6
19,016.1
66,008.5
64,721.6
2017
26,510.1 $
5,013.4
2,014.8
14,047.8
64,267.3
63,183.5
2016
24,031.0 $
6,331.3
1,894.3
10,255.7
57,270.0
56,139.8
2015
29,411.2 $
13,712.9
1,759.4
8,590.8
54,521.0
52,981.2
2014
28,072.8
16,106.9
1,490.2
6,446.5
52,123.3
49,854.7
TABLE 143: PERCENT OF NON-U.S.-RELATED AVERAGE ASSETS AND LIABILITIES TO TOTAL CONSOLIDATED AVERAGE
ASSETS
Assets
Liabilities
2018
25 %
54 %
2017
22 %
54 %
2016
21 %
50 %
2015
27 %
49 %
2014
27 %
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, securities, 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 realizable 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 Capital Markets Credit
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 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 Capital Market Credit Committee oversees country-risk analyses
and imposes limits to country exposure.
174 2018 Annual Report | Northern Trust Corporation
The following table provides information on non-U.S. outstandings by country that exceed 1.00% of Northern Trust’s
assets.
TABLE 144: NON-U.S. OUTSTANDINGS
(In Millions)
AT DECEMBER 31, 2018
Japan
Canada
France
AT DECEMBER 31, 2017
Japan
Canada
AT DECEMBER 31, 2016
Japan
Canada
France
Sweden
$
$
$
BANKS
COMMERCIAL
AND OTHER
TOTAL
391 $
1,328
1,470
510 $
1,437
900 $
2,114
1,311
1,112
4,858 $
359
468
3,375 $
196
1,608 $
309
233
217
5,249
1,687
1,938
3,885
1,633
2,508
2,423
1,544
1,329
Countries whose aggregate outstandings totaled between 0.75% and 1.00% of total assets were as follows: Germany with aggregate outstandings of $1.2 billion and Australia
with aggregate outstandings of $1.3 billion at December 31, 2018; Germany with aggregate outstandings of $1.3 billion and France with aggregate outstandings of $1.3 billion
at December 31, 2017; Australia with aggregate outstandings of $1.2 billion and Germany with aggregate outstandings of $1.2 billion at December 31, 2016.
TABLE 145: 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,
2018
2,594.2 $
4,395.8
2,762.8
1.82 %
2.25 %
2017
2,286.1 $
2,286.1
1,102.6
0.95 %
1.17 %
DECEMBER 31,
2018
168.3 $
981.3
525.2
1.48 %
2.32 %
2017
834.0 $
834.0
738.9
0.81 %
1.29 %
2016
204.8
378.5
617.7
0.25 %
0.07 %
2016
473.7
565.5
847.1
0.27 %
0.64 %
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
$
DECEMBER 31,
2018
7,901.7 $
7,901.7
7,495.5
2.00 %
2.38 %
2017
6,051.1 $
7,040.4
4,854.5
1.04 %
1.38 %
2016
5,109.5
6,037.6
4,872.1
0.37 %
0.57 %
2018 Annual Report | Northern Trust Corporation 175
Total Purchased Funds
(In Millions)
Balance on December 31
Year – Average Balance
– Average Rate
DECEMBER 31,
$
2018
10,664.2 $
10,783.5
1.93 %
2017
9,171.2 $
6,696.0
1.00 %
2016
5,788.0
6,337.0
0.34 %
176 2018 Annual Report | Northern Trust Corporation
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, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018.
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.
2018 Annual Report | Northern Trust Corporation 177
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NORTHERN TRUST CORPORATION:
Opinion on Internal Control Over Financial Reporting
We have audited Northern Trust Corporation and subsidiaries’ (the Corporation) internal control over financial reporting as
of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Corporation maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, 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) (PCAOB), the consolidated balance sheets of the Corporation as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financial
statements), and our report dated February 26, 2019 expressed an unqualified opinion on those consolidated financial
statements.
Basis for Opinion
The 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 the Corporation’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
CHICAGO, ILLINOIS
FEBRUARY 26, 2019
178 2018 Annual Report | Northern Trust Corporation
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 2019 Annual Meeting of Stockholders: “Item 1 – 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 “Compensation Discussion and Analysis,”
“Compensation and Benefits Committee Report,”“Executive Compensation,” and “Director Compensation” sections of the
Corporation’s definitive Proxy Statement for the 2019 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 2019 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 “Board and Board Committee
Information,” “Corporate Governance – Director Independence” and the “Corporate Governance – Related Person
Transactions Policy” sections of the Corporation’s definitive Proxy Statement for the 2019 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 2019 Annual Meeting of Stockholders.
2018 Annual Report | Northern Trust Corporation 179
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, 2018 and 2017
Consolidated Statements of Income - Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows - Years Ended December 31, 2018, 2017, and 2016
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.
ITEM 16 – FORM 10-K SUMMARY
None.
180 2018 Annual Report | Northern Trust Corporation
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 26, 2019
Northern Trust Corporation
(Registrant)
By:
/s/ Michael G. O’Grady
Michael G. O’Grady
Chairman, President, 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/ Michael G. O'Grady
Michael G. O’Grady
/s/ S. Biff Bowman
S. Biff Bowman
/s/ Aileen B. Blake
Aileen B. Blake
/s/ Linda Walker Bynoe
Linda Walker Bynoe
/s/ Susan Crown
Susan Crown
/s/ Dean M. Harrison
Dean M. Harrison
/s/ Jay L. Henderson
Jay L. Henderson
/s/ Marcy S. Klevorn
Marcy S. Klevorn
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Executive Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
/s/ Siddharth N. (Bobby) Mehta
Director
Siddharth N. (Bobby) Mehta
2018 Annual Report | Northern Trust Corporation 181
/s/ Jose Luis Prado
Jose Luis Prado
/s/ Thomas E. Richards
Thomas E. Richards
/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
Director
Director
Director
Director
Director
Director
Director
Date: February 26, 2019
182 2018 Annual Report | Northern Trust Corporation
EXHIBIT INDEX
Exhibit
Number
Description
3.1
3.2
3.3
3.4
4.1
4.2
4.3
10.1**
(i)**
(ii)**
10.2**
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).
