Northern Trust
ANNUAL REPORT
TO SHAREHOLDERS
2019
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
2019
2018
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
$ 6,105.9
1,492.2
565.9
46.4
$ 6,001.4
1,556.4
439.1
46.4
$ 6.66
6.63
2.60
46.82
106.24
$ 6.68
6.64
1.94
43.95
83.59
$ 125,236.6
136,828.4
109,120.6
11,091.0
$ 122,847.3
132,212.5
104,496.8
10,508.3
$ 107,109.4
117,551.4
89,786.0
10,648.4
$ 113,731.0
122,946.6
95,103.1
10,228.9
$ 12,050.4
9,233.5
5,894.6
1,231.3
$ 10,125.3
7,593.9
4,700.3
1,069.4
Financial Ratios and Metrics
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (Fully Taxable Equivalent Basis2)
14.9 %
1.27
39.2
1.60
16.2 %
1.27
29.2
1.46
2 %
(4)
29
—
— %
—
34
7
27
2 %
3
4
6
(6) %
(4)
(6)
4
19 %
22
25
15
CAPITAL RATIOS
Standardized
Approach
Advanced
Approach
Standardized
Approach
Advanced
Approach
DECEMBER 31, 2019
DECEMBER 31, 2018
Common Equity Tier 1Capital
Tier 1Capital
Total Capital
Tier 1 Leverage
Supplementary Leverage
12.7 %
14.5
16.3
8.7
N/A
13.2 %
15.0
16.8
8.7
7.6
12.9 %
14.1
16.1
8.0
N/A
13.7 %
15.0
16.9
8.0
7.0
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.
Michael G. O’Grady
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
To My Fellow Shareholders,
As we begin a new decade, the pace of change around us—at our workplaces, in our homes
and throughout our communities—continues to accelerate. While it is exciting to consider
the possibilities that lie ahead, the time for reflection can often feel elusive. It is at times such
as this that I am reminded of the rare privilege I have to be a part of Northern Trust. In my
role, I am fortunate to be able to see firsthand the positive impact that our organization has
on its various stakeholders each and every day. I am honored, for example, to receive notes
from clients who took their valuable time to praise the exceptional service they received
from a Northern Trust employee. I also have the opportunity to share our organization’s
rich history and culture with new employees, volunteer alongside my colleagues at one of
countless charitable organizations and events, and represent our firm at various Northern
Trust-sponsored cultural exhibits. These are just a few examples of what makes me so
proud to be a part of an organization that achieves greater for all of its stakeholders.
As a fellow shareholder, I am pleased to report that 2019 was another very good year for
Northern Trust, and that our company remains well-positioned for continued success.
This is the result of the prescient decisions and direction of our leaders past and present,
and the hard work and thoughtful execution of our employees, day in and day out. As
macroeconomic, technological and competitive factors challenge and rapidly transform
our industry, our enduring principles of service, expertise and integrity continue to
position us to meet our clients’ current and future needs.
2019 Annual Report | Northern Trust Corporation 1
For more than 130 years, Northern Trust’s success has been anchored in one purpose: to serve
as our clients’ most trusted financial partner, guarding and growing their assets as though
they were our own. Trust is easy to say, but challenging to earn. Earning a client’s trust requires
possessing the capabilities and expertise to solve their problems and help them meet their
goals. It means reliably meeting their needs at any time, all of the time and over time. And, it
means having the strength—as measured by our capital base, liquidity profile and technology
infrastructure—to withstand turbulent conditions. Meeting just one criterion is insufficient.
We must meet all of them consistently in order to earn our clients’ trust fully.
We focus intensely on addressing the particular needs of particular clients. Our clients are
institutions, families and individuals that utilize their investments to achieve their goals.
Whether we are working with a sovereign wealth fund seeking to benefit its nation’s citizens,
a pension plan responsible for the retirement savings of its participants, or a family aspiring
to achieve its philanthropic aspirations, we empower our clients with unique insights,
exceptional advice and meaningful solutions.
Underpinning this effort is our corporate strategy, which leverages the strengths of our
interconnected businesses—wealth management, asset management and asset servicing—
to create competitive advantage and synergistic value. Our long-term strategy has four
primary components:
LEVERAGE OUR EXCEPTIONAL TALENT AND TECHNOLOGY TO PROVIDE
PREMIER, HOLISTIC SERVICES TAILORED TO MEET OUR CLIENTS’ NEEDS.
Our client-centric strategy begins with thoroughly understanding our clients’ current and
anticipated needs and goals. Utilizing our deep expertise across all of our businesses,
our employees collaborate with each other, with strategic technology partners and often
directly with our clients to develop innovative solutions.
We understand that the primary differentiator of our services is the people who provide
them. To develop our talent for the future, we implement strategies to promote a diverse,
adaptive and engaged workforce. Investment in training is crucial to developing employees
equipped and motivated to provide exceptional service. In addition, we strive to hire
employees with specializations in key areas, including technology, fiduciary services and
investment management.
To elevate further the advice we provide our clients, we recently established a wealth
management center of excellence to harness the collective experience of our firm.
Dedicated experts will analyze data and historical outcomes to identify the strategies
that have been most effective for our clients and develop advice tailored for the
unique needs of selected client segments.
2 2019 Annual Report | Northern Trust Corporation
We also utilize technology to develop a deeper understanding of clients’ objectives.
For example, using the dynamic framework of our proprietary Goals Driven Wealth
Management platform, we can quantify a client’s specific life aspirations, develop a
bespoke financial plan to achieve them, and nimbly adapt the plan to changing conditions.
To accelerate the digitalization of our business, we continue to make significant investments
to integrate data and digital capabilities into our services. Our acquisition of Emotomy®,
an open-architecture digital investment advice platform, demonstrates our commitment to
bringing best-in-class investment solutions and technology to those we serve. And recently,
by acquiring a majority stake in our technology partner Parilux, we fast-tracked the roll-out
of Front Office Solutions, a digital, cloud-based platform designed specifically to help asset
allocators more effectively manage complex, multi-asset class portfolios across both private
and public market assets. We began providing these services in 2019 and already have a
healthy pipeline of future clients.
Digital services are fueled by data, and one of our most significant investments this year
was in Northern Trust Matrix®, our new, event-driven data architecture. By emphasizing a
digital-first approach, Matrix enables all participants in the investment chain to benefit from
enhanced tools and make faster, more confident decisions. Through additional investment
in other emerging technologies, such as blockchain, we continue to keep pace with, or stay
ahead of, evolving market trends. For example, we are partnering with Broadridge Financial
Solutions, a provider of investor communications and tech-driven solutions, to deliver an
industry-wide private equity blockchain solution. We are also partnering with BondEvalue,
a leading innovator in the Asia-Pacific fixed income markets, to deliver fractionalized bond
ownership to the Singapore market, an industry first.
While our clients’ validation, often measured by long, enduring relationships, is among
the most important measures of our success, we also take great pride in being recognized
externally for the quality of our service. In 2019, the Financial Times Group recognized us
as the Best U.S. Private Bank for the ninth time in 11 years and Best Global Private Bank for
Succession Planning. We were also recognized as Global Custodian of the Year and Fund
Administrator of the Year by renowned industry publications Global Custodian and Global
Investor, respectively.
GROW ORGANICALLY BY CREATING INNOVATIVE NEW SERVICES AND
DELIVERING EXCEPTIONAL EXPERIENCES TO NEW CLIENT SEGMENTS.
Each of our businesses continues to see meaningful opportunities to grow. With an
increase in assets under management (AUM) of 13 percent and assets under custody
and administration (AUC/A) of 16 percent in 2019, our Wealth Management business is
accelerating its growth by further penetrating existing client and geographic market
2019 Annual Report | Northern Trust Corporation 3
segments and expanding into new markets. Family offices are a prime example; these
professionally managed organizations require the sophisticated asset servicing, investment
management and advisory capabilities that Northern Trust is uniquely qualified to provide.
Ongoing innovations, such as Anchor Analytics™, further solidify our Global Family Office
business as a market leader. In the U.S. wealth management market, we have bolstered our
presence in the Midwest and Florida, and accelerated our growth in Texas, the West Coast
and the Northeast, where our expansion included opening our Philadelphia office.
Our Asset Management business’ growth is enhanced by offering solutions in areas of
greatest demand. We expanded our quality low-volatility suite of strategies, now available
as mutual funds and ETFs in the U.S., collective investment trusts in Europe, diversified funds
in Canada and separate accounts globally. We also launched five sustainable funds and
strategies in Europe to enable institutional clients to deploy sustainable investment strategies.
Our innovative low-carbon strategy is designed to invest at the intersection of low carbon
and high quality, while our euro-denominated investment-grade credit environmental, social
and governance (ESG) strategy is one of the industry’s first. These offerings pair our 30-plus
years of ESG innovation with our significant quantitative active, fixed income and index
investment capabilities.
Our Corporate & Institutional Services business, a global leader in asset servicing, is responding
to the growing complexity of our clients’ needs while growing our global client base, a strategy
leading to increases in AUC/A and AUM of 19 and 16 percent, respectively, in 2019. In today’s
environment of lower long-term investment returns, institutional asset owners and managers
are seeking strategies to create alpha from their investment and operational activities. By
helping them meet their objectives with tailored solutions across the entire asset servicing
spectrum, we have won complex, sophisticated global mandates around the world, including
new relationships with Funds SA in Australia, Storebrand in Sweden and Anchorage Capital
Group in the U.S. We have also extended our capabilities in key areas to support clients even
further. Our advanced currency management solutions, for example, help firms like our
long-time U.K.-based client Hermes Investment Management focus on their core competencies
and improve operational efficiencies. Our outsourced front office trading service, Integrated
Trading Solutions, has also been a disruptor in the market, winning a number of new clients
including Fundsmith, one of the U.K.’s fastest growing investment managers.
CONTINUALLY IMPROVE OUR PRODUCTIVITY BY DESIGNING AND LEVERAGING
A SCALABLE OPERATING MODEL.
While clients overwhelmingly appreciate the quality and efficacy of our services, they also
require us to provide them at a competitive price. Accordingly, it is critical for us to find ways
to improve our level of productivity constantly. This starts with structuring our business to
achieve benefits of scale from the growth of our business. We are currently leveraging
4 2019 Annual Report | Northern Trust Corporation
emerging technologies such as robotics and machine learning to further automate and
increase our operating efficiency. Additionally, we have embedded an ongoing mindset
of carefully ensuring that every dollar we spend results in attractive value for the company.
Productivity improvement is no longer confined to periodic programs. Productivity initiatives,
investments and the related savings are now further ingrained in our comprehensive
planning process and performance measurement.
MAINTAIN OUR FOUNDATIONAL STRENGTH WITH A STRONG, CONSERVATIVE
BALANCE SHEET AND A GLOBALLY RESPECTED BRAND.
Even as we pursue new opportunities and leverage cutting-edge technologies, we are proud
of the strength that comes from our conservative balance sheet and a distinguished brand
that has maintained client trust over more than a century of progress. We do not take our
foundational strength for granted; instead we work hard every day to maintain it through
prudent financial decisions, clear standards of employee conduct, and the highest levels
of cybersecurity and data protection.
By focusing on the disciplined execution of our strategy, we create value for our clients,
shareholders, employees and the communities in which we operate. In 2019, the company
produced attractive returns for our shareholders, with a return on equity of 14.9 percent, and
grew revenues by 2 percent to $6.11 billion for the year.* Trust fees, our largest source of
revenues, totaled $3.85 billion, up 3 percent. We also continued to grow assets as a result of
favorable markets and organic growth. AUC/A ended the year at $12.1 trillion, up 19 percent
from the prior year, while AUM ended the year at $1.2 trillion, up 15 percent from the prior
year. During 2019, we also returned a record $1.7 billion to common shareholders through
dividends and the repurchase of 11.8 million shares.
We understand that for Northern Trust to continue its success, we must also focus on the
world beyond our doors. In each of our global locations, our emphasis on sustainable
services and operations has substantially reduced our global carbon footprint and
greenhouse gas emissions. And through our corporate donations and our employees’
volunteering efforts, we have helped strengthen the educational, cultural and social welfare
of our communities around the globe.
We are fortunate to have a deep pool of leadership talent, including 11 Management Group
members, all of whom bring a diverse array of industry experience and achievements. In
the second half of 2019, Chief Financial Officer Biff Bowman and Chief Risk Officer Wilson
Leech both announced their retirements, effective in early 2020. We thank them for their
unwavering service and congratulate them on their distinguished careers. Jason Tyler, Chief
Financial Officer of our Wealth Management business, succeeded Biff; and Mark Gossett,
Chief Credit Officer and Head of Market and Liquidity Risk Management, succeeded Wilson.
2019 Annual Report | Northern Trust Corporation 5
Our Board of Directors also provides strong governance and tremendous guidance
throughout the year. In April, John Rowe stepped down from the Board after serving
17 years, including nine years as lead director. We greatly appreciate the wise counsel that
John provided throughout his tenure. We are fortunate that Jay Henderson assumed the
role of lead director, and his transition has been seamless.
Even as the global dynamic rapidly shifts around us, Northern Trust constantly strives to
be the most trusted partner for the world’s most prestigious clients through our combination
of unique capabilities, strategies and culture. I extend my warmest thanks to you, our
shareholders, as well as to our clients, our employees and all of our other stakeholders.
I am grateful for the trust you continue to place in Northern Trust and I am proud to be a
part of an organization that achieves greater for all of its stakeholders.
Sincerely,
Michael G. O’Grady
Chairman, President and Chief Executive Ofcer
6 2019 Annual Report | Northern Trust Corporation
M A N A G E M E N T G R O U P
Michael G. O’Grady
Chairman, President and
Chief Executive Officer
Robert P. Browne
Executive Vice President
Chief Investment Officer
Peter B. Cherecwich
President
Corporate & Institutional Services
Steven L. Fradkin
President
Wealth Management
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
Mark C. Gossett
Executive Vice President
Chief Risk Officer
Susan C. Levy
Executive Vice President
General Counsel and
Corporate Secretary
Teresa A. Parker
Executive Vice President
Corporate & Institutional Services
Europe, Middle East and Africa
Thomas A. South
Executive Vice President
Chief Information Officer
Marcy S. Klevorn
Retired Executive Vice President
and President, Mobility
Ford Motor Company
Global automaker
Siddharth N. (Bobby) Mehta
Retired President and
Chief Executive Officer
TransUnion LLC
Global risk and information
solutions provider
Jose Luis Prado
Vice Chairman
Evans Food Group, Ltd.
Global food company
Thomas E. Richards
Retired President and
Chief Executive Officer
CDW Corporation
Provider of integrated
information technology
solutions in the United States,
Canada and the United Kingdom
Martin P. Slark
Retired Chief Executive Officer
Molex LLC
Manufacturer of electronic,
electrical and fiber optic
interconnection products
and systems
Joyce M. St. Clair
Executive Vice President
Chief Human Resources Officer
Shundrawn A. Thomas
President
Asset Management
Jason J. Tyler
Executive Vice President
Chief Financial Officer
David H. B. Smith, Jr.
Executive Vice President,
Policy & Legal Affairs
and General Counsel
Mutual Fund Directors Forum
Nonprofit membership
organization for investment
company directors
Donald Thompson
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
2019 Annual Report | Northern Trust Corporation 7
* R evenues are presented on a fully taxable equivalent basis, a non-generally accepted accounting principle financial measure
that facilitates the analysis of asset yields.
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, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 001-36609
____________________________________________________________
NORTHERN TRUST CORPORA
TION
(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
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock, $1.66 2/3 Par Value
Depositary Shares, each representing 1/1,000th interest in a
share of Series C Non-Cumulative Perpetual Preferred Stock
Depositary Shares, each representing 1/1,000th interest in a
share of Series E Non-Cumulative Perpetual Preferred Stock
NTRS
NTRSP
NTRSO
The NASDAQ Stock Market LLC
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
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
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 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 28, 2019 (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 28, 2019 as reported by The NASDAQ Stock Market LLC, held by non-affiliates was
approximately $19.2 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, 2020, 209,247,666 shares of common stock, $1.66 2/3 par value, were outstanding.
Portions of the registrant’s Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
NORTHERN TRUST CORPORATION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Supplemental Item Information About Our Executive Officers
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
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
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
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
Page
1
12
25
25
26
26
27
29
31
32
91
92
167
167
169
169
169
169
169
169
170
173
174
i 2019 Annual Report | Northern Trust Corporation
PART I
ITEM 1 – BUSINESS
Northern Trust Corporation
Northern Trust Corporation (Corporation) is a leading provider of wealth management, asset servicing, asset management
and banking solutions to corporations, institutions, families and individuals. The Corporation is a financial holding company
conducting business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (Bank).
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, 2019, the Bank had consolidated assets of $135.9 billion and common bank equity capital of $9.3 billion.
The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a network of offices in
21 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region.
At December 31, 2019, the Corporation had consolidated total assets of $136.8 billion and stockholders’ equity of $11.1
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,” "its," 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, 2019, total C&IS assets under custody/administration, assets under custody, and assets under
management were $11.31 trillion, $8.50 trillion, and $917.5 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 $738.8 billion, $735.7 billion, and $313.8 billion,
respectively, at December 31, 2019. Wealth Management services are delivered by multidisciplinary teams through a network
of offices in 19 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, 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
2019 Annual Report | Northern Trust Corporation 1
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 $1.23 trillion in assets as of December 31, 2019,
including $917.5 billion for C&IS clients and $313.8 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 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 differentiate
itself from its competitors with premier, holistic solutions and exceptional experiences tailored to meet clients’ needs. In
addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and continual
productivity improvements. Northern Trust also seeks to maintain its foundational strength with a strong, conservative balance
sheet and a globally respected brand.
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 its 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 and in each of the
jurisdictions in which it does business. The discussion below outlines significant elements of selected laws and regulations
applicable to Northern Trust. Changes in laws or regulations applicable to Northern Trust may have a material effect on its
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 subject
to the supervision, examination, and regulation of the Federal Reserve Board. A financial holding company is permitted to
engage in a broader range of financial activities than a bank holding company. To maintain the Corporation’s status as a
financial holding company, the Bank and the Corporation must remain “well-capitalized” and “well-managed,” and the Bank
must have received at least a “satisfactory” rating in its most recent Community Reinvestment Act (CRA) examination. Failure
to meet one or more of these requirements may result in restrictions on the Corporation’s ability to exercise powers granted
to financial holding companies, to engage in new activities, to continue current activities, or to make acquisitions.
SUBSIDIARY REGULATION
The Bank is a member of the Federal Reserve System, with deposits insured by the Federal Deposit Insurance Corporation
(FDIC), and is subject to regulation by both 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
registered provisionally as a swap dealer with the U.S. Commodity Futures Trading Commission (CFTC) under the Commodity
Exchange Act. As a result, the Bank is subject to supervision, examination and enforcement by certain other regulatory bodies,
including the CFTC and the National Futures Association (NFA).
The Corporation’s nonbanking affiliates are subject to examination by the Federal Reserve Board and, in certain
circumstances, other functional regulators. The Corporation’s broker-dealer subsidiary is a member of the Financial Industry
Regulatory Authority (FINRA), is registered with the U.S. Securities and Exchange Commission (SEC) as a broker-dealer,
investment adviser, and municipal securities dealer, and is subject to the rules and regulations of these bodies. Certain
2 2019 Annual Report | Northern Trust Corporation
nonbanking affiliates are registered with the CFTC as commodity trading advisors and commodity pool operators and subject
to supervision and regulation by the CFTC and NFA. Other subsidiaries of the Corporation are registered with the SEC as
investment advisers and are subject to regulation by the SEC. Subsidiaries may also be regulated by state regulators in various
states.
THE DODD-FRANK ACT, AS AMENDED
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 amended parts of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) and directed the Federal Reserve Board and other federal regulators to revise parts of their
regulations that implement the Dodd-Frank Act. In October 2019, the Federal Reserve Board and other federal regulators
finalized the revisions required by the Regulatory Relief Act. The following items provide a brief description of certain
provisions of the Dodd-Frank Act, as implemented through final rules promulgated by the Federal Reserve Board and other
agencies and amended by the Regulatory ReliefAct, most relevant to the Corporation and its subsidiaries, including the Bank.
Enhanced Prudential Standards. The Dodd-Frank Act, as implemented by the Federal Reserve Board through various
rulemakings and amended by the Regulatory Relief Act, generally imposes enhanced prudential requirements on U.S. bank
holding companies with at least $100 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.
In October 2019, the Federal Reserve Board finalized a proposed rule implementing changes made by the Regulatory
Relief Act. This rule introduced a new four-category framework to determine which enhanced prudential standards and other
requirements are applicable to institutions with total consolidated assets of at least $100 billion, based on asset thresholds and
other risk-based factors. Under the new rules, the Corporation is classified as a Category II institution.
The requirements under the new framework that apply to the Corporation are largely unchanged as a result of the Federal
Reserve Board’s final tailoring rule for enhanced prudential standards. The Corporation must submit annual capital plans to
the Federal Reserve Board, conduct supervisory and internal periodic stress tests to evaluate capital adequacy in adverse
economic conditions, maintain 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 Corporation is not 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.
Resolution Planning. As required by Section 165(d) of the Dodd-Frank Act, the Corporation is required to submit
periodically to regulators a resolution plan for its rapid and orderly resolution in the event of material financial distress or
failure. In addition, under an FDIC rule (the CIDI Resolution Plan Rule) the Bank must submit to the FDIC periodic plans
for resolution in the event of its failure. The Corporation is required to submit its next Section 165(d) resolution plan by July
1, 2021. The FDIC has indicated that the Bank is not required to submit a resolution plan under the CIDI Resolution Plan
Rule before the conclusion of a rulemaking regarding the CIDI Resolution Plan Rule requirements.
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 submitted to the Federal
Reserve Board and the FDIC in December 2017 (the 2017 165(d) Plan). On March 29, 2019, the Federal Reserve Board and
the FDIC jointly announced that they did not identify shortcomings or deficiencies in 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 Commission de Surveillance du Secteur Financier (CSSF) guidance, a Simplified Recovery Plan for Northern Trust
Global Services SE, a Luxembourg-registered indirect subsidiary of the Bank, has been established and will be reviewed and
filed with the CSSF at least biennially. CSSF regulations also require institutions to submit resolution related data on an annual
basis, a requirement for which Northern Trust Global Services SE has an established process.
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 if in default or danger of default and
their resolution under the U.S. Bankruptcy Code would have serious adverse effects on financial stability in the United States,
2019 Annual Report | Northern Trust Corporation 3
among other requirements set by statute. 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. Absent such actions,
the Corporation, as a bank holding company, would remain subject to the U.S. Bankruptcy Code.
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, certain customer-driven matched swaps, and trading activities related to liquidity management. The Volcker
Rule also imposes significant restrictions on sponsoring or investing in certain “covered funds,” such as hedge funds or private
equity funds, again subject to exceptions. Northern Trust maintains an enterprise-wide compliance program to comply with
the Volcker Rule.
Swaps and Other Derivatives. The Dodd-Frank Act imposed a regulatory structure on the over-the-counter derivatives
market, including requirements for clearing, exchange trading, capital, margin, trade reporting, and recordkeeping. The Dodd-
Frank Act also requires certain entities to register as a “major swap participant,” a “swap dealer,” a “major-security-based
swap participant” or a “security-based swap dealer.” The Bank’s activities as a swap dealer are subject to the CFTC’s rules
and regulations, including rules regarding internal and external business conduct standards, reporting and recordkeeping,
mandatory clearing for certain swaps, trade documentation and confirmation requirements, and cross-border swap activities.
The Bank is also subject to Federal Reserve Board regulations 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.
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. 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 may pay dividends, repurchase stock, and make other capital distributions only in accordance with a
capital plan that has been reviewed without objection by the Federal Reserve Board. Dividends from the Bank are a significant
source of funds for the Corporation, and the Corporation’s ability to pay dividends on its common stock therefore depends
on the ability of the Bank to pay sufficient dividends to the Corporation.
Various federal and state laws and regulations limit the amount of dividends that may be paid by the Bank to the Corporation
without regulatory consent. The Bank may not pay any dividends if it is undercapitalized, or if the payment of the dividend
would cause it to become undercapitalized. In general, the amount of dividends that may be paid in a calendar year is limited
to its “recent earnings” (the current year’s net income combined with the retained net income of the two preceding years), or
its “undivided profits” (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus),
whichever is less. The ability of the Bank to pay dividends to the Corporation may also be affected by the capital adequacy
standards applicable to the Bank (discussed further below), which include minimum requirements and buffers.
CAPITAL PLANNING AND STRESS TESTING
The Corporation’s capital distributions are subject to the Federal Reserve Board’s capital plan rules, which require the
Corporation to submit annual capital plans to the Federal Reserve Board for review. 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 to which the Federal Reserve Board has not objected.
The major components of that oversight are the Federal Reserve Board’s Comprehensive Capital Analysis and Review
(CCAR) and Dodd-Frank Act stress tests (DFAST). 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’sand the Bank’sannual company-run stress tests are reported to the appropriate
regulators and made publicly available.
The Corporation submitted its most recent capital plan to the Federal Reserve Board in April 2019 as part of the Federal
Reserve Board’s 2019 CCAR exercise, and the Federal Reserve Board did not object to the Corporation’s plan and proposed
capital actions, including authority to increase its dividend payments and share repurchases, in mid-2019.
The Regulatory Relief Act and the Federal Reserve Board’s tailoring rule implementing changes required by such act did
not directly affect the CCAR exercise or capital plan requirements that apply to the Corporation. The Corporation remains
subject to annual company-run stress testing, annual supervisory stress testing, and annual capital plan submission
requirements.
4 2019 Annual Report | Northern Trust Corporation
The Corporation will submit its 2020 capital plan to the Federal Reserve Board by April 6, 2020. The Federal Reserve
Board is expected to publish either its objection or non-objection to the 2020 capital plan and proposed capital actions, such
as dividend payments and share repurchases, in mid-2020.
Under the DFAST regulations, the Corporation is required to undergo regulatory stress tests conducted by the Federal
Reserve Board 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). Results from the
Corporation’s and the Bank’s annual company-run stress tests are reported to the appropriate regulators and made publicly
available. Northern Trust published the results of its company-run stress tests on June 21, 2019, and the results of its company-
run mid-cycle stress tests on October 31, 2019.
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 discussed below 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.
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 for institutions supervised by the Large Institution Supervision
Coordination Committee and other large and complex institutions.
As of the date of this filing, the Federal Reserve Board has not finalized the April 2018 proposal, and the Corporation
cannot predict whether it will be finalized and whether such finalization would alter the way in which the CCAR exercise and
DFAST regulations are applied to the Corporation.
CAPITAL ADEQUACY REQUIREMENTS
The Corporation, as a bank holding company, is subject to risk-based and leverage capital guidelines implemented by the
Federal Reserve Board that are based on industry-standard guidelines published by the International Basel Committee on
Banking Supervision (Basel Committee), known as Basel III. The Bank, as an FDIC-insured depository institution, is also
required to meet risk-based and leverage capital guidelines established by regulators which are generally similar to those
established by the Federal Reserve Board for bank holding companies.
Under the final Basel III rules, the Corporation, with the Bank, is one of a small number of “core” banking organizations
that are required to use the advanced approaches methodologies to calculate and disclose publicly their risk-based capital
ratios. The Corporation also is subject to a capital floor that is based on the Basel III standardized approach to calculating
risk-based capital ratios. 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 two in the assessment of its capital adequacy.
2019 Annual Report | Northern Trust Corporation 5
The Bank’s risk-based and leverage capital ratios at December 31, 2019, were well above the minimum regulatory
requirements established by U.S. banking regulators. 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, 2019
COMMON EQUITY
TIER 1 CAPITAL
TIER 1 CAPITAL
TOTAL CAPITAL
TIER 1 LEVERAGE
STANDARDIZED ADVANCED STANDARDIZED ADVANCED STANDARDIZED ADVANCED STANDARDIZED ADVANCED
APPROACH APPROACH
APPROACH APPROACH
APPROACH APPROACH
APPROACH APPROACH
Northern Trust
Corporation
The Northern Trust
Company
Minimum required
ratio
“Well-capitalized”
minimum ratios, as
applicable
Northern Trust
Corporation
The Northern
Trust Company
12.7%
13.2%
14.5%
15.0%
16.3%
16.8%
8.7%
8.7%
12.3%
13.0%
12.3%
13.0%
14.0%
14.6%
7.3%
7.3%
4.5%
4.5%
6.0%
6.0%
8.0%
8.0%
4.0%
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%
SUPPLEMENTARY
LEVERAGE
ADVANCED
APPROACH
7.6%
6.4%
3.0%
N/A
3.0%
Advanced approaches institutions, such as the Corporation and the Bank, are subject to a minimum supplementary leverage
ratio of 3.0%. Advanced approaches institutions that are insured depository institutions, such as the Bank, also must maintain
at least a 3.0% supplementary leverage ratio to be considered “well-capitalized.” The Corporation and Bank are also subject
to a capital conservation buffer, which requires them to hold a buffer of common equity Tier 1 capital above the minimum
risk-based capital requirements in order to avoid constraints on dividends, equity repurchases and compensation. The minimum
capital conservation buffer increased to 2.5% in 2019 from 1.875% in 2018.
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, is also a component of the capital adequacy framework. 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%,
but certain other jurisdictions in which the Corporation has credit exposures currently have countercyclical buffers set at levels
greater than 0%, which slightly increase the weighted average countercyclical buffer to which the Corporation is subject.
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.
LIQUIDITY STANDARDS
Northern Trust is subject to the U.S. liquidity coverage ratio (LCR) requirement, which is designed to ensure that covered
banking organizations including the Corporation and the Bank maintain an adequate level of unencumbered high-quality liquid
assets equal to their expected net cash outflow for a 30-day time horizon under a regulatorily prescribed liquidity stress
scenario. As of December 31, 2019, the Corporation and the Bank were in compliance with applicable LCR requirements.
Basel III also introduced the concept of a net stable funding ratio (NSFR) requirement, designed to promote more medium-
and long-term funding of the assets and activities of banking entities over a one-year time horizon. The NSFR will require
certain banking organizations, including the Corporation, to maintain a stable funding profile in relation to the composition
of their assets and off-balance-sheet activities. The Federal Reserve Board has proposed, but has not adopted, a final rule
implementing the NSFR.
The enhanced prudential standards imposed by the Dodd-Frank Act, as amended by the Regulatory Reform Act, specify
certain required liquidity risk management practices for large bank holding companies and banks. The Federal Reserve Board’s
October 2019 final tailoring rule targets certain aspects of these requirements based on banking organizations’ business model
and risk profile, as delineated into four risk-based categories. The Corporation, a Category II institution under the final tailoring
rule, is subject to the liquidity risk management, monthly liquidity stress testing, liquidity buffer, and daily liquidity reporting
requirements.
6 2019 Annual Report | Northern Trust Corporation
PROMPT CORRECTIVE ACTION
Federal banking regulators are required to take “prompt corrective action” with respect to a depository institution if that
institution does not meet certain capital adequacy standards, and are also authorized to take appropriate action against a parent
bank holding company of an under-capitalized banking subsidiary. In certain instances, the Corporation could be required to
guarantee the performance of a capital restoration plan for the Bank if it were under-capitalized.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
The Bank is subject to restrictions governing transactions between it and affiliated entities, including the Corporation, its
affiliates, and its subsidiaries. These transactions must be on terms and conditions that are, or in good faith would be, offered
to nonaffiliated companies (i.e., on terms not less favorable to the Bank than market terms). Further, extensions of credit must
be secured fully with qualifying collateral and are limited to 10% of the Bank’s capital and surplus for transactions with a
single affiliate and to 20% of the Bank’s capital and surplus for transactions with all affiliates.
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 and implemented in the regulation of the federal banking regulators and Financial Crimes Enforcement
Network, which contain anti-money laundering (AML) and financial transparency requirements for conducting due diligence,
verifying client and beneficial owner identification, and monitoring client transactions and detecting and reporting suspicious
activities. AML laws outside the United States contain similar requirements.
Various legal requirements prohibit Northern Trust entities from engaging in business in or with certain jurisdictions and
parties, such as organizations and countries suspected of aiding, harboring or engaging in terrorist acts. The U.S. Department
of the Treasury’s Office of Foreign Assets Control publishes lists of these prohibited parties, 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 and notify the appropriate authorities.
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 reputation. 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.
DEPOSIT INSURANCE AND ASSESSMENTS
The Bank accepts deposits, and eligible deposits have the benefit of FDIC insurance up to the applicable limit, which is
currently $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, or has violated laws, regulations, or orders from a regulatory agency. 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 payable by custody banks.The Bank qualifies as a custody
bank for this purpose.
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. The Bank fulfills its CRA obligations by making
qualified investments for the purposes of community development. 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, setting limitations on disclosure to
third parties of consumer information, setting standards for protecting client information, and requiring notice of data breaches
in certain circumstances. Most states, the European Union (EU) and other non-U.S. jurisdictions also have adopted their own
statutes and/or regulations concerning data privacy and security and requiring notification of data breaches. For example, a
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 worldwide
2019 Annual Report | Northern Trust Corporation 7
revenue for the preceding fiscal year, whichever is greater. In the United States, the California Consumer Protection Act
(CCPA) was adopted by the State of California and became effective January 1, 2020. The CCPA substantially increases the
rights of California residents to understand how their personal data is collected and used by commercial businesses. The CCPA
includes a private right of action (permitting lawsuits to be brought by private individuals instead of the stateAttorney General
or other government actor for breaches), and contemplates civil penalties of up to $2,500 for each violation and up to $7,500
for each intentional violation.
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 federal and state laws and regulations designed to protect
consumers in transactions with banks. Failure to comply with these laws and regulations could lead to substantial penalties,
operating restrictions and reputational damage to the financial institution. Consumer laws and regulations are enforced by the
Consumer Financial Protection Bureau (CFPB) and other federal and state regulators.
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
Prudential Regulation Authority (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. For example, with the establishment of Northern Trust Global Services SE as an
EU-domiciled credit institution in Luxembourg in connection with the Corporation's Brexit-related planning, such entity is
subject to the prudential supervision of the European Central Bank and the CSSF. Moreover, Northern Trust’s non-European
branches and subsidiaries conducting financial services activities also may be within the scope of the laws of the EU, 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 United Kingdom relevant to the Corporation and its subsidiaries, in addition to the BRRD and GDPR discussed
under “The Dodd-Frank Act, as Amended—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 February 1, 2021, 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 were finalized in 2019.
8 2019 Annual Report | Northern Trust Corporation
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 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 offense 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 imposes 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 came into force on
September 19, 2019.
European Deposit Insurance Scheme. On October 11, 2017, the EU Commission announced that it aimed to complete
all parts of the European Banking Union by 2018. The banking union is in place and operational except for the creation of a
single European Deposit Insurance Scheme (EDIS). The EDIS will apply 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 has not yet published any revisions to the text of the EDIS regulation to reflect these changes. The
communication also urged the European Parliament and European Council to adopt these measures quickly to complete the
banking union however this remains outstanding.
Fifth EU Money Laundering Directive. On July 9, 2018, the Fifth EU Money Laundering Directive (MLD5) entered
into force. MLD5 was required to 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.
Shareholder Rights Directive. On May 17, 2017 the recast Shareholder Rights Directive (EU) 2017/828 was published
(SRD II). Member states of the EU were required to bring into force the laws, regulations and administrative provisions
necessary to comply with the Directive by June 10, 2019. SRD was designed to establish requirements in relation to the
exercise of shareholder rights and, recognizing that shares are often held through complex chains of intermediaries, SRD II
is designed to improve mechanisms for the identification of shareholders by companies, as well as improve the transmission
of information along the chain of intermediaries to facilitate the exercise of shareholder rights. Non-EU intermediaries are
2019 Annual Report | Northern Trust Corporation 9
required to comply with the requirements if they provide services with respect to shares of companies that have their registered
office in the EU. The EU Commission Implementing Regulation (EU) 2018/1212 of September 3, 2018 set out minimum
requirements for implementing SRD II, which will apply from September 3, 2020.
Depositary Books & Records. Following the European Securities and Markets Authority’s opinion on asset segregation
and application of depositary delegation rules to CSDs published on July 20, 2017, and entering into force on April 1, 2020,
changes have been introduced by two EU regulations modifying the existing Alternative Investment Fund Managers Directive
(AIFMD) and Undertakings for the Collective Investment in Transferable Securities (UCITS) Level 2 Regulations:
Commission Delegated Regulation (EU) No 2018/1618 relating to the safe-keeping duties of depositaries of alternative
investment funds and Commission Delegated Regulation (EU) No 2018/1619 relating to the safe-keeping duties of depositaries
of UCITS. The changes aim to better define asset segregation requirements and to add additional safeguards, primarily focusing
on information flow between the depositary and any third party to whom safe-keeping functions have been delegated. The
key changes (i) impact the frequency of reconciliations between the depositary’s internal accounts and records and those of
any third party in the custody chain, (ii) require the depositary to maintain an independent record separate from the record
maintained by the third party, and (iii) increase due diligence obligations where custody of assets is delegated to third parties
outside of the EU. The changes impact Northern Trust’s subsidiaries providing depositary services to European-domiciled
fund clients.
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, 2019, each of our non-U.S.
banking subsidiaries had capital ratios above their specified minimum requirements.
Staff
Northern Trust employed approximately 19,800 full-time equivalent staff members as of December 31, 2019.
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 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 "Average Consolidated Balance Sheets With Analysis Of Net Interest Income (Interest And Rate On A Fully Taxable
Equivalent Basis)" table (Item 7) provides the Average Consolidated Balance Sheets with Analysis of Net Interest Income
for the years ended December 31, 2019, 2018 and 2017.
• The "Changes In Net Interest Income" table (Item 7) provides the changes in Net Interest Income for the years ended
December 31, 2019 and 2018.
• 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, 2019,
2018 and 2017.
• The "Remaining Maturity and Average Yield of Debt Securities Held to Maturity and Available for Sale" table (Item 7)
provides the remaining maturity by major security grouping and yield as of December 31, 2019.
• The “Composition of Loan Portfolio” table (Item 7) provides loans and leases by type as of December 31, 2019, 2018,
2017, 2016 and 2015.
• The "Distribution of Non-U.S. Loans by Type" table (Item 7) as of December 31, 2019, 2018, 2017, 2016 and 2015.
• The "Remaining Maturity of Selected Loans and Leases" table (Item 7) as of December 31, 2019.
• The “Commercial Real Estate Loans” table (Item 7) provides details of loan concentrations as of December 31, 2019 and
2018.
• The “Nonperforming Assets” table (Item 7) provides information about the Corporation’s nonaccrual, past due and
restructured loans receivable as of December 31, 2019, 2018, 2017, 2016 and
2015.
10 2019 Annual Report | Northern Trust Corporation
• 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, as well as information with respect to allowance
for credit losses relating to non-U.S. operations for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
• The “Analysis of Allowance for Credit Losses” table (Item 7) for the years ended December 31, 2019, 2018, 2017, 2016
and 2015.
• 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 for the years ended December 31, 2019,
2018, 2017, 2016 and 2015.
• The "Average Deposits by Type" table (Item 7) as of December 31, 2019, 2018 and 2017.
• The "Distribution of Non-U.S. Deposits by Type" table (Item 7) as of December 31, 2019, 2018 and 2017.
• The "Remaining Maturity of Time Deposits $100,000 or More" table (Item 7) as of December 31, 2019.
• The "Average Rates Paid on Interest-Related Deposits by Type" table (Item 7) for the years ended December 31, 2019,
2018 and 2017.
• The "Purchased Funds" table (Item 7) as of December 31, 2019, 2018 and
• The "Selected Average Assets and Liabilities Attributable to Non-U.S. Operations" table (Item 7) for the years ended
2017.
December 31, 2019, 2018, 2017, 2016 and 2015.
• The "Percent of Non-U.S.-Related Average Assets and Liabilities to Total Consolidated Average Assets" table (Item 7)
for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
• The "Non-U.S. Outstandings" table (Item 7) provides information on non-U.S. outstandings by country that exceed 1.00%
of Northern Trust’s assets as of December 31, 2019, 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.
• 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, 2019 and 2018.
• Note 12, "Deposits," (Item 8) provides the remaining maturity of time deposits $100,000 or more as of December 31,
•
deposits $100,000 or more as of December 31, 2018.
2019 and time
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.”
• 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 29, “Off-Balance-Sheet Financial Instruments, Guarantees and Other Commitments.”
2019 Annual Report | Northern Trust Corporation 11
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 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. 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 and 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, in some circumstances, a 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 performance, yields
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.
12 2019 Annual Report | Northern Trust Corporation
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 andAnalysis
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, trade and other policies of various regulatory authorities, central banks, governments and
international agencies may reduce our earnings and affect our growth prospects negatively.
The monetary, trade and other policies of U.S. and international governments, agencies and regulatory bodies have a significant
impact on economic conditions 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, trade 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 withdrawal from 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.” Following delivery of the UK’s formal notice of withdrawal in March 2017, a subsequent negotiation period, and
approval of a withdrawal agreement by each of the UK and the EU, the UK formally exited the EU on January 31, 2020. The
ultimate impact of Brexit on the Corporation and the Bank remains uncertain and will depend on the final terms of the post-
Brexit relationships negotiated between the UK and other EU nations. 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. 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 implemented
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 in the future 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, or lack of confidence in the financial markets may adversely affect certain portions
of our business, financial condition, and results of operations.
Declines in the value of securities held in our investment portfolio can affect us negatively.
Our investment securities portfolio represents a greater proportion, and our loan and lease portfolios represent a smaller
proportion, of our total consolidated assets in comparison to many other financial institutions. The value of securities available
for sale and held to maturity within our investment portfolio, which is generally determined based upon market values available
from third-party sources, may fluctuate as a result of market volatility and economic or financial market conditions. Declines
in the value of securities held in our investment portfolio negatively impact our levels of capital and liquidity. 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.
2019 Annual Report | Northern Trust Corporation 13
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.
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
computer viruses or 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;
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, 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.
14 2019 Annual Report | Northern Trust Corporation
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. Most states, the EU and other non-U.S. jurisdictions also have adopted their own statutes and/or regulations
concerning data privacy and security and requiring notification of data breaches. For example, the General Data Protection
Regulation (GDPR), which 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. In the United
States, the California Consumer Privacy Act (CCPA) was adopted by the State of California and became effective January 1,
2020. The CCPA substantially increases the rights of California residents to understand how their personal data is collected
and used by commercial businesses and includes a private right of action permitting lawsuits to be brought by private individuals
instead of the state Attorney General or other government actor for breaches. These 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 information 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. In addition, a successful cyber-attack could persist for an extended
period of time before being detected. Because any investigation of an information security incident would be inherently
unpredictable, the extent of a particular information security incident and the path of investigating the incident may not be
immediately clear. It may take a significant amount of time before such an investigation can be completed and full and reliable
information about the incident is known. While such an investigation is ongoing, we may not necessarily know the extent of
the harm or how best to remediate it, certain errors or actions could be repeated or compounded before they are discovered
and remediated, and communication to the public, regulators, clients and other stakeholders may be inaccurate, any or all of
which could further increase the costs and consequences of an information security incident.
We expect to continue to face a wide variety of cyber-threats, 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
2019 Annual Report | Northern Trust Corporation 15
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 af fect 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 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.
16 2019 Annual Report | Northern Trust Corporation
A failure or circumvention of our controls and procedures could have a material adverse effect on our business, financial
condition and results of operations.
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies
and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can
provide only reasonable, not absolute, assurances that the objectives of the system will be met. Any failure or circumvention
of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material
adverse effect on our business, financial condition and results of operations. If we identify material weaknesses in our internal
control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement
expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of
our financial reports. In addition, there are risks that individuals, either employees or contractors, consciously circumvent
established control mechanisms by, for example, exceeding trading or investment management limitations, or committing
fraud.
Failure of any of our third-party vendors to perform can result in losses.
Third-party vendors provide key components of our business operations such as data processing, recording and monitoring
transactions, online banking interfaces and services, and network access. Our use of third-party vendors exposes us to the risk
that such vendors may not comply with their servicing and other contractual obligations to us, including with respect to
indemnification and information security, and to the risk that we may not satisfy applicable regulatory responsibilities regarding
the management and oversight of third parties and outsourcing providers. While we have established risk management
processes and continuity plans, any disruptions in service from a key vendor for any reason or poor performance of services
could have a negative effect on our ability to deliver products and services to our clients and conduct our business. Replacing
these third-party vendors or performing the tasks they perform for ourselves could create significant delay and expense.
We are subject to certain risks inherent in operating globally which may affect our business adversely.
In conducting our 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 31% of our revenue in 2019. 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, money
laundering, and laws relating to doing business with certain individuals, groups and countries, such as the U.S. Foreign Corrupt
Practices Act, the USA PATRIOT Act, 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.
2019 Annual Report | Northern Trust Corporation 17
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, with the goal of realizing $250 million in expense run-
rate savings by 2020 through improved organizational alignment, process optimization and strategic sourcing. Although we
have made substantial progress toward achieving this goal, we cannot predict its overall effect on our financial condition or
results of operations in the future.
Acts of terrorism, natural disasters, global climate change, pandemics and global conflicts may have a negative impact on
our business and operations.
Acts of terrorism, natural disasters, global climate change, pandemics, global conflicts or other similar 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 us negatively to the extent that they 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, these or similar events 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.
18 2019 Annual Report | Northern Trust Corporation
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 services
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. In
July 2017, the United Kingdom Financial Conduct Authority, which regulates the process for establishing LIBOR, announced
that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of
LIBOR after 2021, and as a result, the continuation of LIBOR on the current basis cannot be guaranteed after 2021. 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. While we are working to facilitate an orderly
transition from LIBOR to alternative interest rate benchmarks for us and our clients, there continues to be uncertainty regarding
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. 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, is 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 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.
2019 Annual Report | Northern Trust Corporation 19
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.
20 2019 Annual Report | Northern Trust Corporation
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. 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.
Changes by the U.S. and other governments to laws, regulations and policies applicable to the financial services industry
may heighten the challenges we face and make regulatory compliance more difficult and costly.
Various regulatory bodies have demonstrated heightened enforcement scrutiny of financial institutions through many regulatory
initiatives. These initiatives have increased compliance costs and regulatory risks and may lead to financial and reputational
damage in the event of a compliance 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.
2019 Annual Report | Northern Trust Corporation 21
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 generally
accepted accounting principles (GAAP). The process is inherently subject to risk, including the risks that a judge or jury could
decide a case contrary to our evaluation of the law or the facts or that a court could change or modify existing law on a particular
issue important to the case. Our earnings will be adversely affected if 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 the risks or manage appropriately the differing interests often involved in the exercise of fiduciary
responsibilities may subject us to liability or cause client dissatisfaction, which may impact negatively our earnings and growth.
Strategic Risks
If we do not execute strategic plans successfully, we will not grow as we have planned and our earnings growth will be
impacted negatively.
Our growth depends upon successful, consistent execution of our business strategies. A failure to execute these strategies will
impact growth negatively. A failure to grow organically or to integrate successfully an acquisition could have an adverse effect
on our business. The challenges arising from generating organic growth or the integration of an acquired business may include
preserving valuable relationships with employees, clients, suppliers and other business partners, 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.
If we are not able to attract, retain and motivate key personnel, our business could be negatively affected.
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
22 2019 Annual Report | Northern Trust Corporation
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 actual or alleged actions of our affiliates, vendors or other third parties with which we do business, the actual or
alleged 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
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 artificial intelligence, machine learning, 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.
2019 Annual Report | Northern Trust Corporation 23
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.
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.
In December 2017, the Tax Cuts and Jobs Act (H.R. 1) (TCJA) was signed into law. The TCJA 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 one-time repatriation
tax or “toll-charge” on undistributed earnings and profits of U.S.-owned foreign corporations, and introduction of certain anti-
base erosion provisions. The ultimate impact of the TCJA on our financial condition and results of operations in future years
remains uncertain and may differ materially from our expectations due to the anticipated issuance of technical guidance
regarding certain elements of the TCJA(including elements impacting the U.S. taxes payable on the income of the Corporation’s
non-U.S. branches), changes in interpretations and assumptions we have made with respect to the TCJA, 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.
24 2019 Annual Report | Northern Trust Corporation
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 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 D Non-Cumulative Perpetual Preferred Stock (Series D preferred stock) and
Series E Non-Cumulative Perpetual Preferred Stock (Series E 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 21 U.S. states and Washington, D.C., and across 22 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 one leased and two Bank-owned supplementary
operations/data center buildings located in the western suburbs of Chicago. A majority of the Bank’s London-based staff is
located at a leased facility at Canary Wharf in London. Additional support and operations activity originates from four facilities
in India, two facilities in Ireland, and one facility in the Philippines, 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 Bank also has leased space at 333 South Wabash Avenue in Chicago, with employees
moving into the space in early 2020.
The Corporation believes that its owned and leased facilities are suitable and adequate for its business needs. The
Corporation continues to evaluate its owned and leased facilities and may determine from time to time that certain of its
facilities are no longer necessary for its operations. There is no assurance that the Corporation will be able to dispose of any
excess facilities or that it will not incur costs in connection with such dispositions, which could be material to its operating
results in a given period.
2019 Annual Report | Northern Trust Corporation 25
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 26, “Contingent Liabilities,” included under Item 8,
“Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
26 2019 Annual Report | Northern Trust Corporation
SUPPLEMENTAL ITEM – INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following sets forth certain information with regard to each executive officer of the Corporation.
Michael G. O’Grady - Mr. O’Grady, age 54, 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.
Lauren E. Allnutt - Ms. Allnutt, age 43, joined Northern Trust in 2008 and has served as Senior Vice President and
Controller since May 2019. Prior to that, Ms. Allnutt served as manager of Global Financial Control from 2014 to April 2019
and led International Accounting Policy and Control from 2013 to 2014.
Robert P. Browne - Mr. Browne, age 54, joined Northern Trust in 2009 as Executive Vice President and Chief Investment
Officer. Before joining Northern Trust, Mr. Browne served in various senior investment-related roles at ING Investment
Management Holdings N.V.
Peter B. Cherecwich - Mr. Cherecwich, age 55, 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 58, 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.
Mark C. Gossett - Mr. Gossett, age 58, joined Northern Trust in 1983 and has served as Executive Vice President and
Chief Risk Officer since February 2020. Prior to that, Mr. Gossett served as Chief Credit Officer and Head of Market and
Liquidity Risk from 2014 to January 2020 and as Co-Head of Global Foreign Exchange from 2012 to 2014. Mr. Gossett served
as the Chief Risk Officer for Asset Management from 2009 to 2012 and as the Chief Operating Officer of Asset Management
from 2005 to 2009.
Susan C. Levy - Ms. Levy, age 62, 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 59, 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 the Asia-Pacific region.
Thomas A. South - Mr. South, age 50, 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.
Joyce M. St. Clair - Ms. St. Clair, age 60, 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 46, 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
2019 Annual Report | Northern Trust Corporation 27
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.