Certificate of Designation of Series D Non-Cumulative Perpetual Preferred Stock of Northern Trust
Corporation, dated August 4, 2016 (incorporated herein by reference to Exhibit 3.1 to the Corporation’s
Current Report on Form 8-K filed August 8, 2016).
By-laws of Northern Trust Corporation, as amended February 19, 2019 (incorporated herein by reference to
Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed February 19, 2019).
Deposit Agreement, dated August 5, 2014, among Northern Trust Corporation, Wells Fargo Bank, N.A., as
depositary (which, effective February 1, 2018, was succeeded by Equiniti Trust Company), 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).
Deposit Agreement, dated August 8, 2016, among Northern Trust Corporation, Wells Fargo Bank, N.A., as
depositary (which, effective February 1, 2018, was succeeded by Equiniti Trust Company), and the holders
from time to time of the depositary receipts described therein (incorporated by reference to Exhibit 4.2 to the
Corporation’s Current Report on Form 8-K filed August 8, 2016).
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., which effective June 1, 2009, was succeeded by Evercore Trust Company, N.A., and,
which, effective October 19, 2017, was succeeded by Newport Trust Company) 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).
2018 Annual Report | Northern Trust Corporation 183
Exhibit
Number
10.3**
(i)**
(ii)**
10.4**
10.5**
10.6**
(i)**
(ii)**
(iii)**
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).
Description
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).
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 November
1, 2017 (incorporated herein by reference to Exhibit 10.5 to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2017).
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).
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).
184 2018 Annual Report | Northern Trust Corporation
Exhibit
Number
(v)**
(vi)**
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).
Description
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).
(vii)**
Terms and Conditions of 2016 Equity Awards under the Northern Trust Corporation 2012 Stock Plan
(incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2016).
(viii)**
Form of 2017 Stock Option Award Terms and Conditions, as amended (incorporated herein by reference to
Exhibit 10.7(x) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017).
(ix)**
Form of 2017 Stock Unit Award Terms and Conditions, as amended (incorporated herein by reference to
Exhibit 10.7(xi) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017).
(x)**
10.8**
10.9**
Form of 2017 Performance Stock Unit Award Terms and Conditions, as amended (incorporated herein by
reference to Exhibit 10.7(xii) to the Corporation's Annual Report on Form 10-K for the year ended December
31, 2017).
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**
Northern Trust Corporation 2018 Deferred Compensation Plan for Non-Employee Directors (incorporated
herein by reference to Exhibit 10.11 to the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2017).
10.12**
Northern Trust Corporation Key Officer Change in Control Severance Plan (incorporated herein by reference
to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K filed April 28, 2017).
10.13**
Northern Trust Corporation Executive Change in Control Severance Plan (incorporated herein by reference to
Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed April 28, 2017).
10.14**
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).
10.15**
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).
2018 Annual Report | Northern Trust Corporation 185
Exhibit
Number
10.16**
Form of Employment Security Agreement (Tier 2) (incorporated herein by reference to Exhibit 10.1 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010).
Description
10.17**
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).
10.18**
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).
(i)**
(ii)**
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).
10.19**
Northern Trust Corporation 2017 Long Term Cash Incentive Plan (incorporated herein by reference to
Exhibit 10.7 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017).
(i)**
Form of Cash Incentive Award Terms and Conditions, as amended (incorporated herein by reference to
Exhibit 10.19(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017).
10.20**
Northern Trust Corporation 2017 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.1
to the Corporation’s Current Report on Form 8-K filed April 26, 2017).
(i)**
(ii)**
Form of Director Stock Unit Agreement (incorporated herein by reference to Exhibit 10.10 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017).
Form of Director Stock Unit Agreement (prorated) (incorporated herein by reference to Exhibit 10.11 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017).
(iii)**
Form of 2018 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to
Exhibit 10.3 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018).
(iv)**
Form of 2018 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.4 to
the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018).
10.21**
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).
10.22**
Northern Partners Incentive Plan – EMEA Plan (incorporated herein by reference to Exhibit 10.9 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017).
10.23**
Northern Trust Corporation Non-Employee Director Compensation Plan (incorporated herein by reference to
Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018).
186 2018 Annual Report | Northern Trust Corporation
Exhibit
Number
10.24**
10.25**
Northern Partners Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2018).
Description
Consulting Agreement, dated as of September 4, 2018, between The Northern Trust Company and Jana R.
Schreuder (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2018).
10.26**
Letter Agreement with Frederick H. Waddell, dated January 23, 2019.
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, 2018, formatted in Extensible Business Reporting Language (XBRL):
(i) the Consolidated Balance Sheets as of December 31, 2018 and 2017, (ii) the Consolidated Statements of
Income for the twelve months ended December 31, 2018, 2017 and 2016, (iii) the Consolidated Statements of
Comprehensive Income for the twelve months ended December 31, 2018, 2017 and 2016, (iv) the
Consolidated Statements of Changes in Stockholders’ Equity for the twelve months ended December 31,
2018, 2017 and 2016, (v) the Consolidated Statements of Cash Flows for the twelve months ended December
31, 2018, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements.
** Indicates a management contract or a compensatory plan or agreement.
2018 Annual Report | Northern Trust Corporation 187