Jason J. Tyler - Mr. Tyler, age 48, joined Northern Trust in 2011 and has served as Executive Vice President and Chief
Financial Officer since January 2020. Prior to that, Mr. Tyler served as Chief Financial Officer of Wealth Management from
September 2018 to December 2019, as Global Head of Asset Management’s Institutional Group from 2014 to 2018, and as
Global Head of Strategy from 2011 to 2014. Before joining Northern Trust, Mr.Tyler served in certain executive and operational
roles at Ariel Investments and Bank One/American National Bank.
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.
28 2019 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 1,713 shareholders
of record as of January 31, 2020.
The following table shows certain information relating to the Corporation’s purchases of common stock for the three
months ended December 31, 2019.
TABLE 2: PURCHASES OF COMMON STOCK IN THE FOURTH QUARTER OF 2019
PERIOD
October 1 - 31, 2019
November 1 - 30, 2019
December 1 - 31, 2019
Total (Fourth Quarter)
TOTAL NUMBER
OF SHARES
PURCHASED
AVERAGE PRICE
PAID PER SHARE
1,078,712 $
703,401
820,033
2,602,146 $
93.17
106.37
107.76
101.34
TOTAL NUMBER
OF SHARES
PURCHASED AS
MAXIMUM
NUMBER OF
PART OF A SHARES THAT MAY
PUBLICLY
YET BE
PURCHASED
ANNOUNCED
PLAN(1) UNDER THE PLAN
1,078,712
703,401
820,033
2,602,146
10,754,957
10,051,556
9,231,523
9,231,523
(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.
2019 Annual Report | Northern Trust Corporation 29
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, 2019. The cumulative
total stockholder return assumes the investment of $100 in the Corporation’s common stock and in each index on December
31, 2014 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, 2014 with Reinvestment of Dividends
Northern Trust
S&P 500
KBW Bank Index
DECEMBER 31,
2014
2015
2016
2017
2018
$
100 $
109 $
138 $
157 $
134 $
100
100
101
100
114
129
138
153
132
126
2019
175
174
172
30 2019 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 (1)
Average Stockholders’ Equity to Average Assets
2019
2018
2017
2016
2015
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,395.2
1,677.9
6,073.1
(14.5)
4,143.5
1,944.1
451.9
1,492.2
46.4
1,445.8
6.66
6.63
2.60
46.82
106.24
125,236.6
136,828.4
109,120.6
2,573.0
1,148.1
11,091.0
107,109.4
117,551.4
89,786.0
2,389.1
1,139.0
10,648.4
$
$
$
$
$
$
$
$
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
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
$
$
$
$
$
$
$
$
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
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
$
$
$
$
$
$
$
$
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
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
3,632.5
1,070.1
4,702.6
(43.0)
3,280.6
1,465.0
491.2
973.8
23.4
950.4
4.03
3.99
1.41
36.27
72.09
106,848.9
116,749.6
96,868.9
1,497.4
1,371.3
8,705.9
102,249.8
110,715.1
90,768.0
1,497.2
1,426.4
8,624.5
$
12,050.4
9,233.5
1,231.3
$
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
14.9%
1.27
39.2
1.60
9.1
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
Capital Ratios:
DECEMBER 31, 2019
DECEMBER 31, 2018
DECEMBER 31, 2017
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Tier 1 Leverage
Supplementary Leverage(2)
12.7%
14.5
16.3
8.7
N/A
13.2%
15.0
16.8
8.7
7.6
12.9%
14.1
16.1
8.0
N/A
13.7%
15.0
16.9
8.0
7.0
DECEMBER 31, 2016
DECEMBER 31, 2015
12.6%
13.8
15.8
7.8
N/A
13.5%
14.8
16.7
7.8
6.8
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
WELL-CAPITALIZED
RATIOS
MINIMUM
CAPITAL RATIOS
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Tier 1 Leverage
Supplementary Leverage(2)
(1) Net interest margin is presented on a fully taxable equivalent (FTE) basis, a non-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 89.
(2) Effective January 1, 2018, the Corporation and Bank are subject to a minimum supplementary leverage ratio of 3 percent.
12.4 %
13.7
15.1
8.0
6.8
11.8 %
12.9
14.5
8.0
N/A
10.8%
11.4
13.2
7.5
N/A
11.9%
12.5
14.2
7.5
6.2
N/A
6.0
10.0
N/A
N/A
4.5%
6.0
8.0
4.0
3.0
2019 Annual Report | Northern Trust Corporation 31
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 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 formed as a holding company for the Bank in 1971. The Corporation has a global
presence with offices in 21 U.S. states and Washington, D.C., and across 22 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 decreased $64.2 million, or 4%, to $1.49 billion in 2019 from $1.56 billion in 2018. Earnings per diluted common
share was $6.63 in 2019 compared to $6.64 in 2018. Return on average common equity decreased to 14.9% in 2019 from
16.2% in 2018.
Revenue increased $112.8 million, or 2%, to $6.07 billion in 2019 from $5.96 billion in the prior year, primarily driven
by an increase in trust, investment and other servicing fees of 3%, an increase in net interest income of 3%, and an increase
in other operating income of 14%, partially offset by a decrease in foreign exchange trading income of 18%.
Client assets under custody/administration (AUC/A) increased 19% from $10.13 trillion as of December 31, 2018 to
$12.05 trillion as of December 31, 2019. Client assets under custody, a component of AUC/A, increased 22% from $7.59
trillion as of December 31, 2018 to $9.23 trillion as of December 31, 2019. Client assets under custody included $5.89 trillion
of global custody assets as of December 31, 2019, which increased 25% from $4.70 trillion as of December 31, 2018. Client
assets under management increased 15% to $1.23 trillion as of December 31, 2019 from $1.07 trillion at December 31, 2018.
Trust, investment and other servicing fees, which represent the largest component of total revenue, increased 3% to $3.85
billion in 2019, from $3.75 billion in 2018, primarily due to new business and favorable markets, partially offset by unfavorable
currency translation and lower securities lending revenue.
Foreign exchange trading income of $250.9 million in 2019 decreased 18% from $307.2 million in 2018, primarily
resulting from lower foreign exchange swap activity in Treasury.
Other operating income of $145.5 million in 2019 increased 14% from $127.5 million in 2018, primarily due to income
related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year
impairment of a community development equity investment previously held at cost, partially offset by a charge related to the
decision made in 2019 to sell substantially all of the lease portfolio.
Net interest income on a fully taxable equivalent (FTE) basis of $1.71 billion in 2019, increased $46.8 million, or 3%,
from $1.66 billion in 2018, due to an increased net interest margin, partially offset by lower levels of average earning assets.
The net interest margin on an FTE basis increased to 1.60% in 2019 from 1.46% in 2018, primarily due to higher short-term
interest rates and the impact of lower foreign exchange swap activity.
The provision for credit losses in each of 2019 and 2018 was a credit provision of $14.5 million. The current-year credit
provision reflected a decrease in the inherent reserve related to the residential real estate portfolio due to a reduction in
outstanding loans and improved credit quality and reductions to the specific reserve related to the commercial and institutional
and residential real estate portfolios, partially offset by an increase in the inherent reserve related to the private client portfolio
due to an increase in outstanding loans and lower credit quality. The prior-year credit 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. Loans and leases of $31.4 billion as of December 31, 2019 decreased from $32.5 billion as of December 31, 2018.
Net recoveries for the year ended December 31, 2019 were $0.7 million, compared to net charge-offs of $1.1 million for the
year ended December 31, 2018. Nonperforming assets decreased to $86.8 million as of December 31, 2019 from $117.7
million as of December 31, 2018.
Noninterest expense of $4.14 billion in 2019 increased $126.6 million, or 3%, from $4.02 billion in 2018, primarily
reflecting increased compensation, outside services, equipment and software expense, and occupancy expense.
32 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The provision for income taxes in 2019 totaled $451.9 million, representing an effective tax rate of 23.2%. The provision
for income taxes in 2018 totaled $401.4 million, representing an effective tax rate of 20.5%. The increase in the provision for
income taxes was primarily attributable to higher U.S. taxes payable on the income of the Corporation's non-U.S. branches
in 2019 as well as income tax benefits recorded in 2018 associated with the timing of tax deductions for software development-
related expenses and the implementation of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017.
Northern Trust continued to maintain a strong capital position during 2019, with all capital ratios exceeding those required
for classification as “well-capitalized” under federal bank regulatory capital requirements. Total stockholders’ equity increased
6% from $10.5 billion in 2018 to $11.1 billion at year-end. During 2019, the Corporation issued and sold 16 million depositary
shares, each representing 1/1,000th ownership interest in a share of Series E Non-Cumulative Perpetual Preferred Stock for
proceeds of $391.4 million, net of underwriting discounts, commissions, and other issuance costs. These proceeds were
subsequently used to fund the redemption of all outstanding shares of the Corporation’s Series C Non-Cumulative Perpetual
Preferred Stock on January 2, 2020.
During the year ended December 31, 2019, Northern Trust increased its quarterly common stock dividend to $0.70 per
share and repurchased 11.8 million shares of common stock, returning $1.7 billion in capital to common stockholders, compared
to $1.4 billion during the year ended December 31, 2018.
CONSOLIDATED RESULTS OF OPERATIONS
The following information summarizes our consolidated results of operations for 2019 compared to 2018. For a discussion
related to the consolidated results of operations for 2018 compared to 2017, refer to Part II, Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December
31, 2018 (2018 Form 10-K), which was filed with the United States Securities and Exchange Commission on February 26,
2019.
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 2019 of $6.07 billion increased 2% from $5.96 billion in 2018. Noninterest income represented 72% and 73%
2019, which increased 1% from $4.34 billion in
of total revenue in 2019 and 2018, respectively, and totaled $4.40 billion in
2018.
Noninterest income in 2019 increased primarily reflecting higher trust, investment and other servicing fees and other
operating income, partially offset by lower foreign exchange trading income. Trust, investment and other servicing fees of
$3.85 billion in 2019 increased $98.5 million, or 3%, from $3.75 billion in 2018, primarily due to new business and favorable
markets, partially offset by unfavorable currency translation and lower securities lending revenue. Foreign exchange trading
income in 2019 of $250.9 million decreased $56.3 million, or 18%, compared with $307.2 million in 2018, primarily resulting
from lower foreign exchange swap activity in Treasury. Other operating income of $145.5 million in 2019 increased 14%
from $127.5 million in the prior year, primarily due to income related to a bank-owned life insurance program implemented
during 2019, higher miscellaneous income, and the prior-year impairment of a community development equity investment
previously held at cost, partially offset by a charge related to the decision made in 2019 to sell substantially all of the lease
portfolio.
Net interest income on an FTE basis in 2019 of $1.71 billion increased $46.8 million, or 3%, from $1.66 billion in 2018,
due to an increased net interest margin, partially offset by lower levels of average earning assets. The net interest margin on
an FTE basis increased to 1.60% in 2019 from 1.46% in 2018, primarily due to higher short-term interest rates and the impact
of lower foreign exchange swap activity. Average earning assets decreased $6.6 billion, or 6%, from $113.7 billion in 2018
to $107.1 billion in 2019, primarily reflecting lower levels of short-term interest bearing deposits and loans and leases.
2019 Annual Report | Northern Trust Corporation 33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional information regarding Northern Trust’s revenue by type is provided below.
2019 TOTAL REVENUE OF $6.07 BILLION
63% Trust, Investment and Other Servicing Fees
28% Net Interest Income
5% Other Noninterest Income
4% Foreign Exchange Trading Income
Noninterest Income
.
The components of noninterest income, and a discussion of significant changes during 2019 and 2018, are provided below
TABLE 3: NONINTEREST INCOME
($ In Millions)
2019
2018
2017
2019 / 2018
2018 / 2017
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
Trust, Investment and Other Servicing Fees
$
3,852.1 $
3,753.7 $
Foreign Exchange Trading Income
Treasury Management Fees
Security Commissions and Trading Income
Other Operating Income
Investment Security Losses, net
Total Noninterest Income
250.9
44.5
103.6
145.5
(1.4)
307.2
51.8
98.3
127.5
(1.0)
3,434.3
209.9
56.4
89.6
157.5
(1.6)
$
4,395.2 $
4,337.5 $
3,946.1
3%
(18)
(14)
5
14
N/M
1%
9%
46
(8)
10
(19)
N/M
10%
Trust, Investment and Other Servicing Fees
Trust, investment and other servicing fees were $3.85 billion in 2019 compared with $3.75 billion in 2018. 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. For a more detailed discussion of 2019 trust,
investment and other servicing fees, refer to the “Reporting Segments and Related Information” section.
The following tables present selected market indices and the percentage changes year over year to provide context regarding
equity and fixed income market impacts on the Corporation’s results.
TABLE 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
34 2019 Annual Report | Northern Trust Corporation
DAILY AVERAGES
YEAR-END
2019
2,912
1,891
1,118
2018
CHANGE
2,746
1,966
1,125
6%
(4)
(1)
2019
3,231
2,037
1,190
2018
CHANGE
2,507
1,720
1,008
29%
18
18
2019
2,225
512
AS OF DECEMBER 31,
2018
CHANGE
2,047
479
9%
7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 disclosingAUC/A, to the extent that both custody and administration services are provided, the value of the assets
is included only once. At December 31, 2019, AUC/A of $12.05 trillion increased 19% from $10.13 trillion at December 31,
2018. The increased AUC/A primarily reflected favorable markets and net client inflows. Assets under custody, a component
of AUC/A, of $9.23 trillion at December 31, 2019, increased 22% from $7.59 trillion at December 31, 2018, and included
$5.89 trillion of global custody assets, compared to $4.70 trillion at December 31, 2018. The increased assets under custody
primarily reflected favorable markets and net client inflows. Assets under management of $1.23 trillion at the end of 2019
increased 15% from $1.07 trillion at the end of 2018. The increase primarily reflected favorable markets and net inflows.
AUC/A by reporting segment were as follows:
TABLE 6: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE
($ In Billions)
2019
2018
2017
2016
2015
2019 /2018
2018 /2017
Corporate & Institutional Services
$ 11,311.6 $ 9,490.5 $10,066.8 $ 7,987.0 $ 7,279.7
Wealth Management
738.8
634.8
655.8
554.3
517.3
Total Assets Under Custody/Administration $ 12,050.4 $ 10,125.3 $10,722.6 $ 8,541.3 $ 7,797.0
19%
16
19%
(6)%
(3)
(6)%
9%
7
9%
Assets under custody by reporting segment were as follows:
TABLE 7: ASSETS UNDER CUSTODY BY REPORTING SEGMENT
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE
($ In Billions)
2019
2018
2017
2016
2015
2019 /2018
2018 / 2017
Corporate & Institutional Services
$ 8,497.8 $ 6,971.0 $ 7,439.1 $ 6,176.9 $ 5,565.8
Wealth Management
735.7
622.9
645.5
543.6
506.3
Total Assets Under Custody
$ 9,233.5 $ 7,593.9 $ 8,084.6 $ 6,720.5 $ 6,072.1
22%
18
22%
(6)%
(4)
(6)%
9%
8
9%
Assets under custody were invested as follows:
TABLE 8: ASSETS UNDER CUSTODY BY INVESTMENT TYPE
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
DECEMBER 31,
2019
46%
35
17
2
2018
45%
37
16
2
2017
47%
35
16
2
2016
46%
36
17
1
2015
44%
37
17
2
2019 Annual Report | Northern Trust Corporation 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Assets under management by reporting segment were as follows:
TABLE 9: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE
($ In Billions)
2019
2018
2017
2016
2015
2019 / 2018
2018 / 2017
Corporate & Institutional Services
$
917.5 $
790.8 $
871.2 $
694.0 $
648.0
Wealth Management
313.8
278.6
289.8
248.4
227.3
Total Assets Under Management
$ 1,231.3 $ 1,069.4 $ 1,161.0 $
942.4 $
875.3
16%
13
15%
(9)%
(4)
(8)%
7%
7
7%
Assets under management were invested and managed as follows:
TABLE 10: ASSETS UNDER MANAGEMENT BY PRODUCT
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
2019
53%
16
18
13
TABLE 11: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE
Index
Active
Multi-Manager
Other
2019
51%
37
5
7
DECEMBER 31,
2017
51%
16
19
14
DECEMBER 31,
2017
46%
41
5
8
2018
50%
17
19
14
2018
49%
38
5
8
2016
51%
17
20
12
2016
47%
40
5
8
2015
51%
17
20
12
2015
47%
40
4
9
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 2019 of $250.9 million decreased $56.3 million, or 18%, compared with $307.2
million in 2018, primarily resulting from lower foreign exchange swap activity in Treasury.
Treasury Management Fees
Treasury management fees, generated from cash and treasury management products and services provided to clients, of $44.5
million in 2019 decreased 14%, or $7.3 million, from $51.8 million in 2018, primarily due to an increase in the earnings credit
rate applied to client balances and lower transaction based volumes.
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 $103.6 million in 2019, which increased 5%, or $5.3 million, from $98.3 million in 2018,
primarily due to higher revenue from interest rate swaps and core brokerage, partially offset by lower transition management
revenue.
36 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operating Income
The components of other operating income include:
TABLE 12: OTHER OPERATING INCOME
($ In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
$
$
2019
48.0 $
45.6
51.9
2018
48.9 $
46.4
32.2
2017
50.7
48.6
58.2
145.5 $
127.5 $
157.5
2019 / 2018
2018 / 2017
(2)%
(2)
60
14 %
(4)%
(5)
(44)
(19)%
Other income of $51.9 million in 2019 increased $19.7 million or 60%, from $32.2 million in 2018, primarily due to income
related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year
impairment of a community development equity investment previously held at cost, partially offset by a charge related to the
decision made in 2019 to sell substantially all of the lease portfolio.
Investment Security Losses, Net
Net investment security losses totaled $1.4 million and $1.0 million in 2019 and 2018, respectively. Losses in 2019 and 2018
include $0.3 million and $0.5 million of charges related to the other-than-temporary impairment (OTTI) of certain Community
Reinvestment Act (CRA) eligible held-to-maturity securities, respectively.
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 and other, 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 stated on an FTE basis is a non-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 89.
2019 Annual Report | Northern Trust Corporation 37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables present an analysis of average balances and interest rates affecting net interest income and an analysis
of net interest income changes.
TABLE 13: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE
ON A FULLY TAXABLE EQUIVALENT BASIS)
($ In Millions)
AVERAGE EARNING ASSETS
Federal Reserve and Other Central Bank Deposits and
Other(1)
Interest-Bearing Due from and Deposits with
Banks(2)
Federal Funds Sold and Securities Purchased under
Agreements to Resell
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other(3)
Total Securities
Loans and Leases(4)
Total Earning Assets
Allowance for Credit Losses Assigned to Loans and Leases
Cash and Due from Banks and Other Central Bank Deposits (5)
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
INTEREST
2019
AVERAGE
BALANCE
RATE(6)
INTEREST
2018
AVERAGE
BALANCE
RATE(6)
INTEREST
2017
AVERAGE
BALANCE
RATE(6)
$
181.7 $ 18,527.7
0.98% $
207.1 $ 23,899.3
0.87% $
155.1 $ 23,903.9
0.65%
72.4
5,996.7
1.21
70.0
6,022.8
1.16
63.8
7,143.3
0.89
17.9
847.8
2.11
33.3
1,498.8
2.22
27.5
1,850.2
1.48
110.4
5,296.5
24.4
980.5
583.6
22,634.1
381.6
21,773.3
2.09
2.49
2.58
1.75
108.3
13.9
456.0
367.5
5,737.1
725.2
20,682.7
23,136.5
1,100.0
50,684.4
2.17
945.7
50,281.5
1,160.7
31,052.8
2,532.7 107,109.4
3.74
2.36
1,106.5
32,028.6
2,362.6
113,731.0
—
—
—
—
—
—
(111.4)
2,393.6
425.6
1,070.4
682.5
5,981.3
—
—
—
—
—
—
—
—
—
—
—
—
(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
6,342.5
887.3
17,987.0
19,498.9
639.0
44,715.7
929.8
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
—
—
—
—
—
—
$
— $117,551.4
—% $
— $122,946.6
—% $
— $119,607.4
—%
$
160.8
$ 16,577.8
0.97% $
82.0
$ 15,149.3
0.54% $
24.3
$ 15,575.6
0.16%
16.2
867.5
311.9
54,885.2
488.9
72,330.5
214.0
72.6
38.3
8.2
9,358.9
2,389.1
1,139.0
277.6
822.0
85,495.1
—
—
—
—
—
17,455.5
3,952.4
10,648.4
1.86
0.57
0.68
2.29
3.04
3.36
2.98
0.96
1.40
—
—
—
7.8
870.6
294.8
58,556.6
384.6
74,576.5
208.2
10,783.5
53.4
45.0
7.5
1,704.0
1,296.8
277.6
698.7
88,638.4
—
—
—
—
—
20,526.6
3,552.7
10,228.9
0.90
0.50
0.52
1.93
3.13
3.47
2.72
0.79
1.29
—
—
—
9.4
1,273.4
148.4
56,583.2
182.1
73,432.2
67.1
46.9
39.2
4.9
6,696.0
1,496.9
1,519.4
277.5
340.2
83,422.0
—
—
—
—
—
23,072.6
3,132.2
9,980.6
0.74
0.26
0.25
1.00
3.13
2.58
1.75
0.41
1.22
—
—
—
Total Liabilities and Stockholders’ Equity
$
— $117,551.4
—% $
— $122,946.6
—% $
— $119,607.4
—%
Net Interest Income/Margin (FTE Adjusted)
Net Interest Income/Margin (Unadjusted)
$ 1,710.7 $
$ 1,677.9 $
—
—
1.60% $ 1,663.9 $
1.57% $ 1,622.7 $
—
—
1.46% $ 1,475.0 $
1.43% $ 1,429.2 $
—
—
1.33%
1.29%
Net Interest Income/Margin Components (FTE Adjusted)
U.S.
Non-U.S.
Consolidated
$ 1,127.3 $ 86,071.2
1.31% $ 1,079.9 $ 88,717.0
1.22% $ 1,076.4 $ 90,090.3
1.19%
583.4
21,038.2
2.77
584.0
25,014.0
2.33
398.6
21,088.0
1.89
$ 1,710.7 $107,109.4
1.60% $ 1,663.9 $113,731.0
1.46% $ 1,475.0 $111,178.3
1.33%
Note: 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 24.8%. Total
taxable equivalent interest adjustments amounted to $32.8 million in 2019, $41.2 million in 2018 and $45.8 million in 2017. 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.
(1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets in the consolidated
balance sheets.
(2) 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.
(3) Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets in the consolidated balance sheets.
(4) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(5) Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits as presented on the consolidated balance
sheets.
(6) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheets with Analysis of Net Interest Income.
38 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 14: CHANGES IN NET INTEREST INCOME
(INTEREST AND RATE ON A FULLY TAXABLE
EQUIVALENT BASIS)
(In Millions)
Increase (Decrease) in Interest Income
Money Market Assets
2019/2018 CHANGE DUE TO
2018/2017 CHANGE DUE TO
AVERAGE
BALANCE
RATE
TOTAL
AVERAGE
BALANCE
RATE
TOTAL
Federal Reserve and Other Central Bank Deposits
and Other
$
(58.1) $
32.7 $
(25.4) $
— $
52.0 $
Interest-Bearing Due from and Deposits with Banks
(0.3)
2.7
2.4
Federal Funds Sold and Securities Purchased under
Agreements to Resell
(13.9)
(1.5)
(15.4)
Securities
U.S. Government
Obligations of States and Political Subdivisions
Government Sponsored Agency
Other
Loans and Leases
Total
Deposits
Savings and Money Market
Savings Certificates and Other Time
Non-U.S. Offices Time
Short-Term Borrowings
Senior Notes
Subordinated Notes
Long-Term Debt
Floating Rate Capital Debt
Total
(Decrease) Increase in Net Interest Income
(6.7)
(3.5)
(7.3)
(1.4)
47.0
52.0
(20.5)
12.9
9.3
26.2
2.2
125.8
62.2
197.2
52.0
6.2
5.8
18.9
0.8
172.8
114.2
176.7
(5.4)
5.7
45.1
(20.0)
(77.9)
7.5
4.8
82.5
34.1
132.1
2.1
10.5
127.6
14.1
54.2
$
(124.8) $
294.9 $
170.1 $
59.6 $
487.8 $
547.4
$
8.3 $
70.5 $
78.8 $
—
(13.9)
(14.1)
20.6
(5.5)
—
8.4
31.0
19.9
(1.4)
(1.2)
0.7
8.4
17.1
5.8
19.2
(6.7)
0.7
(0.7) $
(4.8)
5.3
55.9
6.5
(5.8)
—
58.4 $
3.2
141.1
85.2
—
11.6
2.6
57.7
(1.6)
146.4
141.1
6.5
5.8
2.6
$
$
(4.6) $
127.9 $
123.3 $
56.4 $
302.1 $
358.5
(120.2) $
167.0 $
46.8 $
3.2 $
185.7 $
188.9
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.
2019 Annual Report | Northern Trust Corporation 39
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 15: 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
2019
2018
2017
2019 / 2018
2018 / 2017
$
2,499.9
$
2,321.4 $
1,769.4
32.8
2,532.7
822.0
1,710.7
1,677.9
41.2
2,362.6
698.7
1,663.9
1,622.7
45.8
1,815.2
340.2
1,475.0
1,429.2
$
107,109.4
$
113,731.0 $
111,178.3
85,495.1
21,614.3
88,638.4
25,092.6
83,422.0
27,756.3
8 %
(20)
7
18
3
3
(6)%
(4)
(14)
31%
(10)
30
105
13
14
2%
6
(10)
CHANGE IN PERCENTAGE
2.36%
2.08%
1.63%
0.96
1.40
0.77
1.57%
1.60%
0.79
1.29
0.62
1.43%
1.46%
0.41
1.22
0.31
1.29%
1.33%
0.28
0.17
0.11
0.15
0.14
0.14
0.45
0.38
0.07
0.31
0.14
0.13
Refer to pages 38 and 39 for additional analysis of net interest income.
Net interest income in 2019 of $1.68 billion increased $55.2 million, or 3%, from $1.62 billion in 2018. Net interest
income on an FTE basis for 2019 was $1.71 billion, which increased $46.8 million, or 3%, from $1.66 billion in 2018, due
to an increased net interest margin, partially offset by lower levels of average earning assets. Average earning assets decreased
$6.6 billion, or 6%, to $107.1 billion in 2019 from $113.7 billion in 2018. The net interest margin in 2019 was 1.57%, which
increased from 1.43% in 2018. The net interest margin on an FTE basis in 2019 was 1.60%, which increased from 1.46% in
2018.
Average earning assets decreased primarily reflecting lower levels of short-term interest bearing deposits and loans and
leases. Federal Reserve and Other Central Bank Deposits and Other averaged $18.5 billion in 2019, which decreased $5.4
billion, or 22%, from $23.9 billion in 2018. Interest-Bearing Due From and Deposits with Banks averaged $6.0 billion in each
of 2019 and 2018. Loans and leases averaged $31.1 billion, which decreased $975.8 million, or 3%, from $32.0 billion in
2018. 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 $50.7 billion, which increased
$402.9 million, or 1%, from $50.3 billion in 2018.
Funding of the balance sheet reflected lower levels of non-U.S. interest-bearing deposits and demand and other noninterest-
bearing deposits, partially offset by increases in U.S. interest-bearing deposits. Average interest-bearing deposits decreased
$2.3 billion, or 3%, to $72.3 billion in 2019 from $74.6 billion in 2018. Average demand and other noninterest-bearing deposits
decreased $3.0 billion, or 15%, to $17.5 billion in 2019 from $20.5 billion in 2018.
Stockholders’ equity averaged $10.6 billion in 2019, compared with $10.2 billion in 2018. The increased stockholders’
equity of $419.5 million, or 4%, was primarily attributable to current-year earnings, the issuance of preferred stock, and
accumulated other comprehensive income since the prior-year period, 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, 2019,
the Corporation increased its quarterly common stock dividend by 27% to $0.70 per share and repurchased 11.8 million shares,
returning $1.7 billion in capital to common stockholders, compared to $1.4 billion in 2018.
Under the Corporation’s 2019 capital plan, which was reviewed without objection by the Federal Reserve, the Corporation
may repurchase up to $828.5 million of common stock after December 31, 2019, through June 30, 2020.
40 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Credit Losses
The provision for credit losses was a credit provision of $14.5 million in each of 2019 and 2018. The current-year credit
provision primarily reflected a decrease in the inherent reserve related to the residential real estate portfolio due to a reduction
in outstanding loans and improved credit quality and reductions to the specific reserve related to the commercial and institutional
and residential real estate portfolios, partially offset by an increase in the inherent reserve related to the private client portfolio
due to an increase in outstanding loans and lower credit quality. The prior-year credit 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, 2019 decreased 26% from the prior year-end. Residential real estate, commercial
and institutional, commercial real estate, private client, and non-U.S. loans accounted for 85%, 9%, 4%, 1%, and 1%
respectively, of nonperforming loans and leases at December 31, 2019. For further discussion of the allowance and provision
for credit losses, refer to the “Asset Quality” section.
Noninterest Expense
Noninterest expense for 2019 of $4.14 billion increased $126.6 million, or 3%, from $4.02 billion in 2018, primarily reflecting
increased compensation, outside services, equipment and software expense, and occupancy expense.
The components of noninterest expense and a discussion of significant changes during 2019 and 2018 are provided below.
TABLE 16: NONINTEREST EXPENSE
($ In Millions)
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Other Operating Expense
Total Noninterest Expense
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2019
2018
2017
2019 / 2018
2018 / 2017
$
1,859.0 $
1,806.9 $
1,733.7
3%
4%
355.2
774.5
612.1
212.9
329.8
356.7
739.4
582.2
201.1
330.6
319.9
668.4
524.0
191.8
331.6
—
5
5
6
—
12
11
11
5
—
$
4,143.5 $
4,016.9 $
3,769.4
3%
7%
Compensation
Compensation expense, the largest component of noninterest expense, of $1.86 billion in 2019 increased $52.1 million, or
3%, compared to $1.81 billion in 2018, primarily reflecting higher salary expense driven by staff growth and base pay
adjustments, partially offset by lower incentive expense. Staff on a full-time equivalent basis totaled approximately 19,800
at December 31, 2019, up 5% from approximately 18,800 at December 31, 2018.
Employee Benefits
Employee benefits expense of $355.2 million in 2019 decreased slightly from $356.7 million in 2018, primarily reflecting
lower retirement plan and medical expenses, partially offset by higher payroll taxes.
Outside Services
Outside services expense of $774.5 million in 2019 increased $35.1 million, or 5%, from $739.4 million in 2018, primarily
due to higher technical services costs as well as consulting and legal services, partially offset by lower sub-custodian expenses.
Equipment and Software
Equipment and software expense of $612.1 million in 2019 increased $29.9 million, or 5%, compared to $582.2 million in
2018, primarily reflecting higher software support costs, software disposition, depreciation and amortization, and maintenance
costs.
Occupancy
Occupancy expense of $212.9 million in 2019 increased $11.8 million, or 6%, from $201.1 million in 2018, primarily due to
higher rent and building operating costs associated with executing workplace real estate strategies.
2019 Annual Report | Northern Trust Corporation 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operating Expense
Other operating expense of $329.8 million in 2019 decreased slightly from $330.6 million in 2018. The components of other
operating expense are as follows:
TABLE 17: OTHER OPERATING EXPENSE
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
Business Promotion
FDIC Insurance Premiums
Staff Related
Other Intangibles Amortization
Other Expenses
$
2019
104.2 $
9.9
42.8
16.6
156.3
2018
98.3 $
27.4
33.6
17.4
153.9
Total Other Operating Expense
$
329.8 $
330.6 $
2017
95.4
34.7
42.8
11.4
147.3
331.6
2019 / 2018
2018 / 2017
6 %
3 %
(64)
27
(4)
2
(21)
(22)
52
4
— %
— %
Other operating expense in the current year compared to the prior year primarily reflects decreased FDIC insurance premiums,
partially offset by higher staff-related expense and business promotion expense.
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 2019 provision for income taxes was $451.9
million, representing an effective rate of 23.2%. This compares with a provision for income taxes of $401.4 million and an
effective rate of 20.5% in 2018.
The increase in the provision for income taxes was primarily attributable to higher U.S. taxes payable on the income of
the Corporation's non-U.S. branches in 2019 as well as income tax benefits recorded in 2018 associated with the timing of
tax deductions for software development-related expenses and the implementation of the Tax Cuts and Jobs Act (TCJA)
enacted in the fourth quarter of 2017.
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 18: 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 included 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-U.S. subsidiaries,
offset by a $12.7 million net provision recorded associated with the repricing of deferred taxes.
As a result of the TCJA, earnings which had been reinvested indefinitely outside of the United States were deemed to
have been repatriated to the United States and were subject to a repatriation tax. As of December 31, 2018, Northern Trust’s
repatriation tax was $133.2 million.
See Note 22, “Income Taxes,” to the consolidated financial statements provided in Item 8, “Financial Statements and
Supplementary Data,” for more information on income taxes.
REPORTING SEGMENTS AND RELATED INFORMATION
The following information summarizes our results of operations by reporting segment for 2019 compared to 2018. For a
discussion related to the results of operations by reporting segment for 2018 compared to 2017, refer to Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Form 10-K, which was
filed with the United States Securities and Exchange Commission on February 26, 2019.
42 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset
management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management
business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and
Wealth Management.
Reporting segment financial information, presented on an internal management-reporting basis, is determined by
accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets,
liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under
the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and
other product characteristics on an instrument level. 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.
Effective January 1, 2019, Northern Trust implemented several enhancements to its FTP methodology, including the
allocation of contingent liquidity charges to C&IS and Wealth Management client instruments and products. These
methodology enhancements affect the results of each reporting segment. Due to the lack of historical information, segment
results for periods ended prior to January 1, 2019 have not been revised to reflect the methodology enhancements.
Also effective January 1, 2019, all revenues, expenses and average assets are allocated to C&IS and Wealth Management,
with the exception of non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation,
restructuring, and tax adjustments not directly attributable to a specific reporting segment.
For reporting periods ended prior to January 1, 2019, income and expense associated with the wholesale funding activities
and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive-level
compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and were reported in Treasury
and Other.
Reporting segment results are subject to reclassification when organizational changes are made. The results are also
subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.
The following table reflects the earnings and average assets for the Corporation.
TABLE 19: CONSOLIDATED FINANCIAL INFORMATION
($ In Millions)
Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2019
2018
2017
2019 / 2018
2018 / 2017
Trust, Investment and Other Servicing Fees
$
3,852.1 $
3,753.7 $
3,434.3
Foreign Exchange Trading Income
Other Noninterest Income
Total Noninterest Income
Net Interest Income (1)
Revenue (1)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes
(1)
Provision for Income Taxes
(1)
250.9
292.2
4,395.2
1,710.7
6,105.9
(14.5)
4,143.5
1,976.9
484.7
307.2
276.6
4,337.5
1,663.9
6,001.4
(14.5)
4,016.9
1,999.0
442.6
209.9
301.9
3,946.1
1,475.0
5,421.1
(28.0)
3,769.4
1,679.7
480.7
Net Income
Average Assets
$
$
1,492.2 $
1,556.4 $
1,199.0
117,551.4 $
122,946.6 $
119,607.4
3 %
(18)
6
1
3
2
N/M
3
(1)
10
(4)%
(4)%
9 %
46
(8)
10
13
11
N/M
7
19
(8)
30 %
3 %
(1) Stated on an FTE basis. The consolidated figures include $32.8 million, $41.2 million, and $45.8 million of FTE adjustments for 2019, 2018, and 2017, respectively.
2019 Annual Report | Northern Trust Corporation 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Corporate & Institutional Services
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations,
endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe.
Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund
administration; investment operations outsourcing; investment management; investment risk and analytical services; employee
benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management
services; banking and cash management. Client relationships are managed through the Bank and the Bank’s and the
Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-
Pacific region.
The following table summarizes the results of operations of C&IS for the years ended December 31, 2019, 2018, and
2017 on a management-reporting basis.
TABLE 20: C&IS RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2019
2018
2017
2019 / 2018
2018 / 2017
Trust, Investment and Other Servicing Fees
$
2,211.5
$
2,173.1 $
1,984.6
2 %
9 %
Foreign Exchange Trading Income
Other Noninterest Income
Total Noninterest Income
Net Interest Income (1)
Revenue (1)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes
(1)
Provision for Income Taxes
(1)
232.2
178.2
2,621.9
918.7
3,540.6
1.9
2,605.5
933.2
219.4
233.4
183.0
2,589.5
992.2
3,581.7
1.9
2,421.4
1,158.4
255.3
Net Income
$
713.8
$
903.1 $
197.9
176.1
2,358.6
733.8
3,092.4
3.4
2,194.5
894.5
279.5
615.0
(1)
(3)
1
(7)
(1)
—
8
(19)
(14)
18
4
10
35
16
(44)
10
30
(9)
(21)%
47 %
Percentage of Consolidated Net Income
48%
58%
51%
Average Assets
(1) Stated on an FTE basis.
$
87,557.1
$
82,996.5 $
80,105.6
5 %
4 %
C&IS net income decreased 21% in 2019 compared to 2018 primarily due to higher noninterest expense, partially offset by
lower net interest 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.
44 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provided below are the components of C&IS trust, investment and other servicing fees.
TABLE 21: C&IS TRUST, INVESTMENT AND OTHER SERVICING FEES
($ In Millions)
2019
2018
2017
2019 / 2018
2018 / 2017
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
Custody and Fund Administration
$
1,549.3 $
1,501.1 $
1,342.1
Investment Management
Securities Lending
Other
445.7
87.2
129.3
436.8
102.0
133.2
403.5
96.4
142.6
Total Trust, Investment and Other Servicing Fees
$
2,211.5 $
2,173.1 $
1,984.6
2019 C&IS
TRUST, INVESTMENT, AND OTHER SERVICING FEES
3%
2
(15)
(3)
2%
12%
8
6
(7)
10%
70% Custody and Fund Administration
20% Investment Management
6% Other Services
4% Securities Lending
Custody and fund administration fees, the largest component of trust, investment and other servicing fees, increased $48.2
million, or 3%, from 2018 to 2019 primarily due to new business, partially offset by unfavorable currency translation and
markets. Fees from investment management increased $8.9 million, or 2%, from 2018 to 2019 primarily due to new business
and favorable markets. Securities lending revenue decreased $14.8 million, or 15% from 2018 to 2019, primarily driven by
lower spreads and loan volumes.
Provided below is a breakdown of the C&IS assets under custody and under management.
TABLE 22: C&IS ASSETS UNDER CUSTODY
($ In Billions)
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
DECEMBER 31,
CHANGE
2019
2018
2017
2019 / 2018
2018 / 2017
$
4,516.0 $
3,693.4 $
2,998.5
820.3
163.0
2,538.6
589.2
149.8
3,972.1
2,602.4
697.1
167.5
22%
(7)%
18
39
9
(2)
(15)
(11)
Total Assets Under Custody
$
8,497.8 $
6,971.0 $
7,439.1
22%
(6)%
2019 Annual Report | Northern Trust Corporation 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019 C&IS ASSETS UNDER CUSTODY
53% North America
35% Europe, Middle East, and Africa
10% Asia Pacific
2% Securities Lending
TABLE 23: C&IS ASSETS UNDER MANAGEMENT
($ In Billions)
North America
Europe, Middle East, and Africa
Asia Pacific
Securities Lending
DECEMBER 31,
2019
2018
$
588.4 $
493.1 $
125.2
40.9
163.0
113.3
34.6
149.8
Total Assets Under Management
$
917.5 $
790.8 $
2019 C&IS
ASSETS UNDER MANAGEMENT
2017
533.5
127.3
42.9
167.5
871.2
CHANGE
2019 / 2018
2018 / 2017
19%
(8)%
11
18
9
(11)
(19)
(11)
16%
(9)%
64% North America
18% Securities Lending
14% Europe, Middle East, and Africa
4% Asia Pacific
2019 C&IS
ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
53% Equities
18% Securities Lending
17% Cash and Other Assets
12% Fixed Income Securities
C&IS assets under custody of $8.50 trillion at December 31, 2019, increased 22% from $6.97 trillion at December 31, 2018.
Assets under management increased 16% to $917.5 billion at December 31, 2019, from $790.8 billion at December 31, 2018.
46 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
$163.0 billion and $149.8 billion at December 31, 2019 and 2018, respectively.
C&IS Foreign Exchange Trading Income
Foreign exchange trading income of $232.2 million in 2019, decreased $1.2 million, or 1%, from $233.4 million in 2018,
primarily due to lower foreign exchange swap activity in Treasury, partially offset by the enhanced segment reporting
methodology beginning January 1, 2019.
C&IS Other Noninterest Income
Other noninterest income for 2019 of $178.2 million decreased $4.8 million, or 3%, from $183.0 million in 2018, primarily
due to a decrease in other operating income and treasury management fees, partially offset by the enhanced segment reporting
methodology beginning January 1, 2019.
C&IS Net Interest Income
Net interest income on an FTE basis, inclusive of the FTP methodology enhancements described above, decreased $73.5
million, or 7%, in 2019 to $918.7 million from $992.2 million in 2018, primarily reflecting higher charges due to the FTP
methodology enhancements and a decrease in the net interest margin, partially offset by an increase in average earning assets.
Net interest margin on an FTE basis decreased to 1.26% from 1.29%. Average earning assets of $79.1 billion, increased $2.2
billion, or 3%, from $76.9 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 $54.9 billion in 2019, increased from $54.2 billion in 2018.
C&IS Provision for Credit Losses
The provision for credit losses was a provision of $1.9 million for both 2019 and 2018. The 2019 provision reflected an
increase to the inherent reserve for outstanding loans due to lower credit quality, partially offset by a decrease to the specific
reserve related to standby letters of credit and outstanding loans. The 2018 provision reflected increases to the specific reserve
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.
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, of $2.61 billion in 2019,
increased $184.1 million, or 8%, from $2.42 billion in 2018. The increase primarily reflects higher expense allocations,
including those due to the enhanced segment reporting methodology beginning January 1, 2019, and higher compensation
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 assets under custody/
administration, assets under custody, and assets under management of $738.8 billion, $735.7 billion, and $313.8 billion,
respectively, at December 31, 2019. Wealth Management services are delivered by multidisciplinary teams through a network
of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.
2019 Annual Report | Northern Trust Corporation 47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2019,
2018, and 2017 on a management-reporting basis.
TABLE 24: WEALTH MANAGEMENT RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2019
2018
2017
2019 / 2018
2018 / 2017
Trust, Investment and Other Servicing Fees
$
1,640.6
$
1,580.6 $
1,449.7
Foreign Exchange Trading Income
Other Noninterest Income
Total Noninterest Income
Net Interest Income (1)
Revenue (1)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes
(1)
Provision for Income Taxes
(1)
Net Income
Percentage of Consolidated Net Income
Average Assets
(1) Stated on an FTE basis.
$
$
18.7
131.1
1,790.4
792.0
2,582.4
(16.4)
1,531.6
1,067.2
271.1
4.2
102.7
1,687.5
816.5
2,504.0
(16.4)
1,460.0
1,060.4
262.1
796.1
$
798.3 $
3.1
103.9
1,556.7
736.2
2,292.9
(31.4)
1,405.3
919.0
347.2
571.8
4 %
N/M
28
6
(3)
3
N/M
5
1
3
— %
9 %
35
(1)
8
11
9
N/M
4
15
(25)
40 %
53%
51%
48%
29,994.3
$
26,163.7 $
26,599.9
15 %
(2)%
Wealth Management net income decreased slightly in 2019, primarily reflecting higher noninterest expense and lower net
interest income, partially offset by higher trust, investment and other servicing fees, other noninterest income, and foreign
exchange trading income.
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 25: WEALTH MANAGEMENT TRUST, INVESTMENT AND OTHER SERVICING FEES
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
Central
East
West
Global Family Office
$
2019
619.3 $
422.2
330.9
268.2
2018
607.8 $
401.7
320.0
251.1
2017
575.5
356.2
291.7
226.3
Total Trust, Investment and Other Servicing Fees
$
1,640.6 $
1,580.6 $
1,449.7
2019 / 2018
2018 / 2017
2%
5
3
7
4%
6%
13
10
11
9%
2019 WEALTH MANAGEMENT FEES
38% Central
26% East
20% West
16% Global Family Office
48 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 26: WEALTH MANAGEMENT ASSETS UNDER CUSTODY
($ In Billions)
Global Family Office
Central
East
West
DECEMBER 31,
2019
2018
$
474.1 $
405.5 $
115.1
81.7
64.8
88.2
72.7
56.5
Total Assets Under Custody
$
735.7 $
622.9 $
2019 WEALTH MANAGEMENT ASSETS UNDER CUSTODY
2017
422.9
94.8
70.5
57.3
645.5
CHANGE
2019 / 2018
2018 / 2017
17%
31
12
15
18%
(4)%
(7)
3
(1)
(4)%
64% Global Family Office
16% Central
11% East
9% West
TABLE 27: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
DECEMBER 31,
CHANGE
($ In Billions)
Central
Global Family Office
East
West
2019
$
104.4 $
94.2
66.8
48.4
2018
96.2 $
83.5
57.0
41.9
Total Assets Under Management
$
313.8 $
278.6 $
2019 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
2017
102.1
87.1
57.0
43.6
289.8
2019 / 2018
2018 / 2017
9%
13
17
16
13%
(6)%
(4)
—
(4)
(4)%
33% Central
30% Global Family Office
21% East
16% West
2019 Annual Report | Northern Trust Corporation 49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
53% Equities
25% Fixed Income Securities
22% Cash and Other Assets
The Wealth Management regions shown above are comprised of the following: Central includes Illinois, Michigan, Minnesota,
Missouri, Ohio and Wisconsin; East includes Connecticut, Delaware, Florida, Georgia, Massachusetts, New York,
Pennsylvania, 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 of $1.64 billion in 2019 increased $60.0 million, or 4%, from $1.58 billion in 2018. The results in
2019 benefited
from new business and favorable markets.
At December 31, 2019, assets under custody in Wealth Management were $735.7 billion compared with $622.9 billion
at December 31, 2018. Assets under management were $313.8 billion at December 31, 2019 compared to $278.6 billion at
the previous year end.
Wealth Management Foreign Exchange Trading Income
Foreign exchange trading income of $18.7 million in 2019 increased $14.5 million from $4.2 million in 2018, primarily due
to the enhanced segment reporting methodology beginning January 1, 2019.
Wealth Management Other Noninterest Income
Other noninterest income for 2019 of $131.1 million, increased $28.4 million, or 28%, from $102.7 million in 2018, primarily
due to the enhanced segment reporting methodology beginning January 1, 2019.
Wealth Management Net Interest Income
Net interest income on an FTE basis, inclusive of the FTP methodology enhancements described above, of $792.0 million for
2019 decreased $24.5 million, or 3%, from $816.5 million in 2018, primarily attributable to a decrease in the net interest
margin, partially offset by an increase in earning assets. Net interest margin on an FTE basis decreased to 3.06% from 3.16%,
reflecting lower yields on earning assets. Average earning assets of $28.0 billion in 2019, increased $2.1 billion, or 8%, in the
current year from $25.9 billion in 2018.
Wealth Management Provision for Credit Losses
The provision for credit losses was a credit provision of $16.4 million in both 2019 and 2018. The 2019 credit provision was
primarily driven by a reduction in outstanding loans and improved credit quality in the residential real estate portfolio, which
resulted in a reduction of the inherent allowance. The 2018 credit provision 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.
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, of $1.53 billion in 2019 increased
$71.6 million, or 5%, from $1.46 billion in the prior year. The increase primarily reflects higher expense allocations, including
those due to the enhanced segment reporting methodology beginning January 1, 2019, increased compensation expense and
outside services expense, partially offset by lower other operating expense.
50 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Treasury and Other
Beginning January 1, 2019, Treasury and Other includes income and expenses associated with non-recurring activities such
as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments. For reporting periods
ended prior to January 1, 2019, income and expense associated with the wholesale funding activities and investment portfolios
of the Corporation and the Bank, as well as certain corporate-based expense, executive-level compensation and nonrecurring
items, were not allocated to C&IS and Wealth Management, and are reported in Treasury and Other. Treasury and Other
information for 2019 is not directly comparable to prior period information due to the enhanced segment reporting methodology
beginning January 1, 2019.
The following table summarizes the results of operations of Treasury and Other for the years ended December 31, 2019,
2018, and 2017 on a management-reporting basis.
TABLE 28: TREASURY AND OTHER RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
Net Interest Income (1)
Revenue (1)
Noninterest Expense
Income (Loss) before Income Taxes
(1)
Provision (Benefit) for Income Taxes
(1)
Net Income
Percentage of Consolidated Net Income
Average Assets
(1) Stated on an FTE basis.
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2019
2018
2017
2019 / 2018
2018 / 2017
$
(17.1)
$
60.5
$
—
(17.1)
6.4
(23.5)
(5.8)
(144.8)
(84.3)
135.5
(219.8)
(74.8)
(17.7)
$
(145.0) $
30.8
5.0
35.8
169.6
(133.8)
(146.0)
12.2
(1)%
(9)%
1%
—
$
13,786.4
$
12,901.9
$
$
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
96%
N/M
N/M
(20)
N/M
N/M
N/M
7%
Treasury and Other noninterest income in 2019 was an expense of $17.1 million, which decreased from $60.5 million in 2018
primarily due to the enhanced segment reporting methodology beginning January 1, 2019.
Beginning January 1, 2019, net interest income and average assets are allocated to the C&IS and Wealth Management
reporting segments. Accordingly, net interest income on an FTE basis in 2019 was zero, compared to net interest expense of
$144.8 million in 2018.
Treasury and Other noninterest expense in 2019 of $6.4 million decreased $129.1 million from $135.5 million in 2018
due to the enhanced segment reporting methodology beginning January 1, 2019.
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.
2019 Annual Report | Northern Trust Corporation 51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 2019, Northern Trust managed $1.23 trillion in assets for personal and institutional clients, including
$917.5 billion for C&IS clients and $313.8 billion for Wealth Management clients. The following table presents consolidated
assets under management as of December 31, 2019, 2018 and 2017 by investment type.
TABLE 29: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
($ In Billions)
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
Total Assets Under Management
DECEMBER 31,
2019
2018
$
650.8 $
534.2 $
193.8
223.6
163.1
178.3
207.0
149.9
2017
592.3
183.5
217.5
167.7
CHANGE
2019 / 2018
2018 / 2017
22%
(10)%
9
8
9
(3)
(5)
(11)
$
1,231.3 $
1,069.4 $
1,161.0
15%
(8)%
Assets under management increased $161.9 billion, or 15%, to $1.23 trillion at year-end 2019 from $1.07 trillion at year-end
2018. The increase primarily reflected favorable markets and net inflows. The following table presents activity in consolidated
assets under management by product during the years ended December 31, 2019, 2018 and 2017.
TABLE 30: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT
($ In Billions)
Balance as of January 1,
Inflows by Product
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
Total Inflows
Outflows by Product
Equities
Fixed Income Securities
Cash and Other Assets
Securities Lending Collateral
Total Outflows
Net Inflows (Outflows)
Market Performance, Currency and Other
Market Performance and Other
Currency
Total Market Performance, Currency and Other
Balance as of December 31,
2019
2018
$
1,069.4 $
1,161.0 $
193.6
48.1
551.6
260.5
1,053.8
(205.5)
(49.7)
(541.0)
(247.3)
174.7
63.7
484.3
165.6
888.3
(179.2)
(72.5)
(487.4)
(183.3)
2017
942.4
192.1
68.1
407.9
132.4
800.5
(185.7)
(57.2)
(384.0)
(76.7)
(1,043.5)
(922.4)
(703.6)
10.3
(34.1)
96.9
151.1
0.5
151.6
(49.3)
(8.2)
(57.5)
111.6
10.1
121.7
$
1,231.3 $
1,069.4 $
1,161.0
CONSOLIDATED BALANCE SHEET REVIEW
Total assets were $136.8 billion and $132.2 billion at December 31, 2019 and 2018, respectively, and averaged $117.6 billion
in 2019 compared with $122.9 billion in 2018. Average balances are considered to be a better measure of balance sheet trends,
as period-end balances can be impacted by the timing of deposit and withdrawal activity involving large client balances.
Interest-bearing client deposits totaled $82.8 billion and $81.8 billion at December 31, 2019 and 2018, respectively, and
averaged $72.3 billion in 2019 compared to $74.6 billion in 2018. Noninterest-bearing client deposits totaled $26.3 billion
and $22.7 billion, respectively, and averaged $17.5 billion in 2019 compared with $20.5 billion in 2018.
Total stockholders' equity was $11.1 billion and $10.5 billion at December 31, 2019 and 2018, respectively, and averaged
$10.6 billion in 2019 compared with $10.2 billion in 2018. The increase in stockholders' equity was primarily attributable to
earnings, the issuance of preferred stock, and accumulated other comprehensive income since the prior year, partially offset
by the repurchase of common stock pursuant to the Corporation's share repurchase program and dividend declarations. During
52 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership interest in a share
of Series E Non-Cumulative Perpetual Preferred Stock for proceeds of $391.4 million, net of underwriting discounts,
commissions, and other issuance costs. These proceeds were subsequently used to fund the redemption of all outstanding
shares of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock on January 2, 2020.
Asset Quality
The following information summarizes our asset quality for 2019 compared to 2018. For a discussion related to our asset
quality for 2018 compared to 2017, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations in our 2018 Form 10-K, which was filed with the United States Securities and Exchange Commission
on February 26, 2019.
Securities Portfolio
The following table presents the book values of Northern Trust’s held to maturity, available for sale, and trading investment
securities by type as of December 31, 2019, 2018 and 2017. For additional information relating to the securities portfolio,
refer to Note 4, “Securities,” provided in Item 8, "Financial Statements and Supplementary Data."
TABLE 31: SECURITIES PORTFOLIO
($ 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,
2019
2018
$
138.8
$
101.6
$
10.1
4.1
12,131.5
12,284.5
4,549.1
1,615.3
23,271.2
4,128.2
—
5,312.5
38,876.3
0.3
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
$
$
51,161.1
50,684.4
$
$
51,243.1
50,281.5
$
$
2017
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
2019 Annual Report | Northern Trust Corporation 53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the remaining maturity and average yield of Northern Trust's held to maturity and available for
sale debt securities by security type as of December 31, 2019.
TABLE 32: 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, 2019
AVERAGE
MATURITY
Debt Securities Held to Maturity
U.S. Government
Obligations of States and Political
Subdivisions
Government Sponsored Agency
Other – Fixed
– Floating
$
138.8
1.52% $
—
—% $
—
—% $
—
—%
1 mo.
8.1
0.6
3,843.7
563.1
4.71
4.81
0.99
0.94
2.0
1.7
5,771.5
1,534.5
5.47
4.81
0.80
1.33
—
1.2
62.0
254.1
—
4.81
1.92
1.04
—
0.6
102.6
—
—
4.74
1.79
—
7 mos.
64 mos.
20 mos.
43 mos.
Total Debt Securities Held to Maturity
4,554.3
1.00
7,309.7
0.92
317.3
1.22
103.2
1.81
24 mos.
Debt Securities Available for Sale
U.S. Government
1,898.4
1.53
2,098.3
1.75
552.4
1.78
Obligations of States and Political
Subdivisions
Government Sponsored Agency
Asset-Backed – Fixed
Asset-Backed – Floating
Other – Fixed
– Floating
80.1
5,005.0
882.6
49.1
549.8
417.1
1.49
2.35
2.02
2.10
2.05
2.09
85.4
9,728.8
1,589.2
569.9
3,328.8
911.3
2.73
2.34
2.54
3.06
2.49
1.95
1,449.8
5,869.4
576.2
451.9
40.8
64.7
2.60
2.29
3.23
2.94
2.02
2.16
—
—
2,668.0
—
9.3
—
—
—
30 mos.
—
2.09
—
1.11
—
—
87 mos.
59 mos.
34 mos.
120 mos.
35 mos.
25 mos.
Total Debt Securities Available for Sale
$ 8,882.1
2.10% $ 18,311.7
2.32% $ 9,005.2
2.40% $ 2,677.3
2.09%
53 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, 2019, 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.
Northern Trust maintains a high quality debt securities portfolio, with 81% of the combined available for sale, held to
maturity, and trading account portfolios at December 31, 2019 composed of U.S. Treasury and government-sponsored agency
securities and triple-Arated 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, 9% were rated double-A, 3% were
rated below double-A, and 7% were not rated by Moody’s Investors Service or Standard and Poor’s. As of December 31,
2019, securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security.
At December 31, 2019, 23% of corporate debt was rated triple-A, 32% was rated double-A, and 45% was rated below
double-A or not rated. Securities classified as “other asset-backed” at December 31, 2019 had average lives of less than 5
years, and 100% were rated triple-A.
Unrealized losses within the debt securities portfolio at December 31, 2019 were $189.5 million as compared to $357.1
million at December 31, 2018, primarily reflecting higher market rates since purchase; 26% of the corporate debt portfolio is
backed by guarantees provided by U.S. and non-U.S. governmental entities. There were $0.3 million and $0.5 million of losses
recognized in 2019 and 2018, respectively, in connection with the write-down of CRA securities determined to be OTTI.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as
collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To
minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is
monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed.
It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under
agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the repurchase.
54 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and Leases
During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the consistency
of its reporting across various regulatory regimes. As a result, the loan and lease balances for periods ended prior to January
1, 2017 below have been adjusted to conform to the presentation for periods ended after such date. The adjustments generally
reflected reclassification of loans and leases from the commercial and institutional class to the residential real estate class.
There was no impact on total loans and leases previously reported.
The following table presents the amounts outstanding of loans and leases by segment and class as of December 31, 2019 and
the preceding four year-ends.
TABLE 33: COMPOSITION OF LOAN PORTFOLIO
($ 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
2019
2018
2017
2016
2015
DECEMBER 31,
$
8,915.6 $
8,728.1 $
9,042.2 $
9,287.4 $
3,378.0
1,751.0
65.6
164.0
3,228.8
2,701.6
90.7
426.0
3,482.7
1,538.5
229.2
265.4
4,002.5
1,877.8
293.9
205.1
9,307.5
3,848.8
1,137.7
544.4
194.1
14,274.2
15,175.2
14,558.0
15,666.7
15,032.5
11,068.7
5,999.6
67.1
10,733.3
6,514.0
67.5
10,753.1
7,247.6
33.5
10,052.0
8,077.5
25.9
17,135.4
17,314.8
18,034.2
18,155.4
$
31,409.6 $
32,490.0 $
32,592.2 $
33,822.1 $
9,136.4
8,974.7
37.3
18,148.4
33,180.9
The following table presents the amounts outstanding of non-U.S. loans by type as of December 31, 2019 and the preceding
four year-ends.
TABLE 34: DISTRIBUTION OF NON-U.S. LOANS BY TYPE
(In Millions)
Commercial
Banks
Other
Total
DECEMBER 31,
2019
183.5 $
—
1,567.5
2018
117.4 $
—
2,584.2
2017
289.5 $
—
1,249.0
2016
318.0 $
26.2
1,533.6
2015
335.2
8.5
794.0
1,751.0 $
2,701.6 $
1,538.5 $
1,877.8 $
1,137.7
$
$
Note: Non-U.S. loans primarily include short duration advances related to the processing of custodied client investments.
2019 Annual Report | Northern Trust Corporation 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the remaining maturity of selected loans and leases as of December 31, 2019.
TABLE 35: REMAINING MATURITY OF SELECTED LOANS AND LEASES
(In Millions)
U.S. (Excluding Residential Real Estate and Private Client Loans):
Commercial and Institutional
Commercial Real Estate
Lease Financing, net
Other-Commercial
Other-Personal
Total U.S.
Non-U.S.
Total Selected Loans and Leases
Interest Rate Sensitivity of Loans and Leases:
Fixed Rate
Variable Rate
Total
DECEMBER 31, 2019
TOTAL
ONE YEAR
OR LESS
ONE TO FIVE
YEARS
OVER FIVE
YEARS
$
8,915.6 $
2,096.7 $
5,757.9 $
1,061.0
3,378.0
65.6
164.0
67.1
12,590.3
1,751.0
540.2
—
164.0
67.1
2,868.0
1,531.0
2,171.7
23.0
—
—
666.1
42.6
—
—
7,952.6
1,769.7
169.8
50.2
14,341.3 $
4,399.0 $
8,122.4 $
1,819.9
7,127.0 $
2,235.6 $
3,757.7 $
7,214.3
2,163.4
4,364.7
1,133.7
686.2
14,341.3 $
4,399.0 $
8,122.4 $
1,819.9
$
$
$
Residential Real Estate
The residential real estate loan portfolio is primarily composed of mortgages and home equity credit lines provided as an
accommodation to clients. Residential real estate loans totaled $6.0 billion at December 31, 2019, or 20% of total U.S. loans
and leases, compared with $6.5 billion, or 22% of total U.S. loans and leases, at December 31, 2018. 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 adjustable rate mortgage 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 $6.0 billion in residential real estate loans at December 31, 2019, $1.6 billion were in Florida, $1.2 billion
were in California, and $1.0 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 undrawn commitments to extend
residential real estate credit, which are primarily equity credit lines, totaled $714.2 million and $824.0 million at December 31,
.
2019 and 2018, respectively
Commercial Real Estate
In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower’s
principal business activity is the acquisition or the development of real estate for commercial purposes; (2) the principal
collateral is real estate held for commercial purposes, and loan repayment is expected to flow from the operation of the property;
or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of the
business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without
regard to the use of loan proceeds. The commercial real estate portfolio consists of commercial mortgages and construction,
acquisition and development loans extended primarily to experienced investors well known to Northern Trust. Underwriting
standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to owners
through guarantees also is commonly required.
Commercial mortgage financing is provided for the acquisition or refinancing of income-producing properties. Cash
flows from the properties generally are sufficient to amortize the loan. These loans are primarily located in the California,
Illinois, Florida, Texas, and Arizona markets. Construction, acquisition and development loans provide financing for
commercial real estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or
refinance the loan through a commercial mortgage with Northern Trust or another financial institution upon completion.
56 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides additional detail regarding commercial real estate loan types:
TABLE 36: COMMERCIAL REAL ESTATE LOANS
($ 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,
2019
2018
$
754.3 $
646.5
573.3
278.0
420.1
811.2
490.7
529.7
254.9
426.6
2,672.2
2,513.1
432.1
95.5
178.2
420.6
127.0
168.1
$
3,378.0 $
3,228.8
At December 31, 2019, legally binding commitments to extend credit and standby letters of credit to commercial real estate
borrowers totaled $301.6 million and $9.2 million, respectively. 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 $8.5 million, respectively.
Nonperforming Assets and 90 Days Past Due Loans
During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the consistency
of its reporting across various regulatory regimes. As a result, the loan and lease balances for periods ended prior to January
1, 2017 below have been adjusted to conform to the presentation for periods ended after such date. The adjustments generally
reflected reclassification of loans and leases from the commercial and institutional class to the residential real estate class.
There was no impact on total loans and leases previously reported.
Nonperforming assets consist of nonperforming loans and leases and other real estate owned (OREO). OREO is comprised
of commercial and residential properties acquired in partial or total satisfaction of loans. Loans that are delinquent 90 days
or more and still accruing interest can fluctuate widely at any reporting period based on the timing of cash collections,
renegotiations and renewals. The following table presents nonperforming assets and loans that were delinquent 90 days or
more and still accruing at December 31, 2019 and each of the prior four year-ends.
TABLE 37: NONPERFORMING ASSETS
($ 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
DECEMBER 31,
2019
2018
2017
2016
2015
$
$
$
7.6
3.6
0.5
11.7
71.4
0.5
71.9
83.6
3.2
86.8
7.4
$
6.8 $
26.0 $
9.2 $
6.9
0.4
14.1
95.0
0.2
95.2
109.3
8.4
8.3
—
34.3
116.4
—
116.4
150.7
4.6
11.6
—
20.8
139.1
0.3
139.4
160.2
5.2
18.1
16.7
—
34.8
144.9
0.4
145.3
180.1
8.2
$
$
117.7 $
155.3 $
165.4 $
188.3
16.4 $
8.0 $
31.0 $
7.1
Nonperforming Loans and Leases to Total Loans and Leases
0.27%
0.34%
0.46%
0.47%
0.54%
Allowance for Credit Losses Assigned to Loans and Leases to
Nonperforming Loans and Leases
1.3x
1.0x
0.9x
1.0x
1.1x
2019 Annual Report | Northern Trust Corporation 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming assets of $86.8 million as of December 31, 2019 decreased $30.9 million, or 26% from $117.7 million at
December 31, 2018, reflecting decreases in the residential real estate portfolio driven by payoffs and payments, partially offset
by new nonperforming assets. Changes in the level of nonperforming assets may be indicative of changes in the credit quality
of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment
of the specific allowance and the quantitative and qualitative factors used in the determination of the inherent allowance levels
within the allowance for credit losses.
58 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance and Provision for Credit Losses
During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the consistency
of its reporting across various regulatory regimes. The allowance for credit losses as of and prior to December 31, 2016 remains
unadjusted, as the impact of the reclassification on the allowance was immaterial.
TABLE 38: ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
($ 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 (Recoveries)
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
2019
2018
2017
2016
2015
$
138.2
$
153.8 $
192.0 $
233.3 $
295.9
2.9
0.1
3.0
3.2
0.3
3.5
6.5
0.3
0.6
0.9
5.7
0.6
6.3
7.2
(0.7)
(14.5)
—
(13.8)
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)
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)
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)
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)
124.4
$
138.2 $
153.8 $
192.0 $
233.3
104.5
$
112.6 $
131.2 $
161.0 $
25.6
22.6
31.0
193.8
39.5
$
$
$
138.2 $
153.8 $
192.0 $
233.3
32,490.0 $
32,592.2 $
33,822.1 $
33,180.9
32,028.6 $
33,565.2 $
34,043.5 $
33,016.1
— %
(0.05)
0.33
— %
0.34
—%
(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
2019 Annual Report | Northern Trust Corporation 59
$
$
$
19.9
124.4
$ 31,409.6
$ 31,052.8
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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).
The SEC requires the disclosure of the allowance for credit losses that is applicable to international operations. The
disclosure has been prepared in compliance with this disclosure requirement and is used in determining non-U.S. operating
performance. The amounts disclosed 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. There was no
allowance for credit losses relating to non-U.S. operations for years 2016 through 2019. For 2015, there was a $3.3 million
allowance for credit losses at the beginning of the year, a credit provision of $3.3 million during the year, and no allowance
for credit losses as of December 31, 2015.
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, 2019, and at each of the prior four year-ends.
TABLE 39: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
2019
2018
DECEMBER 31,
2017
2016
2015
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
PERCENT
OF
LOANS
TO
TOTAL
LOANS
PERCENT
OF
LOANS
TO
TOTAL
LOANS
PERCENT
OF
LOANS
TO
TOTAL
LOANS
PERCENT
OF
LOANS
TO
TOTAL
LOANS
ALLOWANCE
AMOUNT
ALLOWANCE
AMOUNT
ALLOWANCE
AMOUNT
ALLOWANCE
AMOUNT
$
6.9
—% $
10.0
—% $
5.4
—% $
2.1
—% $
3.1
—%
($ 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:
$
$
35.3
33.0
0.1
—
0.2
68.6
27.0
20.5
1.4
48.9
28
11
—
6
1
46
19
35
—
54
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
117.5
100% $
128.2
100% $
148.4
100% $
189.9
100% $
230.2
100%
124.4
100% $
138.2
100% $
153.8
100% $
192.0
100% $
233.3
100%
Loans and Leases
$
104.5
$
112.6
$
131.2
$
161.0
$
193.8
Undrawn
Commitments and
Standby Letters of
Credit
Total Allowance for
Credit Losses
Allowance Assigned to
Loans and Leases to
Total Loans and Leases
19.9
25.6
22.6
31.0
39.5
$
124.4
$
138.2
$
153.8
$
192.0
$
233.3
0.33%
0.35%
0.40%
0.48%
0.58%
60 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Specific Component of the Allowance: The amount of specific allowance is determined through an individual evaluation
of loans and lending-related commitments considered impaired taking into consideration expected future cash flows, collateral
value, and other factors that may impact the borrower’s ability to pay.
The specific allowance component decreased $3.1 million from $10.0 million at December 31, 2018 to $6.9 million at
December 31, 2019, primarily attributable to standby letters of credit and outstanding loans in the commercial and institutional
portfolio and outstanding loans in the residential real estate portfolios.
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 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 $10.7 million to $117.5 million at December 31, 2019, compared with
$128.2 million at December 31, 2018, primarily due to a reduction in outstanding loans and improved credit quality within
the residential real estate portfolio, partially offset by an increase in the inherent reserve related to the private client portfolio
due to an increase in outstanding loans and lower credit quality.
Overall Allowance: The evaluation of the specific component and the inherent component above resulted in a total
allowance for credit losses of $124.4 million at December 31, 2019, compared with $138.2 million at the end of 2018. The
allowance of $104.5 million assigned to loans and leases, as a percentage of total loans and leases, was 0.33% at December 31,
2019, which decreased from a $112.6 million allowance assigned to loans and leases, representing 0.35% of total loans and
leases at December 31, 2018. Allowances assigned to undrawn loan commitments and standby letters of credit totaled $19.9
million and $25.6 million at December 31, 2019 and 2018, respectively, and are included in Other Liabilities in the consolidated
balance sheets.
Provision: The provision for credit losses was a credit provision of $14.5 million and net recoveries totaled $0.7 million
in 2019. This compares with a credit provision of $14.5 million and net charge-offs of $1.1 million in 2018.
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, 2019, impaired
loans totaled $92.2 million and included $82.6 million of loans deemed troubled debt restructurings as compared to total
impaired loans of $116.2 million at December 31, 2018, which included $99.8 million of loans deemed troubled debt
restructurings. Impaired loans had $5.0 million and $7.2 million of the allowance for credit losses allocated to them at
December 31, 2019, and 2018, 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, 2019) homogeneous loans are collectively evaluated for impairment
and excluded from impaired loan disclosures as allowed under applicable accounting standards.
Capital Expenditures
Capital expenditures in 2019 included continued investments to enhance Northern Trust’s software and hardware capabilities,
the opening of new offices, and the expansion and renovation of several existing offices. Capital expenditures for 2019 totaled
$599.8 million, of which $441.8 million was for software, $73.7 million was for computer hardware, $77.7 million was for
building and leasehold improvements, and $6.6 million was for furnishings. These capital expenditures principally support,
enhance, and protect Northern Trust’s investment management, asset servicing and asset management systems and capabilities,
and deliver innovative solutions 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 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.
2019 Annual Report | Northern Trust Corporation 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
D
T
eposits
he following tables present deposit information as of December 31, 2019, 2018 and 2017.
T
ABLE 40: 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 41: 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 42: REMAINING MATURITY OF TIME DEPOSITS $100,000 OR MORE
DECEMBER 31,
2019
2018
2017
$
11,890.4 $
14,303.4 $
16,412.0
29.9
58.2
60.3
11,920.3
14,361.6
16,472.3
16,577.8
15,149.3
15,575.6
96.5
445.1
325.9
109.3
434.2
327.1
130.1
717.3
426.0
17,445.3
16,019.9
16,849.0
29,365.6
30,381.5
33,321.3
5,535.2
54,885.2
6,165.0
58,556.6
6,600.3
56,583.2
60,420.4
64,721.6
63,183.5
$
89,786.0 $
95,103.1 $
96,504.8
DECEMBER 31,
2019
2018
2017
$
66,265.7 $
69,899.2 $
70,987.1
6,081.8
126.7
—
103.5
4,612.7
161.9
—
14.3
4,246.0
305.5
6.3
6.1
$
72,577.7 $
74,688.1 $
75,551.0
DECEMBER 31, 2019
U.S. OFFICE
NON-U.S. OFFICES
CERTIFICATES OF
DEPOSIT
OTHER TIME
TOTAL
$
$
320.6 $
1,008.1 $
132.9
220.1
212.9
10.8
—
—
886.5 $
1,018.9 $
1,328.7
143.7
220.1
212.9
1,905.4
(In Millions)
3 Months or Less
Over 3 Months through 6 Months
Over 6 Months through 12 Months
Over 12 Months
Total
62 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 43: 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,
2019
2018
2017
0.97%
0.54%
0.16%
0.87
1.55
2.59
1.01
0.57
0.68
0.17
0.76
1.80
0.56
0.50
0.52
0.15
0.46
1.38
0.20
0.26
0.25
Short-Term Borrowings
The following tables present short-term borrowing information as of December 31, 2019, 2018 and 2017. For additional
information relating to short-term borrowings, refer to Note 5, “Securities Purchased Under Agreements to Resell and Securities
Sold Under Agreements to Repurchase,” provided in Item 8, "Financial Statements and Supplementary Data."
TABLE 44: 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,
2019
2018
2017
$
552.9
$
2,594.2 $
1,979.5
1,267.4
2.05%
0.77%
4,395.8
2,762.8
1.82%
2.25%
DECEMBER 31,
2019
2018
$
489.7
$
168.3 $
489.7
339.0
1.89%
1.43%
981.3
525.2
1.48%
2.32%
2,286.1
2,286.1
1,102.6
0.95%
1.17%
2017
834.0
834.0
738.9
0.81%
1.29%
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,
2019
2018
2017
$
6,744.8
$
7,901.7 $
7,879.1
7,752.5
2.34%
1.68%
7,901.7
7,495.5
2.00%
2.38%
6,051.1
7,040.4
4,854.5
1.04%
1.38%
2019 Annual Report | Northern Trust Corporation 63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total Purchased Funds
(In Millions)
Balance on December 31
Year – Average Balance
– Average Rate
DECEMBER 31,
2019
2018
2017
$
7,787.4
$
10,664.2 $
9,358.9
10,783.5
9,171.2
6,696.0
2.29%
1.93%
1.00%
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 assets. Non-U.S. source 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 assets between U.S. and non-U.S.-domiciled customers. Therefore, certain subjective estimates
and assumptions have been made to allocate assets between U.S. and non-U.S. operations.
The following tables present selected average assets and liabilities attributable to non-U.S. operations (based on the
obligor's domicile) and the percent of those balances to total consolidated average assets. See also Note 33, “Reporting
Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”
TABLE 45: 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
2019
2018
2017
2016
$
27,240.7 $
30,781.3 $
26,510.1 $
24,031.0 $
3,896.5
1,721.1
15,420.6
62,110.3
60,419.7
3,943.2
2,054.6
19,016.1
66,008.5
64,721.6
5,013.4
2,014.8
14,047.8
64,267.3
63,183.5
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
TABLE 46: PERCENT OF NON-U.S.-RELATED AVERAGE ASSETS AND LIABILITIES TO TOTAL CONSOLIDATED AVERAGE ASSETS
Assets
Liabilities
2019
23%
53%
2018
25%
54%
2017
22%
54%
2016
21%
50%
2015
27%
49%
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.
64 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides information on non-U.S. outstandings by country that exceed 1.00% of Northern Trust’s assets.
TABLE 47: NON-U.S. OUTSTANDINGS
(In Millions)
AT DECEMBER 31, 2019
Japan
Canada
Germany
AT DECEMBER 31, 2018
Japan
Canada
France
AT DECEMBER 31, 2017
Japan
Canada
BANKS
COMMERCIAL
AND OTHER
TOTAL
$
1,300 $
2,334 $
1,079
429
337
1,120
$
$
391 $
4,858 $
1,328
1,470
359
468 $
510 $
3,375 $
1,437
196
3,634
1,416
1,549
5,249
1,687
1,938
3,885
1,633
Note: Countries whose aggregate outstandings totaled between 0.75% and 1.00% of total assets were as follows: France with aggregate outstandings of $1.2 billion at December
31, 2019; 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.
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, 2019, the Bank had over $38.0 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. 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 69% of total assets as of December 31, 2019. The market
value of unencumbered securities at the Bank, which include those placed at the Federal Reserve discount window, totaled
$46.7 billion at December 31, 2019. The Corporation and the Bank each satisfied the U.S. liquidity coverage ratio requirements
during 2019.
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 May 3, 2019, the Corporation issued $500 million of 3.15% senior notes, due May 3, 2029. The
Corporation also received $2.0 billion of dividends from the Bank in 2019. Dividends from the Bank are subject to certain
restrictions, as discussed in further detail in Note 32, “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 2019 were $1.1 billion of common stock repurchases and $529.7
million of common stock dividends.
The Corporation’s liquidity, defined as the amount of cash and highly marketable assets, was $2.6 billion and $866.8
million at December 31, 2019 and 2018, respectively. During, and at year-end, 2019 and 2018, 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 2019 and 2018 was $1.96 billion and $887.0 million, respectively. The cash flows of the Corporation are
shown in Note 35, “Northern Trust Corporation (Corporation only),” to the consolidated financial statements provided in
Item 8, “Financial Statements and Supplementary Data.”
2019 Annual Report | Northern Trust Corporation 65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A significant source of liquidity for both the Corporation and the Bank is the ability to draw funding from capital markets
globally. The credit ratings of the Corporation and the Bank as of December 31, 2019, provided below, allow Northern Trust
to access capital markets on favorable terms.
TABLE 48: NORTHERN TRUST CREDIT RATINGS AS OF DECEMBER 31, 2019
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 FITCH RATINGS
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 28, “Offsetting of
Assets and Liabilities,” 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. At December 31, 2019, the net maximum amount of these termination payments that Northern Trust could have been
required to pay was $439.1 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, 2019, that would be triggered
by a significant downgrade in its debt ratings.
Statements of Cash Flows
For the year ended December 31, 2019, net cash provided by operating activities was $2.6 billion, primarily reflecting period
earnings and lower net collateral deposited with derivative counterparties.
Net cash provided by operating activities for the year ended December 31, 2018, 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 used in investing activities was $3.4 billion for the year ended December 31, 2019, primarily reflecting higher
levels of deposits with the Federal Reserve and other central banks, net purchases of debt securities available for sale, and the
purchase of bank-owned life insurance policies in 2019, partially offset by the net proceeds from the maturity and redemption
of debt securities held to maturity and lower levels of loans and leases.
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.
For the year ended December 31, 2019, net cash provided by financing activities totaled $0.6 billion, primarily reflecting
higher levels of total deposits, proceeds from the issuance by the Corporation of 3.15% senior notes, and proceeds from the
Series E Non-Cumulative Perpetual Preferred Stock issuance, partially offset by lower federal funds purchased, lower short-
term other borrowings, and the repurchase of common stock pursuant to the Corporation’s share repurchase program. The
increase in total deposits was primarily attributable to higher levels of domestic interest-bearing client deposits and non-U.S.
office noninterest-bearing deposits, partially offset by lower levels of non-U.S. interest-bearing deposits.
For the year ended December 31, 2018, net cash used in financing activities totaled $5.8 billion, primarily reflecting
decreased levels of total deposits, the repurchase of common stock pursuant to the Corporation’s share repurchase program,
66 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
lower securities sold under agreements to repurchase, dividends paid on common and preferred stock, and repayments of the
6.50% subordinated notes previously issued by the Bank and due August 2018, partially offset by higher short-term other
borrowings and the proceeds from the issuance by the Corporation of 3.65% senior notes. The decrease in total deposits was
primarily attributable to lower levels of non-interest bearing domestic and non-U.S. office client deposits and lower domestic
interest-bearing client deposits.
Regulatory Environment
Northern Trust actively follows regulatory developments and regularly evaluates its liquidity risk management framework
against proposed rulemaking and industry best practices in order to comply with applicable regulations and further enhance
its liquidity policies. Please refer to “Liquidity Standards” under “Supervision and Regulation” in Item 1, “Business,” of this
Annual Report on Form 10-K for a discussion of applicable liquidity standards.
Contractual Obligations
The following table shows Northern Trust’s contractual obligations as of December 31, 2019.
TABLE 49: CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2019
($ 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
ONE YEAR
AND LESS
1-3
YEARS
3-5 YEARS
$
2,573.0 $
499.9 $
998.8 $
— $
1,148.1
277.7
695.7
720.1
—
—
101.3
287.7
—
—
164.3
349.7
—
—
130.1
80.3
OVER 5
YEARS
1,074.3
1,148.1
277.7
300.0
2.4
$
5,414.6 $
888.9 $
1,512.8 $
210.4 $
2,802.5
Note: Obligations as shown do not include deposit liabilities or interest requirements on funding sources.
(1) Refer to Note 13, “Senior Notes and Long-Term Debt,” and Note 14, “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 of enforceable and legally binding agreements to purchase products or services at specified significant terms.
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 2019 as average stockholders’ equity increased $419.5 million, or 4%, reaching $10.6
billion. Total stockholders’ equity was $11.1 billion at December 31, 2019, as compared to $10.5 billion at December 31,
2018. During 2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership
interest in a share of Series E Non-Cumulative Perpetual Preferred Stock for proceeds of $391.4 million, net of underwriting
discounts, commissions, and other issuance costs. These proceeds were subsequently used to fund the redemption of all
outstanding shares of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock on January 2, 2020. In July 2019,
the Board increased the quarterly common stock dividend by 17% to $0.70 per common share. Common dividends totaling
$565.9 million were declared in 2019. During the year ended December 31, 2019, the Corporation repurchased 11.8 million
shares of common stock, including 0.6 million shares withheld related to share-based compensation, at an average price per
share of $93.40. Preferred dividends totaling $46.4 million were declared in 2019.
2019 Annual Report | Northern Trust Corporation 67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced
approaches. For each ratio, the lower of the result calculated under the standardized approach and the advanced approach
serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of the
Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios, under the applicable
U.S. regulatory rules as of December 31, 2019 and 2018.
TABLE 50: CAPITAL ADEQUACY
($ 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
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
(1)
Risk-Weighted Assets
Total Assets – End of Period (EOP)
Adjusted Average Fourth Quarter Assets
(2)
Total Loans and Leases – EOP
Common Stockholders’ Equity to:
Total Loans and Leases – EOP
Total Assets – EOP
Risk-Based Capital Ratios
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital (Tier 1 and Tier 2)
Tier 1 Leverage
Supplementary Leverage
(3)
DECEMBER 31, 2019
DECEMBER 31, 2018
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
$
9,817.5
$
9,817.5
$
9,626.3
$
9,626.3
—
—
(776.1)
—
(142.7)
—
—
(776.1)
—
(142.7)
—
—
(767.6)
—
(128.9)
—
—
(767.6)
—
(128.9)
8,898.7
8,898.7
8,729.8
8,729.8
1,273.4
(20.1)
1,253.3
1,273.4
(20.1)
1,253.3
882.0
(15.1)
866.9
882.0
(15.1)
866.9
10,152.0
10,152.0
9,596.7
9,596.7
124.4
1,099.5
80.8
1,304.7
—
1,099.5
80.8
1,180.3
138.2
1,099.4
107.7
1,345.3
$
$
11,456.7
70,088.3
$
$
11,332.3
67,526.9
$
$
10,942.0
67,837.1
$
$
136,828.4
117,165.7
31,409.6
136,828.4
117,165.7
31,409.6
132,212.5
120,402.6
32,490.0
31.26%
7.18
31.26%
7.18
12.7%
13.2%
14.5
16.3
8.7
N/A
15.0
16.8
8.7
7.6
29.63%
7.28
12.9%
14.1
16.1
8.0
N/A
—
1,099.4
107.7
1,207.1
10,803.8
63,914.8
132,212.5
120,402.6
32,490.0
29.63%
7.28
13.7%
15.0
16.9
8.0
7.0
(1) Risk-weighted assets exclude, as applicable under each regulatory approach, amounts primarily related to goodwill, certain other intangible assets, and net unrealized gains
or losses on securities and reflect adjustments for excess allowances for credit losses that have been excluded from Tier 1 and Tier 2 capital, if any.
(2) Adjusted average fourth quarter assets exclude amounts primarily related to goodwill, other intangible assets, and net unrealized gains or losses on securities.
(3) Effective January 1, 2018, the Corporation and Bank are subject to a minimum supplementary leverage ratio of 3 percent.
As of December 31, 2019 and 2018, 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 34, “Regulatory Capital Requirements,” to the consolidated financial
statements provided in Item 8, “Financial Statements and Supplementary Data.”
68 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of December 31, 2019, the Corporation’s common equity Tier 1 capital ratio as calculated under the advanced
approaches methodologies would have been 13.2% on a fully phased-in basis, while the Corporation’s common equity Tier 1
capital ratio under the standardized approach would have been 12.7% on a fully phased-in basis.
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, 2019 and 2018.
TABLE 51: 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 and Financial Guarantees
Commercial Letters of Credit
Custody Securities Lent with Indemnification
DECEMBER 31,
2019
2018
$
$
$
7,500.2 $
16,906.0
7,629.9
17,393.1
24,406.2 $
25,023.0
2,416.7 $
32.3
2,486.2
32.3
138,085.9
128,904.8
2019 Annual Report | Northern Trust Corporation 69
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, 2019.
TABLE 52: UNDRAWN COMMITMENTS TO EXTEND CREDIT BY INDUSTRY SECTOR
AS OF DECEMBER 31, 2019
($ 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(1)
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
$
3,664.3 $
1,786.8 $
1,877.5 $
—
6,659.7
747.5
58.2
749.7
5,817.1
285.1
1,259.5
710.8
200.7
20,152.6
301.6
—
1,144.3
87.5
—
780.1
224.6
4.3
192.0
2,352.1
—
—
71.2
131.2
5,542.3
102.5
—
587.8
87.5
—
5,879.6
522.9
53.9
557.7
3,465.0
285.1
1,259.5
639.6
69.5
14,610.3
199.1
—
556.5
—
2,412.2
30.7
1,479.1
15.1
53.6
145.7
3,807.0
247.8
10.6
390.7
323.1
8,915.6
3,378.0
65.6
1,751.0
164.0
21,686.0
6,320.1
15,365.9
14,274.2
714.2
1,970.2
35.8
2,720.2
119.4
1,024.9
35.8
1,180.1
594.8
945.3
—
1,540.1
5,999.6
11,068.7
67.1
17,135.4
$
24,406.2 $
7,500.2 $
16,906.0 $
31,409.6
(1) 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
and financial guarantees of $2.4 billion and $2.5 billion at December 31, 2019 and 2018, respectively, include $44.5 million
and $72.3 million, respectively, of standby letters of credit secured by cash deposits or participated to others.
Financial guarantees are issued by Northern Trust to guarantee the performance of a client to a third party under certain
arrangements.
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.
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
70 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $138.1 billion and
$128.9 billion at December 31, 2019 and 2018, 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 at December 31, 2019, or 2018 related to these indemnifications.
Additional information about Northern Trust’s off-balance-sheet financial instruments is included in Note 29, “Off-
Balance-Sheet Financial Instruments, Guarantees and Other Commitments” 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.
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.
2019 Annual Report | Northern Trust Corporation 71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF 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 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 taking into consideration 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 from a historical observation period that includes both expansionary and
recessionary periods. The estimation methodology and the related qualitative adjustment framework segregate the loan and
lease portfolio into segments based on loan type, loan size, and borrower rating. For each segment, the probability of default
over a loss emergence period and a loss given default are derived from the historical data and 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 2019 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pension Plan Accounting
Northern Trust maintains a noncontributory defined benefit pension plan covering substantially all U.S. employees (U.S.
Qualified Plan) and a U.S. noncontributory supplemental pension plan (U.S. Non-qualified 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.
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. pension plans in 2019, Northern Trust utilized a discount rate of 4.47%
for both the U.S. Qualified Plan and the U.S. Non-qualified 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 U.S. Qualified Plan
assets was 6.00%.
In evaluating possible revisions to pension-related assumptions for the U.S. pension plans as of Northern Trust’s
December 31, 2019 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 3.37% at
December 31, 2019 for the U.S. Qualified and Non-qualified
plans, a decrease from 4.47% at December 31,
2018.
• Compensation Level: Based on a review of actual and anticipated salary experience, the compensation scale assumption
is based on a graded schedule from 9.00% to 2.50% that
averages 4.97%.
• 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 U.S. Qualified Plan decreased from 6.00%
for 2019 to 5.25% for 2020.
• Mortality Table: As of December 31, 2019, Northern Trust has adopted the aggregate Pri-2012 mortality table with a
2012 base year, which was released by the Society of Actuaries in October 2019. Northern Trust’s pension obligations
reflect proposed future improvement under scale MP-2019, which was also released by the Society of Actuaries in October
2019. This assumption was updated at December 31, 2019 from improvement scale MP-2018. The updated improvement
scale applies to annuity payments only and results in generally lower projected mortality improvements than estimated
by the MP-2018 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 2020.
Net pension expense in 2020 is expected to increase by approximately $30.6 million, primarily driven by the decrease in
discount rate and expected rate of return.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In order to illustrate the sensitivity of these assumptions on the expected U.S pension plans’ periodic pension expense in 2020
and the projected benefit obligation as of December 31, 2019, the following table is presented to show the effect of increasing
or decreasing each of these assumptions by 25 basis points.
TABLE 53: SENSITIVITY OF U.S. PENSION PLANS ASSUMPTIONS
($ In Millions)
Increase (Decrease) in 2020 Pension Expense
Discount Rate Change
Compensation Level Change
Rate of Return on Plan Assets Change
Increase (Decrease) in 2019 Projected Benefit Obligation
Discount Rate Change
Compensation Level Change
25 BASIS
POINT INCREASE POINT DECREASE
25 BASIS
$
(4.2) $
2.0
(3.7)
(51.8)
8.9
4.4
(2.0)
3.7
54.8
(8.6)
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 U.S. Qualified Plan for the 2019 plan year. Northern Trust contributed $50.0 million to
the U.S. Qualified Plan at the beginning of 2018, retrospectively for the 2017 plan year. The minimum required contribution
to the U.S. Qualified Plan is expected to be zero in 2020. The maximum deductible contribution is estimated at $275 million
for 2020.
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, 2019, approximately 29% of Northern Trust’s total assets and approximately 1% of its total liabilities
were carried on the consolidated balance sheets at fair value. As discussed more fully in Note 3, “Fair Value Measurements,”
to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data,” GAAP requires
entities to categorize financial assets and liabilities carried at fair value according to a three-level valuation hierarchy. The
hierarchy gives the highest priority to quoted, active market prices for identical assets and 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 11% 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 89% of Northern Trust’s assets and 99% of its liabilities carried at fair value are categorized as Level 2,
as they are valued using models in which all significant inputs are observable in active markets. Investment debt securities
classified as available for sale make up 97% of Level 2 assets with the remaining 3% primarily consisting of derivative financial
instruments. Level 2 liabilities are comprised solely of derivative financial instruments.
Northern Trust’s Level 2 assets include available for sale and trading account securities, the fair values of which are
determined predominantly by external pricing vendors. Northern Trust has a well-established process to validate prices received
from pricing vendors as discussed more fully in Note 3, “Fair Value Measurements,” to the consolidated financial statements
provided in Item 8, “Financial Statements and Supplementary Data.”
As of December 31, 2019, 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 97%, measured on a notional value basis,
related to client-related and trading activities, predominantly consisting of foreign exchange contracts. Derivative instruments
are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted
markets and reflect contractual terms of contracts. Northern Trust evaluated the impact of counterparty credit risk and its own
credit risk on the valuation of derivative instruments. Factors considered included the likelihood of default by Northern Trust
and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting
agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative
instruments. The resulting valuation adjustments are not considered material.
As of December 31, 2019, 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 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
74 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 26, “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
On January 1, 2020, Northern Trust adopted 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.
In conjunction with the adoption of ASU 2016-13, Northern Trust expects an increase in the allowance for credit losses
of less than $20 million. This change in accounting principle will be applied prospectively by increasing the allowance for
credit losses on January 1, 2020, with a corresponding cumulative effect adjustment to decrease retained earnings, net of
income taxes. Periods prior to the adoption date will not be adjusted. Northern Trust also expects that the Corporation and the
Bank's capital ratios will not be materially impacted by the adoption of this standard.
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 have a significant
impact on Northern Trust’s consolidated financial condition or results of operations.
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. 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
across the organization, contains three roles, each a complementary 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 54: 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 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 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 CRO and the Risk Management executive leadership team of Northern Trust, together with the Chief Financial Officer,
Head of Capital and Resolution Planning, General Counsel and Chief Audit Executive, meet as the Global Enterprise Risk
Committee (GERC) to provide executive management oversight and guidance with respect to the management of the categories
of risk and risk themes within Northern Trust. Among other risk management responsibilities, GERC receives reports,
escalations, 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Operational Risk Committee (ORC) provides independent oversight and is responsible for setting the operational
risk-related policies and developing the operational risk management framework and programs that support 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 aggregate level and types of risk the Board of Directors and senior management
are willing to assume to achieve the Corporation’s strategic objectives and business plan, consistent with prudent management
of risk and applicable capital, liquidity, and other regulatory requirements. It includes consideration of the likelihood and
impact of risks, using both monetary loss and non-financial measures across risk themes to monitor against tolerance thresholds
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 has oversight responsibility with respect to 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 and is a non-voting member of GERC.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 29, “Off-Balance-Sheet Financial
Instruments, Guarantees and Other Commitments” 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 where applicable for counterparties with master netting agreements.
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.
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 influence 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,
manage and report on 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 and to assess the adequacy of associated internal
controls.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• 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 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 Risk 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Chief Information
Risk 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.
Northern Trust has also begun exploring the integration of climate-related scenario analyses into its broader risk
management program to help align with certain recommendations of the Task Force on Climate Related Financial Disclosures
(TCFD). Conducting such climate-related scenario analyses and assessing the magnitude of climate-related financial risks
and opportunities related to Northern Trust's global assets are intended to position the organization to navigate uncertain
climate futures more effectively.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
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 stress 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.
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.
The Liquidity Management Policy and 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. Treasury, in the first line of defense, proposes liquidity risk management strategies and
is responsible for performing liquidity management activities. The Asset and Liability Management Committee (ALCO)
provides first line management oversight and is responsible for approving strategies and activities within the risk appetite,
monitoring risk metrics, overseeing balance sheet resources, and reviewing reporting such as cash flows, LCR, and stress test
results.
Market and Liquidity Risk Management, in the second line of defense, provides challenge to the first line activities,
evaluates compliance with regulatory requirements and process effectiveness, and escalates material items for corrective
action. The MLRC provides second line oversight and is responsible for reviewing market and liquidity risk exposures,
approving 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
The Asset and Liability Management Policy, Policy on Dealer Trading Activities, and exposure limits for market risk are
set by board-level committees, 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.
Treasury, in the first line of defense, proposes market risk management strategies and is responsible for performing market
risk management activities. ALCO provides first line management oversight and is responsible for approving strategies and
activities within the risk appetite, monitoring risk metrics, overseeing balance sheet resources, and reviewing reporting such
as stress test results.
Market and Liquidity Risk Management, in the second line of defense, provides challenge to the first line activities,
evaluates compliance with regulatory requirements and process effectiveness, and escalates material items for corrective
action. 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 in the banking book is the potential for deterioration in Northern Trust's financial position (e.g. interest
income, market value of equity, or capital) due to changes in interest rates. NII and MVE sensitivity are the primary metrics
used for measurement and management of interest rate risk. 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 sufficiently correlated, which allows Northern Trust to manage its interest rate risk within its risk appetite.
There are four commonly recognized types of interest rate risk in the banking book:
•
•
•
repricing, which arises from differences in the maturity and repricing terms of assets and liabilities;
yield curve, which arises from changes in the shape of the yield curve;
basis, which arises from imperfect correlation in the adjustment of the rates earned and paid on different financial
instruments with otherwise similar repricing characteristics; and
embedded optionality, which arises from client or counterparty behavior in response to interest rate changes.
•
Interest Rate Risk 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 based on the period-end balance sheet.
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;
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;
placing and taking Eurodollar time deposits; and
hedging with various types of derivative financial instruments.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
•
•
•
•
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 55: NET INTEREST INCOME SENSITIVITY AS OF DECEMBER 31, 2019
($ 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
$
70
85
(77)
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.
MVE Sensitivity
MVE is defined as the present value of assets minus the present value of liabilities, net of the value of financial derivatives
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:
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
•
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;
the present values of most noninterest-related balances (such as receivables, equipment, and payables) are the same as
their book values; and
• Monte Carlo simulation is used to generate forward interest rate paths.
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 56: MARKET VALUE OF EQUITY SENSITIVITY AS OF DECEMBER 31, 2019
($ 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
$
(203)
(773)
45
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.
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 global foreign exchange (GFX) 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.
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. The GFX trading portfolio at Northern
Trust is composed of spot, forward, and non-deliverable foreign currency transactions. For GFX, spot risk is driven primarily
by foreign exchange rate (FX) risk, and forward risk is driven primarily by interest rate (IR) risk.
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 GFX VaR measures to meet specific regulatory and internal management
needs. Variations include different methodologies (historical simulation, Monte Carlo simulation and Taylor approximation),
horizons of one day and ten days, confidence levels of 95% and 99%, subcomponent VaRs using only FX drivers and only
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IR drivers, and look back periods of one year, two years, 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 GFX 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 GFX is typically less than the sum of its two subcomponents due to diversification benefits derived from the
two subcomponents.
TABLE 57: GLOBAL FOREIGN CURRENCY VALUE-AT-RISK
($ In Millions)
FOR THE YEAR ENDED DECEMBER 31,
High
Low
Average
As of December 31,
TOTAL VaR
(FX AND IR DRIVERS)
$
2019
0.3 $
—
0.1
0.1
FX VaR (FX DRIVERS ONLY)
IR VaR (IR DRIVERS ONLY)
2018
0.3 $
0.1
0.1
0.1
2019
0.3 $
—
0.1
0.1
2018
0.2 $
—
0.1
0.1
2019
0.2 $
—
0.1
0.1
2018
0.3
—
0.1
0.1
During 2019, Northern Trust experienced one day of actual GFX trading loss in excess of the daily GFX VaR estimate. During
2018, Northern Trust did not incur an actual GFX trading loss in excess of the daily GFX VaR estimate.
Other Nonmaterial Trading Activities
Market risk associated with other trading activities is negligible. Northern Trust’s broker-dealer subsidiary, 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, 2019.
Northern Trust is also party to interest rate derivative contracts consisting mostly of interest rate swaps and swaptions
entered into to meet clients’ interest rate management needs, but also including a small number of caps and floors. All interest
rate derivative transactions are executed by Northern Trust's 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.
86 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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; market and 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:
•
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 data privacy;
failure to satisfy regulatory standards or to obtain regulatory approvals when required, including for the use and distribution
of capital;
changes in tax laws, accounting requirements or interpretations and other legislation in the United States or other countries
that could affect Northern Trust or its clients;
•
•
•
•
•
•
•
2019 Annual Report | Northern Trust Corporation 87
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
•
geopolitical risks, risks related to global climate change and the risks of extraordinary events such as natural disasters,
pandemics, terrorist events and war, and the responses of the United States and other countries to those events;
the 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;
• 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.
88 2019 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUPPLEMENTAL INFORMATION
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 58: RECONCILIATION TO FULLY TAXABLE EQUIVALENT
2019
2018
2017
FOR THE YEAR ENDED DECEMBER 31,
($ In Millions)
Interest Income
Interest Expense
Net Interest Income
Net Interest Margin
REPORTED
FTE ADJ.
FTE
REPORTED
FTE ADJ.
FTE
REPORTED
FTE ADJ.
FTE
$ 2,499.9
$
32.8 $ 2,532.7
$ 2,321.4 $
41.2 $ 2,362.6 $ 1,769.4 $
45.8 $ 1,815.2
822.0
—
822.0
698.7
—
698.7
340.2
—
340.2
$ 1,677.9
$
32.8 $ 1,710.7
$ 1,622.7 $
41.2 $ 1,663.9 $ 1,429.2 $
45.8 $ 1,475.0
1.57%
1.60%
1.43%
1.46%
1.29%
1.33%
Total Revenue
$ 6,073.1
$
32.8 $ 6,105.9
$ 5,960.2 $
41.2 $ 6,001.4 $ 5,375.3 $
45.8 $ 5,421.1
($ In Millions)
Interest Income
Interest Expense
Net Interest Income
Net Interest Margin
Total Revenue
FOR THE YEAR ENDED DECEMBER 31,
2016
2015
REPORTED
FTE ADJ.
FTE
REPORTED
FTE ADJ.
FTE
$ 1,416.9 $
25.1 $ 1,442.0 $ 1,224.0 $
25.3 $ 1,249.3
182.0
—
182.0
153.9
—
153.9
$ 1,234.9 $
25.1 $ 1,260.0 $ 1,070.1 $
25.3 $ 1,095.4
1.15%
1.18%
1.05%
1.07%
$ 4,961.8 $
25.1 $ 4,986.9 $ 4,702.6 $
25.3 $ 4,727.9
2019 Annual Report | Northern Trust Corporation 89
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarterly Financial Data (Unaudited)
The following table presents quarterly financial data for years ended 2019 and 2018.
TABLE 59: QUARTERLY FINANCIAL DATA (UNAUDITED)
STATEMENTS OF INCOME
2019
2018
($ In Millions Except Per Share Information)
Trust, Investment and Other Servicing Fees
FOURTH
QUARTER
992.2
$
THIRD
QUARTER
975.5
SECOND
QUARTER
955.5
$
FIRST
QUARTER
928.9
$
$
$
FOURTH
QUARTER
933.9
$
THIRD
QUARTER
939.2
$
SECOND
QUARTER
942.9
$
FIRST
QUARTER
937.7
Other Noninterest Income
Net Interest Income
Interest Income
Interest Expense
Net Interest Income
Provision for Credit Losses
Noninterest Expense
Provision for Income Taxes
Net Income
Preferred Stock Dividends
Net Income Applicable to Common Stock
PER COMMON SHARE
Net Income – Basic
– Diluted
AVERAGE BALANCE SHEET ASSETS
134.7
144.7
133.7
130.0
152.7
126.9
149.9
154.3
576.1
155.3
420.8
(1.0)
1,072.3
105.3
620.8
203.1
417.7
(7.0)
1,036.3
124.0
640.2
222.8
417.4
(6.5)
1,006.2
117.5
662.8
240.8
422.0
—
1,028.7
105.1
648.6
231.4
417.2
(4.0)
1,021.9
76.0
599.2
191.0
408.2
(9.0)
1,002.3
106.5
567.7
154.4
413.3
1.5
997.4
116.8
371.1 $
384.6 $
389.4 $
347.1 $
409.9 $
374.5 $
390.4 $
5.8
17.4
5.9
17.3
5.9
17.3
5.9
365.3 $
367.2 $
383.5 $
329.8 $
404.0 $
357.2 $
384.5 $
1.71
$
1.70
$
1.76
$
1.70
1.69
1.75
1.49
$
1.48
1.81
$
1.59
$
1.69
$
1.80
1.58
1.68
$
$
$
505.9
121.9
384.0
(3.0)
995.3
102.1
381.6
17.3
364.3
1.59
1.58
Cash and Due from Banks
$
2,292.6
$
2,551.5
$
2,784.3
$
1,940.7
$
2,400.9
$
2,702.9
$
2,440.5
$
2,593.2
Federal Reserve and Other Central Bank
Deposits and Other(1)
Interest-Bearing Due from and Deposits with
Banks(2)
Federal Funds Sold and Securities Purchased
under Agreements to Resell
Securities(3)
Loans and Leases
Allowance for Credit Losses Assigned to Loans
and Leases
Other Assets
17,230.0
17,524.9
19,236.2
20,163.2
21,762.6
22,889.6
24,512.8
26,495.1
6,073.9
5,656.5
5,811.9
6,452.2
5,228.9
5,410.3
6,556.9
6,920.4
945.9
51,919.0
30,990.8
816.9
50,024.9
30,935.9
650.9
48,911.2
31,098.9
978.1
51,889.3
31,189.4
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
(105.5)
8,758.6
(111.2)
8,952.7
(115.1)
7,980.6
(114.0)
6,917.8
(120.3)
6,855.4
(127.6)
6,885.5
(126.4)
7,138.0
(131.0)
6,344.8
Total Assets
$ 118,105.3 $ 116,352.1 $ 116,358.9 $ 119,416.7 $ 121,314.2 $ 122,155.6 $ 123,866.7 $ 124,493.3
LIABILITIES AND STOCKHOLDERS’
EQUITY
Deposits
Demand and Other Noninterest-Bearing
$
17,462.9
$
16,687.3
$
17,826.5
$
17,858.4
$
19,211.2
$
19,430.5
$
21,484.7
$
22,022.9
Savings, Money Market, and Other
18,130.2
17,802.7
15,950.9
14,372.8
14,349.1
14,787.6
15,565.0
15,916.4
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
919.0
52,925.8
89,437.9
8,770.5
2,584.6
1,154.0
277.7
4,948.0
898.9
53,631.5
89,020.4
8,768.8
2,587.7
1,156.7
277.7
3,853.0
888.6
54,679.9
89,345.9
9,427.6
2,361.4
1,131.6
277.6
3,276.7
761.4
58,377.2
91,369.8
10,494.0
2,014.1
1,112.9
277.6
3,719.5
721.1
58,873.9
93,155.3
10,987.9
1,996.5
1,099.6
277.6
3,498.5
810.5
58,473.2
93,501.8
11,380.7
1,818.0
1,254.4
277.6
3,648.5
896.6
57,684.5
95,630.8
11,336.2
1,497.6
1,410.8
277.5
3,511.7
1,058.5
59,199.7
98,197.5
9,405.3
1,497.4
1,426.5
277.5
3,551.4
10,932.6
10,687.8
10,538.1
10,428.8
10,298.8
10,274.6
10,202.1
10,137.7
Total Liabilities and Stockholders’ Equity
$ 118,105.3 $ 116,352.1 $ 116,358.9 $ 119,416.7 $ 121,314.2 $ 122,155.6 $ 123,866.7 $ 124,493.3
(1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets in the consolidated
balance sheets as of December 31, 2019, and 2018.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented in the consolidated balance
sheets as of December 31, 2019, and 2018..
(3) 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, 2019 and 2018.
90 2019 Annual Report | Northern Trust Corporation
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.
2019 Annual Report | Northern Trust Corporation 91
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)” in Item 7, “Management's
Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K 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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the
results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, 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, 2019 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 25, 2020 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for credit losses related to loans and leases collectively evaluated for inherent impairment
As discussed in Notes 1 and 7 to the consolidated financial statements, the Corporation’s allowance for credit losses
related to loans and leases collectively evaluated for inherent impairment (ALLL) was $99.5 million of a total allowance
for credit losses of $104.5 million as of December 31, 2019. The ALLL is estimated using a historical loss methodology
that estimates the probability of default and loss given default for all loans and leases. The ALLL also incorporates
adjustments in accordance with the Corporation’s qualitative adjustment framework.
92 2019 Annual Report | Northern Trust Corporation
We identified the assessment of the ALLL as a critical audit matter because it involved significant measurement uncertainty
regarding complex auditor judgment, and knowledge and experience in the industry. In addition, auditor judgment was
required to evaluate the sufficiency of audit evidence obtained. The assessment of the ALLL encompassed the evaluation
of the ALLL methodology, including the methodologies used to estimate the probability of default and loss given default,
and their key factors and assumptions, including the borrower ratings, the historical observation period, and the loss
emergence period. The assessment also included an evaluation of the ALLL calculations.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal
controls over the Corporation’s ALLL process, including controls related to the (1) development of the ALLL methodology,
(2) determination of key factors and assumptions used to estimate the probability of default and loss given default, and
(3) calculations of the ALLL estimate. We evaluated the Corporation’s process to develop the ALLL estimate by testing
certain source data, factors and assumptions that the Corporation used and considered the relevance and reliability of such
data, factors and assumptions. In addition, we involved credit risk professionals with specialized industry knowledge and
experience, who assisted in:
•
•
•
•
•
evaluating the Corporation’s ALLL methodology for compliance with U.S. generally accepted accounting principles,
testing the historical observation period assumption used in the probability of default and loss given default
methodologies to evaluate the length of the periods,
testing borrower ratings for a selection of loan relationships by evaluating financial performance of the borrower and
underlying collateral,
evaluating the methodology used to develop the probability of default, loss emergence period, and loss given default
assumptions, and
evaluating the ALLL calculations, including testing the mathematical accuracy of certain key assumption calculations.
We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained
related to the Corporation’s ALLL.
We have served as the Corporation’s auditor since 2002.
CHICAGO, ILLINOIS
FEBRUARY 25, 2020
2019 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 $12,249.3 and $14,267.0)
Trading Account
Total Debt Securities
Loans and Leases
Commercial
Personal
Total Loans and Leases (Net of unearned income of $14.1 and $13.2)
Allowance for Credit Losses Assigned to Loans and Leases
Buildings and Equipment
Client Security Settlement Receivables
Goodwill
Other Assets
Total Assets
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing
Savings, 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
Series E, outstanding shares of 16,000
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 209,709,046 and 219,012,050
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock (35,462,478 and 26,159,474 shares, at cost)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements on pages 98-166.
94 2019 Annual Report | Northern Trust Corporation
DECEMBER 31,
2019
2018
$
4,459.2
$
4,581.6
33,886.0
30,080.2
4,877.1
712.8
4,264.2
1,165.2
38,876.3
12,284.5
0.3
36,888.8
14,354.0
0.3
51,161.1
51,243.1
14,274.2
17,135.4
15,175.2
17,314.8
31,409.6
32,490.0
(104.5)
483.3
845.7
696.8
8,401.3
(112.6)
428.2
1,646.1
669.3
5,757.2
$ 136,828.4 $ 132,212.5
$ 14,114.7
$ 14,508.0
21,441.5
14,612.0
986.7
12,177.4
60,400.3
688.7
8,220.1
66,468.0
109,120.6
104,496.8
552.9
489.7
6,744.8
2,573.0
1,148.1
277.7
4,830.6
2,594.2
168.3
7,901.7
2,011.3
1,112.4
277.6
3,141.9
125,737.4
121,704.2
388.5
493.5
391.4
408.6
1,013.1
11,656.7
(194.7)
388.5
493.5
—
408.6
1,068.5
10,776.8
(453.7)
(3,066.1)
(2,173.9)
11,091.0
10,508.3
$ 136,828.4 $ 132,212.5
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 Gains (Losses), net (Note)
Total Noninterest Income
Net Interest Income
Interest Income
Interest Expense
Net Interest Income
Provision for Credit Losses
Net Interest Income after Provision for Credit Losses
Noninterest Expense
Compensation
Employee Benefits
Outside Services
Equipment and Software
Occupancy
Other Operating Expense
Total Noninterest Expense
Income before Income Taxes
Provision for Income Taxes
NET INCOME
Preferred Stock Dividends
Net Income Applicable to Common Stock
PER COMMON SHARE
Net Income – Basic
– Diluted
Average Number of Common Shares Outstanding – Basic
– Diluted
Note: Changes in Other-Than-Temporary-Impairment (OTTI) Losses
Other Security Gains (Losses), net
Investment Security Gains (Losses), net
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
Net Income
Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)
Net Unrealized Gains (Losses) on Debt Securities Available for Sale
Net Unrealized Gains (Losses) on Cash Flow Hedges
Net Foreign Currency Adjustments
Net Pension and Other Postretirement Benefit Adjustments
Other Comprehensive Income (Loss)
Comprehensive Income
See accompanying notes to consolidated financial statements on pages 98-166.
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
$
3,852.1 $
3,753.7 $
3,434.3
250.9
44.5
103.6
145.5
(1.4)
4,395.2
2,499.9
822.0
1,677.9
(14.5)
1,692.4
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
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
1,859.0
1,806.9
1,733.7
355.2
774.5
612.1
212.9
329.8
4,143.5
1,944.1
451.9
356.7
739.4
582.2
201.1
330.6
4,016.9
1,957.8
401.4
1,492.2 $
1,556.4 $
46.4
46.4
319.9
668.4
524.0
191.8
331.6
3,769.4
1,633.9
434.9
1,199.0
49.8
1,445.8 $
1,510.0 $
1,149.2
6.66 $
6.63
6.68 $
6.64
4.95
4.92
214,525,547
223,148,335
228,257,664
215,601,149
224,488,326
229,654,401
(0.3) $
(1.1)
(1.4) $
(0.5) $
(0.5)
(1.0) $
(0.2)
(1.4)
(1.6)
$
$
$
$
$
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
$
1,492.2 $
1,556.4 $
2017
1,199.0
228.9
(7.7)
49.9
(12.1)
259.0
(22.3)
(1.4)
22.2
(12.6)
(14.1)
(42.4)
(1.6)
16.7
(17.0)
(44.3)
$
1,751.2 $
1,542.3 $
1,154.7
2019 Annual Report | Northern Trust Corporation 95
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Millions Except Per Share Information)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Balance at January 1, 2017
$
882.0 $
408.6 $
1,035.8 $
8,908.4 $
(370.0) $ (1,094.4) $ 9,770.4
Net income
Other Comprehensive Income (Loss) (Net of
Tax and Reclassifications)
Dividends:
Common stock, $1.60 per share
Preferred stock
Stock Options and Awards
Stock Purchased
Treasury Stock Transactions — Stock Options
and Awards
Stock Options and Awards — Amortization
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(117.1)
128.5
1,199.0
—
—
1,199.0
—
(44.3)
—
(44.3)
(372.5)
(49.8)
—
—
—
—
—
—
—
—
—
—
—
—
225.1
(372.5)
(49.8)
225.1
(523.1)
(523.1)
—
—
(117.1)
128.5
Balance at December 31, 2017
$
882.0 $
408.6 $
1,047.2 $
9,685.1 $
(414.3) $ (1,392.4) $ 10,216.2
Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income
Change in Accounting Principle
Net income
Other Comprehensive Income (Loss) (Net of
Tax and Reclassifications)
Dividends Declared:
Common Stock, $1.94 per share
Preferred Stock
Stock Options and Awards
Stock Purchased
Treasury Stock Transactions — Stock Options
and Awards
Stock Options and Awards — Amortization
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(110.2)
131.5
25.3
(4.5)
1,556.4
—
(439.1)
(46.4)
—
—
—
—
(25.3)
—
—
(14.1)
—
—
—
—
—
—
—
—
—
—
—
—
142.8
—
(4.5)
1,556.4
(14.1)
(439.1)
(46.4)
142.8
(924.3)
(924.3)
—
—
(110.2)
131.5
Balance at December 31, 2018
$
882.0 $
408.6 $
1,068.5 $
10,776.8 $
(453.7) $ (2,173.9) $ 10,508.3
Net income
Other Comprehensive Income (Loss) (Net of
Tax and Reclassifications)
Dividends:
Common Stock, $2.60 per share
Preferred Stock
—
—
—
—
Issuance of Preferred Stock, Series E
391.4
Stock Options and Awards
Stock Purchased
Treasury Stock Transactions — Stock Options
and Awards
Stock Options and Awards — Amortization
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(163.9)
108.5
1,492.2
—
(565.9)
(46.4)
—
—
—
—
—
—
1,492.2
259.0
—
259.0
—
—
—
—
—
—
—
—
208.0
(565.9)
(46.4)
391.4
208.0
(1,100.2)
(1,100.2)
—
—
(163.9)
108.5
Balance at December 31, 2019
$ 1,273.4 $
408.6 $
1,013.1 $
11,656.7 $
(194.7) $ (3,066.1) $ 11,091.0
See accompanying notes to consolidated financial statements on pages 98-166.
96 2019 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
Bank-Owned Life Insurance Policy Premiums
Other Investing Activities, net
Net Cash (Used in) Provided by Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits
Change in Federal Funds Purchased
Change in Securities Sold under Agreements to Repurchase
Change in Short-Term Other Borrowings
Proceeds from Senior Notes
Repayments of Senior Notes
Proceeds from Issuance of Preferred Stock - Series E
Treasury Stock Purchased
Net Proceeds from Stock Options
Cash Dividends Paid on Common Stock
Cash Dividends Paid on Preferred Stock
Other Financing Activities, net
Net Cash Provided by (Used In) 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
Transfers to Leases Held For Sale from Leases
See accompanying notes to consolidated financial statements on pages 98-166.
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
$
1,492.2
$
1,556.4
$
1,199.0
1.4
64.6
(14.5)
103.2
339.1
16.6
(70.7)
(6.1)
34.3
(50.3)
(23.6)
1,154.0
(448.2)
2,592.0
486.3
(614.6)
(3,683.2)
(14,154.3)
16,290.9
(12,811.0)
11,057.2
1,087.9
(158.0)
(441.8)
821.0
(10.5)
(1,500.0)
225.1
(3,405.0)
4,263.6
(2,041.3)
320.9
(1,184.5)
498.0
—
392.5
(1,100.2)
44.0
(529.7)
(46.4)
(1.0)
615.9
74.7
(122.4)
4,581.6
4,459.2 $
$
845.5
437.0
3.5
53.6
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
—
2019 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 19 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 in the application of certain of our significant accounting
policies 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 but not limited to 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
98 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
basis and are reported within other security gains (losses), net, in the consolidated statements of income. Interest income is
recorded on the accrual basis, adjusted for the amortization of premium and accretion of discount.
Securities Held to Maturity consist of debt securities that management intends to, and Northern Trust has the ability to,
hold until maturity. Such securities are reported at cost, adjusted for amortization of premium and accretion of discount. Interest
income is recorded on the accrual basis adjusted for the amortization of premium and accretion of discount.
Securities Held for Trading are stated at fair value. Realized and unrealized gains and losses on securities held for trading
are reported in the consolidated 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 Bank of Chicago 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 30, “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 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 generally include foreign exchange contracts, interest rate contracts, total
return swap contracts and credit default swap contracts. All derivative financial instruments, whether designated as hedges or
not, 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, 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.
2019 Annual Report | Northern Trust Corporation 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income statement 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 have similar risk characteristics, measurement attributes, or risk monitoring
methods. The classes within the commercial segment have been defined as commercial and institutional, commercial real
estate, lease financing, 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 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 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
100 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-period 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 million) 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 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
2019 Annual Report | Northern Trust Corporation 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
102 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. A valuation allowance is established for deferred tax assets if it is more-likely-than-not
that all or a portion will not be realized. 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 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.
2019 Annual Report | Northern Trust Corporation 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019, Northern Trust adopted 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 (ROU asset) representing its right to use the underlying asset
over the lease term. Upon adoption, Northern Trust elected the package of practical expedients available under ASU 2016-02,
which allowed 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
adopting ASU 2016-02, Northern Trust recognized operating lease liabilities and ROU assets of approximately $530 million
and $480 million, respectively. Northern Trust did not restate comparative periods for the effects of applying ASU 2016-02.
There was no significant impact to Northern Trust’s consolidated results of operations. Please refer to Note 10, “Lease
Commitments” for further information.
On January 1, 2019, Northern Trust adopted ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs
(Subtopic 310-20): Premium Amortization on Purchased Callable Securities” (ASU 2017-08). ASU 2017-08 amends the
amortization period for certain callable debt securities held at a premium and shortens the amortization period for the premium
to the earliest call date. Upon adoption of ASU 2017-08, there was no significant impact to Northern Trust’s consolidated
financial condition or results of operations.
On January 1, 2019, Northern Trust adopted ASU No. 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. Upon adoption of ASU 2018-16, there was no significant impact to
Northern Trust’s consolidated financial condition or results of operations.
Note 3 – Fair Value Measurements
Fair value under GAAP is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants on the measurement date.
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, 2019, or 2018.
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, 2019, Northern Trust’s available for sale debt securities portfolio included 1,704 Level 2
securities with an aggregate market value of $34.3 billion. All 1,704 debt securities were valued by external pricing vendors.
As of December 31, 2018, Northern Trust’s available for sale debt securities portfolio included 1,479 Level 2 debt securities
with an aggregate market value of $31.7 billion. All 1,479 debt securities were valued by external pricing vendors. Trading
104 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
account debt securities, which totaled $0.3 million as of December 31, 2019 and 2018, 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 liabilities consist of swaps that Northern Trust entered into with the purchaser of 1.1 million and
1.0 million shares of V isa 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 26,
“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 liabilities as of December 31, 2019 and 2018, as
well as the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant
unobservable inputs for such liabilities as of such dates.
2019 Annual Report | Northern Trust Corporation 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 60: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
INPUT VALUE
DECEMBER 31, 2019
Swaps Related to Sale of Certain
Visa Class B Common Shares
$
33.4 million
Discounted Cash Flow
Conversion Rate
Visa Class A Appreciation
1.62x
8.54%
RANGE OF INPUTS
Expected Duration
1.0 – 3.0 years
DECEMBER 31, 2018
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
Conversion Rate
1.62x – 1.64x
Visa Class A Appreciation
7.0% – 11.0%
Expected Duration
1.5 – 4.0 years
106 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and
2018, segregated by fair value hierarchy level.
TABLE 61: RECURRING BASIS HIERARCHY LEVELING
DECEMBER 31, 2019
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
ASSETS/
LIABILITIES
AT FAIR
VALUE
$
4,549.1 $
— $
— $
— $
(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
—
—
—
—
—
—
—
—
—
1,615.3
23,271.2
3.3
2,402.7
769.9
2,127.6
3,330.5
797.7
9.0
4,549.1
34,327.2
—
0.3
Total Available for Sale and Trading Debt Securities
4,549.1
34,327.5
Other Assets
Derivative Assets
Foreign Exchange Contracts
Interest Rate Contracts
Total Derivative Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Contracts
Other Financial Derivatives (1)
—
—
—
—
—
—
3,234.8
152.9
3,387.7
3,182.2
97.4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,549.1
1,615.3
23,271.2
3.3
2,402.7
769.9
2,127.6
3,330.5
797.7
9.0
38,876.3
0.3
38,876.6
—
—
—
—
—
—
—
—
—
—
—
—
(2,334.1)
(3.9)
900.7
149.0
(2,338.0)
1,049.7
—
—
33.4
(1,548.6)
1,633.6
(57.3)
(12.5)
40.1
20.9
Total Derivative Liabilities
$
— $
3,279.6 $
33.4 $
(1,618.4) $
1,694.6
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, 2019, derivative assets and liabilities shown above also include reductions of $1,136.8 million and $417.2 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.
2019 Annual Report | Northern Trust Corporation 107
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
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 Derivative (1)
Total Derivatives Assets
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts
Interest Rate Contracts
Other Financial Derivative (2)
Total Derivative Liabilities
DECEMBER 31, 2018
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
ASSETS/
LIABILITIES
AT FAIR
VALUE
$
5,185.3 $
— $
— $
— $
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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
(1,308.8)
1,157.3
(47.0)
(1.3)
49.1
—
(1,357.1)
1,206.4
—
—
32.8
(1,751.7)
(43.4)
(1.2)
510.8
49.7
31.6
592.1
$
— $
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.
The following table presents the changes in Level 3 liabilities for the years ended December 31, 2019 and 2018.
TABLE 62: CHANGES IN LEVEL 3 LIABILITIES
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 within the consolidated statements of income.
108 2019 Annual Report | Northern Trust Corporation
SWAPS RELATED TO SALE OF
CERTAIN VISA CLASS B
COMMON SHARES
2019
32.8 $
17.1
(16.5)
33.4 $
12.3 $
2018
29.7
19.8
(16.7)
32.8
13.3
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018, there were no 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, 2019 and 2018, 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 that have been adjusted to fair value totaled $8.0 million at December 31, 2019. 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. 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, 2019 and 2018, 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 63: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF DISCOUNTS APPLIED
Loans
$8.0 million Market Approach
Discount to reflect realizable value
15.0% – 30.0%
DECEMBER 31, 2019
FINANCIAL INSTRUMENT
FAIR VALUE
VALUATION TECHNIQUE
UNOBSERVABLE INPUT
RANGE OF DISCOUNTS APPLIED
Loans
OREO
$24.9 million Market Approach
Discount to reflect realizable value
15.0% – 30.0%
$0.4 million Market Approach
Discount to reflect realizable value 15.0% – 30.0%
DECEMBER 31, 2018
2019 Annual Report | Northern Trust Corporation 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the fair values of all financial instruments.
TABLE 64: FAIR VALUE OF FINANCIAL INSTRUMENTS
(In Millions)
BOOK VALUE
TOTAL
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
DECEMBER 31, 2019
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(1)
Held to Maturity
Trading Account
Loans (excluding Leases)
Held for Investment
Client Security Settlement Receivables
Other Assets
Federal Reserve and Federal Home Loan Bank Stock
Community Development Investments
Employee Benefit and Deferred Compensation
LIABILITIES
Deposits
$
4,459.2
33,886.0
4,877.1
712.8
$
4,459.2
33,886.0
4,877.1
712.8
$
4,459.2
—
—
—
$
—
33,886.0
4,877.1
712.8
38,876.3
12,284.5
0.3
38,876.3
12,249.3
0.3
4,549.1
138.8
—
34,327.2
12,110.5
0.3
31,239.5
845.7
31,517.8
845.7
301.2
749.3
199.5
301.2
749.3
207.6
—
—
—
—
131.0
—
845.7
301.2
749.3
76.6
Demand, Noninterest-Bearing, Savings, Money Market and Other
Interest-Bearing
$
47,733.6
$
47,733.6
$
47,733.6
$
—
$
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
Subordinated Debt
Floating Rate Capital Debt
Other Liabilities
Standby Letters of Credit
Loan Commitments
DERIVATIVE INSTRUMENTS
Asset/Liability Management
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
Other Financial Derivatives
Liabilities(2)
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
986.7
60,400.3
552.9
489.7
6,744.8
2,573.0
994.2
60,400.3
552.9
489.7
6,745.9
2,593.0
1,148.1
277.7
1,169.5
262.1
25.5
32.3
25.5
32.3
—
—
—
—
—
—
—
—
—
—
994.2
60,400.3
552.9
489.7
6,745.9
2,593.0
1,169.5
262.1
$
$
83.1
24.1
$
83.1
24.1
$
—
—
$
83.1
24.1
20.5
21.1
33.4
20.5
21.1
33.4
3,151.7
3,158.1
3,151.7
3,158.1
132.4
76.3
132.4
76.3
—
—
—
—
—
—
—
—
—
25.5
32.3
—
—
—
—
20.5
21.1
—
33.4
3,151.7
3,158.1
132.4
76.3
—
—
—
—
—
—
—
—
—
—
—
31,517.8
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) Refer to the table located on page 107 for the disaggregation of available for sale debt securities.
(2) This line consists of swaps related to the sale of certain Visa Class B common shares.
110 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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(1)
Held to Maturity
Trading Account
Loans (excluding Leases)
Held for Investment
Client Security Settlement Receivables
Other Assets
Federal Reserve and Federal Home Loan Bank Stock
Community Development Investments
Employee Benefit and Deferred Compensation
LIABILITIES
Deposits
$
4,581.6
30,080.2
4,264.2
1,165.2
$
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
36,888.8
14,267.0
0.3
5,185.3
101.6
—
31,703.5
14,165.4
0.3
—
—
—
—
—
—
—
32,287.0
1,646.1
32,339.2
1,646.1
—
—
—
1,646.1
32,339.2
—
300.3
606.6
202.3
300.3
606.6
194.5
—
—
125.0
300.3
606.6
69.5
Demand, Noninterest-Bearing, Savings, Money Market and Other
Interest-Bearing
$
37,340.1 $
37,340.1 $
37,340.1 $
— $
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
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(2)
Liabilities(3)
Client-Related and Trading
Foreign Exchange Contracts
Assets
Liabilities
Interest Rate Contracts
Assets
Liabilities
688.7
66,468.0
2,594.2
168.3
7,901.7
2,011.3
691.8
66,468.0
2,594.2
168.3
7,904.1
1,994.4
1,112.4
277.6
1,089.7
253.5
30.8
34.3
30.8
34.3
—
—
—
—
—
—
—
—
—
—
691.8
66,468.0
2,594.2
168.3
7,904.1
1,994.4
1,089.7
253.5
—
—
$
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
66.1
68.6
66.1
68.6
—
—
—
—
—
—
—
—
30.0
24.5
1.3
—
2,159.4
2,190.0
66.1
68.6
(1) Refer to the table located on page 108 for the disaggregation of available for sale debt securities.
(2) This line consists of a total return swap contract.
(3) This line consists of swaps related to the sale of certain Visa Class B common shares.
—
—
—
—
—
—
—
—
—
—
—
—
30.8
34.3
—
—
—
—
—
32.8
—
—
—
—
2019 Annual Report | Northern Trust Corporation 111
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 65: 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
Commercial Mortgage-Backed
Other
Total
DECEMBER 31, 2019
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
4,527.5 $
26.7 $
5.1 $
1,604.0
23,247.5
3.3
2,378.9
766.3
2,091.3
3,324.5
769.9
9.0
24.6
101.8
—
27.8
4.4
37.4
11.3
28.7
—
13.3
78.1
—
4.0
0.8
1.1
5.3
0.9
—
FAIR
VALUE
4,549.1
1,615.3
23,271.2
3.3
2,402.7
769.9
2,127.6
3,330.5
797.7
9.0
$
38,722.2 $
262.7 $
108.6 $
38,876.3
DECEMBER 31, 2018
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
5,203.1 $
21.8 $
39.6 $
657.6
22,522.7
143.3
2,312.6
832.7
2,087.8
2,678.9
587.4
15.7
2.0
52.4
—
3.2
1.4
11.9
1.7
4.0
—
3.7
150.5
1.1
21.1
4.8
3.5
22.9
4.2
—
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
$
37,041.8 $
98.4 $
251.4 $
36,888.8
112 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 66: REMAINING MATURITY OF DEBT SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 2019
ONE YEAR OR LESS
ONE TO FIVE YEARS
FIVE TO TEN YEARS
OVER TEN YEARS
TOTAL
(In Millions)
U.S. Government
Obligations of States and
Political Subdivisions
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$ 1,899.0
$ 1,898.4
$ 2,075.9
$ 2,098.3
$
552.6
$
552.4
$
—
$
—
$ 4,527.5
$ 4,549.1
80.0
80.1
83.0
85.4
1,441.0
1,449.8
—
—
1,604.0
1,615.3
Government Sponsored Agency
4,994.1
5,005.0
9,714.1
9,728.8
5,870.0
5,869.4
2,669.3
2,668.0
23,247.5
23,271.2
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
—
341.8
281.0
333.9
885.1
46.6
9.0
—
341.7
281.6
334.6
885.3
46.4
9.0
3.3
3.3
1,981.5
2,005.5
485.3
488.3
1,707.4
1,743.1
1,977.3
1,984.8
167.9
174.2
—
—
—
55.6
—
50.0
452.8
555.4
—
—
55.5
—
49.9
451.1
577.1
—
—
—
—
—
9.3
—
—
—
—
—
—
9.3
—
—
3.3
3.3
2,378.9
2,402.7
766.3
769.9
2,091.3
2,127.6
3,324.5
3,330.5
769.9
797.7
9.0
9.0
$ 8,870.5 $ 8,882.1 $ 18,195.7 $ 18,311.7 $ 8,977.4 $ 9,005.2 $ 2,678.6 $ 2,677.3 $38,722.2 $38,876.3
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
Debt Securities Held to Maturity. The following tables provide the amortized cost, fair values and remaining maturities
of debt securities held to maturity.
TABLE 67: 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
Non-U.S. Government
Corporate Debt
Covered Bonds
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
Non-U.S. Government
Corporate Debt
Covered Bonds
Certificates of Deposit
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds
Other Asset-Backed
Other
Total
DECEMBER 31, 2019
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
138.8 $
— $
— $
10.1
4.1
4,076.0
405.1
3,006.7
262.9
3,285.4
804.3
291.1
0.2
0.2
5.3
1.4
16.1
—
21.7
0.7
0.1
—
—
2.5
0.3
2.4
—
2.1
0.3
73.3
FAIR
VALUE
138.8
10.3
4.3
4,078.8
406.2
3,020.4
262.9
3,305.0
804.7
217.9
$
12,284.5 $
45.7 $
80.9 $
12,249.3
DECEMBER 31, 2018
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
101.6 $
— $
— $
18.9
4.5
6,488.2
472.9
2,877.6
45.1
2,966.8
1,146.4
232.0
0.6
0.2
2.1
0.4
9.6
—
5.8
—
—
—
—
8.7
1.8
9.3
—
12.3
4.0
69.6
FAIR
VALUE
101.6
19.5
4.7
6,481.6
471.5
2,877.9
45.1
2,960.3
1,142.4
162.4
$
14,354.0 $
18.7 $
105.7 $
14,267.0
2019 Annual Report | Northern Trust Corporation 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 68: REMAINING MATURITY OF DEBT SECURITIES HELD TO MATURITY
December 31, 2019
ONE YEAR OR LESS
ONE TO FIVE YEARS
FIVE TO TEN YEARS
OVER TEN YEARS
TOTAL
Non-U.S. Government
2,757.9
2,757.8
1,318.1
1,321.0
8.1
0.6
8.2
0.6
2.0
1.7
2.1
1.8
(In Millions)
U.S. Government
Obligations of States and
Political Subdivisions
Government Sponsored Agency
Corporate Debt
Covered Bonds
Certificates of Deposit
Sub-Sovereign, Supranational
and Non-U.S. Agency Bonds
Other Asset-Backed
Other
Total
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
138.8
$ 138.8
$
—
$
—
$
—
$
—
$
—
$
—
$
138.8
$
138.8
359.2
360.0
2,406.9
2,418.8
—
—
45.9
599.8
262.9
577.8
151.9
10.6
46.2
601.6
262.9
577.8
152.0
10.5
2,691.5
2,711.4
398.3
132.0
398.7
119.3
16.1
254.1
45.9
15.8
254.0
39.7
—
1.2
—
—
—
—
—
1.2
—
—
—
—
—
0.6
—
—
—
—
—
—
—
0.7
—
—
—
—
—
—
102.6
48.4
10.1
4.1
10.3
4.3
4,076.0
4,078.8
405.1
406.2
3,006.7
3,020.4
262.9
262.9
3,285.4
3,305.0
804.3
291.1
804.7
217.9
$ 4,554.3 $ 4,556.4 $ 7,309.7 $ 7,333.1 $
317.3 $
310.7 $
103.2 $
49.1 $12,284.5 $12,249.3
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, 2019 and 2018, approximately $160.8 million and $287.9
million respectively 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. Proceeds of $1.2 billion, $307.3 million, and $2.2 billion in 2019, 2018, and
2017, respectively, from the sale of debt securities resulted in the following gains and losses shown below.
TABLE 69: INVESTMENT SECURITY GAINS AND LOSSES
(In Millions)
Gross Realized Debt Securities Gains
Gross Realized Debt Securities Losses
Changes in Other-Than-Temporary Impairment Losses(1)
Net Investment Security (Losses)/Gains
DECEMBER 31,
2019
2.4 $
(3.5)
(0.3)
(1.4) $
2018
1.5 $
(2.0)
(0.5)
(1.0) $
2017
0.2
(1.6)
(0.2)
(1.6)
$
$
(1) Other-than-temporary Impairment Losses relate to certain Community Reinvestment Act (CRA) eligible held to maturity debt securities
114 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities with Unrealized Losses. The following table provides 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, 2019
and 2018.
TABLE 70: DEBT SECURITIES WITH UNREALIZED LOSSES
AS OF DECEMBER 31, 2019
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 UNREALIZED
LOSSES
VALUE
FAIR UNREALIZED
LOSSES
VALUE
FAIR UNREALIZED
LOSSES
VALUE
$
252.2 $
2.7 $
899.8 $
2.4 $
1,152.0 $
902.5
5,405.0
3,620.2
410.4
646.8
1,302.0
706.9
62.8
54.1
13.3
35.6
2.5
1.3
3.2
3.1
2.1
0.7
26.7
—
7,818.4
—
492.8
—
155.2
1,164.9
59.3
164.0
—
42.5
—
3.0
—
0.1
3.5
0.2
46.6
902.5
13,223.4
3,620.2
903.2
646.8
1,457.2
1,871.8
122.1
218.1
5.1
13.3
78.1
2.5
4.3
3.2
3.2
5.6
0.9
73.3
$
13,362.9 $
91.2 $
10,754.4 $
98.3 $
24,117.3 $
189.5
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 UNREALIZED
LOSSES
VALUE
FAIR UNREALIZED
LOSSES
VALUE
FAIR UNREALIZED
LOSSES
VALUE
$
— $
— $
2,862.0 $
39.6 $
2,862.0 $
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
279.6
6,822.4
1,274.0
1,097.4
696.9
1,189.2
954.9
274.4
112.6
1.3
117.0
9.0
18.8
10.4
11.2
11.0
4.1
50.8
449.2
15,191.2
6,339.2
1,810.1
1,343.3
2,294.2
3,462.7
297.2
163.1
39.6
3.7
150.5
9.8
22.9
14.1
15.8
26.9
4.2
69.6
$
18,648.8 $
83.9 $
15,563.4 $
273.2 $
34,212.2 $
357.1
As of December 31, 2019, 1,289 debt securities with a combined fair value of $24.1 billion were in an unrealized loss
position, with their unrealized losses totaling $189.5 million. Unrealized losses of $78.1 million and $13.3 million related to
government sponsored agency and obligations of states and political subdivisions, respectively, are primarily attributable to
changes in market rates since their purchase.
The majority of the $73.3 million of unrealized losses in debt securities classified as “other” at December 31, 2019
related to debt 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, 2019 were attributable to changes
in overall market interest rates, increased credit spreads, or reduced market liquidity. As of December 31, 2019, Northern
Trust did not intend to sell any investment in an unrealized loss position and it was more likely than not that Northern Trust
would not 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
2019 Annual Report | Northern Trust Corporation 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2019 and 2018, incorporates an expected loss
approach using discounted cash flows on the underlying collateral pools. To evaluate whether an unrealized loss on a CRA-
eligible mortgage-backed security 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
mortgage pools, and Northern Trust’s outlook for the housing market and the overall economy. If the present value of the
collateral pools were 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-eligible 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-eligible mortgage-backed securities vary by
year of loan origination and collateral quality.
There were $0.3 million and $0.5 million of OTTI losses recognized in 2019 and 2018, respectively. There were $0.2
million OTTI losses recognized during the year ended December 31, 2017.
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, 2019, 2018, and 2017.
TABLE 71: 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,
2019
(0.3) $
—
(0.3) $
2018
(0.5) $
—
(0.5) $
2017
(0.2)
—
(0.2)
$
$
(1) For initial other-than-temporary impairments in the respective period, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For
subsequent impairments of the same security, the balance includes any additional changes in fair value of the security subsequent to its most recently recorded OTTI.
(2) For initial other-than-temporary impairments in the respective period, the balance includes the portion of the excess of amortized cost over the fair value of the impaired
securities that was recorded in OCI. For subsequent impairments of the same security, the balance includes additional changes in OCI for that security subsequent to its most
recently recorded OTTI.
Provided in the table below are the cumulative credit-related losses recognized in earnings on debt securities other-than-
temporarily impaired.
TABLE 72: 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,
2019
4.1 $
0.2
0.1
—
2018
3.6 $
0.4
0.1
—
4.4 $
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.
116 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize information related to securities purchased under agreements to resell and securities sold
under agreements to repurchase.
TABLE 73: 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 74: 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
2019
2018
$
707.8
$
1,031.2
835.0
2.10%
1,478.3
2.22%
$
1,290.0
$
1,942.0
2019
$
489.7
$
339.0
1.89%
2018
168.3
525.2
1.48%
$
489.7
$
981.3
TABLE 75: 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 28
Amounts related to agreements not included in Note 28
Remaining Contractual M
aturity of the Agreements
Overnight and Continuous
December 31, 2019
December 31, 2018
$
489.7
$
489.7
489.7
—
168.3
168.3
168.3
—
Note 6 – Loans and Leases
Amounts outstanding for loans and leases, by segment and class, are shown below.
TABLE 76: 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,
2019
2018
$
8,915.6 $
3,378.0
1,751.0
65.6
164.0
8,728.1
3,228.8
2,701.6
90.7
426.0
14,274.2
15,175.2
11,068.7
5,999.6
67.1
10,733.3
6,514.0
67.5
17,135.4
17,314.8
$
$
31,409.6 $
32,490.0
(104.5)
(112.6)
31,305.1 $
32,377.4
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
2019 Annual Report | Northern Trust Corporation 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Trustdoes not offer equity credit lines that include an option to convert the outstanding
balance to an amortizing payment loan. As of December 31, 2019 and 2018, equity credit lines totaled $448.5 million and
$655.5 million, respectively, and equity credit lines for which first liens were held by Northern Trust represented 97% and
95%, 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, totaling $1.1 billion and $2.2 billion at December 31, 2019 and 2018,
respectively.Demand deposit overdrafts reclassified as loan balances totaled $90.4 million and $152.5 million at December 31,
2019 and 2018, respectively. As of December 31, 2019, there were no loans and $53.6 million of leases classified as held for
sale related to the decision to sell substantially all of the lease portfolio. As of December 31, 2018, there were no loans or
leases classified as held for sale.
The components of the net investment in direct finance and leveraged leases are as follows:
TABLE 77: 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,
2019
2018
$
1.5 $
21.3
0.2
—
23.0
19.1
33.1
(9.6)
42.6
$
65.6 $
9.8
23.8
0.3
—
33.9
33.9
33.3
(10.4)
56.8
90.7
The following schedule reflects the future minimum lease payments to be received over the next five years under direct finance
leases.
TABLE 78: FUTURE MINIMUM LEASE PAYMENTS
(In Millions)
2020
2021
2022
2023
2024
$
FUTURE MINIMUM
LEASE PAYMENTS
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.
118 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated
using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary
among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of
credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s
borrower rating models, by loan and lease class.
• Commercial and Institutional: leverage, profit margin, liquidity, asset size and capital levels;
• Commercial Real Estate: debt service coverage, loan-to-value ratio, leasing status and guarantor support;
• Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels;
• Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels;
• Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio;
Private Client: cash flow-to-debt and net worth ratios, leverage and liquidity; and
•
Personal-Other: cash flow-to-debt and net worth ratios.
•
While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking
of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range
from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted
borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required.
Risk ratings are generally validated at least annually.
Loan and lease segment and class balances at December 31, 2019 and 2018 are provided below, segregated by borrower
ratings into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.
TABLE 79: 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, 2019
DECEMBER 31, 2018
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
$
5,890.8 $
2,912.9 $
111.9 $ 8,915.6 $
5,477.4 $
3,159.8 $
90.9 $ 8,728.1
1,126.8
717.0
53.6
69.5
2,237.3
883.2
12.0
94.5
13.9
3,378.0
150.8
1,751.0
—
—
65.6
164.0
1,209.6
1,625.3
78.3
203.3
1,992.2
1,075.3
12.4
222.7
27.0
3,228.8
1.0
2,701.6
—
—
90.7
426.0
7,857.7
6,139.9
276.6
14,274.2
8,593.9
6,462.4
118.9 15,175.2
5,455.3
2,638.1
28.5
5,573.0
3,185.4
38.6
40.4
11,068.7
176.1
5,999.6
—
67.1
6,321.1
2,745.0
32.2
4,403.2
3,502.3
35.3
9.0 10,733.3
266.7
6,514.0
—
67.5
8,121.9
8,797.0
216.5
17,135.4
9,098.3
7,940.8
275.7 17,314.8
Total Loans and Leases
$
15,979.6 $
14,936.9 $
493.1 $31,409.6 $
17,692.2 $
14,403.2 $
394.6 $32,490.0
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
2019 Annual Report | Northern Trust Corporation 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 2019
and 2018.
TABLE 80: DELINQUENCY STATUS
(In Millions)
December 31, 2019
Commercial
CURRENT
30 – 59 DAYS
PAST DUE
60 – 89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PERFORMING NONPERFORMING
TOTAL LOANS
AND LEASES
8,892.7 $
4.1 $
10.0 $
1.2 $
8,908.0 $
7.6 $
Commercial and Institutional $
Commercial Real Estate
Non-U.S.
Lease Financing, net
Other
Total Commercial
Personal
Private Client
Residential Real Estate
Other
Total Personal
3,363.3
1,750.3
65.6
164.0
14,235.9
11,025.3
5,902.3
67.1
16,994.7
2.4
0.2
—
—
6.7
33.1
19.8
—
52.9
4.0
—
—
—
14.0
9.5
4.9
—
14.4
4.7
—
—
—
5.9
0.3
1.2
—
1.5
3,374.4
1,750.5
65.6
164.0
3.6
0.5
—
—
8,915.6
3,378.0
1,751.0
65.6
164.0
14,262.5
11.7
14,274.2
11,068.2
5,928.2
67.1
17,063.5
0.5
71.4
—
71.9
11,068.7
5,999.6
67.1
17,135.4
Total Loans and Leases
$ 31,230.6 $
59.6 $
28.4 $
7.4 $
31,326.0 $
83.6 $
31,409.6
Other Real Estate Owned
Total Nonperforming Assets
$
$
3.2
86.8
30 – 59 DAYS
60 – 89 DAYS
CURRENT
PAST DUE
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PERFORMING NONPERFORMING
TOTAL LOANS
AND LEASES
(In Millions)
December 31, 2018
Commercial
Commercial and Institutional
$ 8,678.2 $
37.4 $
4.5 $
1.2 $
8,721.3 $
6.8 $
Commercial Real Estate
Non-U.S.
Lease Financing, net
Other
3,191.5
2,701.2
90.7
426.0
8.4
—
—
—
15.6
—
—
—
Total Commercial
15,087.6
45.8
20.1
Personal
Private Client
Residential Real Estate
Other
Total Personal
10,681.1
6,376.8
67.5
17,125.4
39.5
27.2
—
66.7
12.5
6.2
—
18.7
6.4
—
—
—
7.6
—
8.8
—
8.8
3,221.9
2,701.2
90.7
426.0
6.9
0.4
—
—
8,728.1
3,228.8
2,701.6
90.7
426.0
15,161.1
14.1
15,175.2
10,733.1
6,419.0
67.5
17,219.6
0.2
95.0
—
95.2
10,733.3
6,514.0
67.5
17,314.8
Total Loans and Leases
$ 32,213.0 $
112.5 $
38.8 $
16.4 $
32,380.7 $
109.3 $
32,490.0
Other Real Estate Owned
Total Nonperforming Assets
$
$
8.4
117.7
120 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information related to impaired loans by segment and class.
TABLE 81: IMPAIRED LOANS
(In Millions)
With no related specific allowance
AS OF DECEMBER 31, 2019
AS OF DECEMBER 31, 2018
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
SPECIFIC
ALLOWANCE
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
SPECIFIC
ALLOWANCE
Commercial and Institutional
$
—
$
0.1
$
—
$
0.2
$
0.4
$
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
2.4
75.6
1.2
6.8
1.2
5.0
10.4
81.8
4.4
102.5
1.2
8.9
1.5
5.1
14.9
108.8
—
—
—
2.3
1.1
1.6
3.4
1.6
5.8
76.7
1.7
6.4
2.6
22.8
15.0
101.2
7.6
104.7
1.7
7.3
2.8
26.1
18.1
132.5
$
92.2 $
123.7 $
5.0 $
116.2 $
150.6 $
—
—
—
—
3.0
1.1
3.1
4.1
3.1
7.2
YEAR ENDED DECEMBER 31, 2019
YEAR ENDED DECEMBER 31, 2018
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
$
0.5
$
—
$
6.8
$
3.5
88.5
1.7
7.9
1.4
16.7
13.3
106.9
0.3
1.8
0.1
—
—
—
0.3
1.9
6.4
94.9
0.6
4.6
2.1
9.2
19.9
104.7
$
120.2 $
2.2 $
124.6 $
—
0.2
1.9
0.1
—
—
—
0.2
2.0
2.2
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 $7.3 million in 2019, $8.0 million in 2018, and $9.1 million in 2017.
There were $9.1 million and $12.6 million of aggregate undrawn loan commitments and standby letters of credit at
December 31, 2019 and 2018, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.
Troubled Debt Restructurings (TDRs). Included within impaired loans were $54.9 million and $64.6 million of
nonperforming TDRs and $27.7 million and $35.2 million of performing TDRs as of December 31, 2019 and 2018, respectively.
2019 Annual Report | Northern Trust Corporation 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides, by segment and class, the number of TDR modifications of loans and leases during the
years ended December 31, 2019, and 2018, and the recorded investments and unpaid principal balances as of December 31,
2019 and 2018.
TABLE 82: TROUBLED DEBT RESTRUCTURINGS
($ In Millions)
December 31, 2019
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, 2018
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 $
7.5 $
2
3
45
—
45
—
7.5
37.4
—
37.4
48 $
44.9 $
8.8
—
8.8
38.8
—
38.8
47.6
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
1 $
0.3 $
2
3
48
1
49
2.8
3.1
27.7
—
27.7
52 $
30.8 $
0.5
2.8
3.3
30.8
0.1
30.9
34.2
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, 2019, the TDR modifications of loans within residential real estate were primarily
other modifications, extensions of term, deferrals of principal, and interest rate concessions. During the year ended
December 31, 2019, TDR modifications of loans within commercial and institutional, commercial real estate, and private
client classes were other modifications, extensions of term, and deferrals of principal. During the year ended December 31,
2018, the TDR modifications of loans within residential real estate loans were primarily extensions of term, deferrals of
principal, other modifications, and interest rate concessions; modifications within commercial and institutional, commercial
real estate, and private client classes were primarily extensions of term, deferrals of principal, and other modifications.
There were five loans or leases TDR modifications during the previous twelve-month period which subsequently became
nonperforming during the year ended December 31, 2019. The total recorded investment for these loans was approximately
$5.8 million and the unpaid principal balance for these loans was approximately $6.1 million.
There were four loans or leases TDR modifications during the previous twelve-month period which subsequently became
nonperforming during the year ended December 31, 2018. The total recorded investment for these loans was approximately
$2.1 million and the unpaid principal balance for these loans was approximately $2.4 million.
All loans and leases with TDR modifications 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.
122 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Northern Trust may obtain physical possession of real estate via foreclosure. As of December 31, 2019 and 2018, Northern
Trust held foreclosed real estate properties with a carrying value of $3.2 million and $8.4 million, respectively, as a result of
obtaining physical possession. In addition, as of December 31, 2019 and 2018, Northern Trust had loans with a carrying value
of $18.1 million and $10.9 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 83: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
2019
2018
2017
COMMERCIAL PERSONAL TOTAL COMMERCIAL PERSONAL TOTAL COMMERCIAL PERSONAL TOTAL
(In Millions)
Balance at Beginning of Year $
Charge-Offs
Recoveries
Net (Charge-Offs) Recoveries
Provision for Credit Losses
Balance at End of Year
Allowance for Credit Losses
Assigned to:
Loans and Leases
Undrawn Commitments
and Standby Letters of
Credit
$
$
78.7 $
59.5 $ 138.2 $
80.8 $
73.0 $ 153.8 $
104.9 $
87.1 $ 192.0
(3.0)
0.9
(2.1)
(2.7)
(3.5)
(6.5)
6.3
2.8
7.2
0.7
(0.9)
1.7
0.8
(9.2)
(10.1)
7.3
9.0
(1.9)
(1.1)
(11.8)
(14.5)
(2.9)
(11.6)
(14.5)
(11.4)
5.5
(5.9)
(18.2)
(10.1)
(21.5)
5.8
11.3
(4.3)
(10.2)
(9.8)
(28.0)
73.9 $
50.5 $ 124.4 $
78.7 $
59.5 $ 138.2 $
80.8 $
73.0 $ 153.8
58.1 $
46.4 $ 104.5 $
57.6 $
55.0 $ 112.6 $
63.5 $
67.7 $ 131.2
15.8
4.1
19.9
21.1
4.5
25.6
17.3
5.3
22.6
Total Allowance for Credit
Losses
$
73.9 $
50.5 $ 124.4 $
78.7 $
59.5 $ 138.2 $
80.8 $
73.0 $ 153.8
2019 Annual Report | Northern Trust Corporation 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019 and 2018.
TABLE 84: RECORDED INVESTMENTS IN LOANS AND LEASES
COMMERCIAL
PERSONAL
TOTAL
Total Allowance for Credit Losses
$
73.9 $
50.5 $
COMMERCIAL
PERSONAL
TOTAL
(In Millions)
December 31, 2019
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
(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
$
10.4 $
81.8 $
14,263.8
14,274.2
17,053.6
17,135.4
3.4
54.7
58.1
15.8
1.6
44.8
46.4
4.1
$
15.0 $
101.2 $
15,160.2
15,175.2
17,213.6
17,314.8
4.1
53.5
57.6
21.1
3.1
51.9
55.0
4.5
92.2
31,317.4
31,409.6
5.0
99.5
104.5
19.9
124.4
116.2
32,373.8
32,490.0
7.2
105.4
112.6
25.6
138.2
Total Allowance for Credit Losses
$
78.7 $
59.5 $
Note 8 – Concentrations of Credit Risk
Concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have
similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions. The fact that a credit exposure falls into one of these groups does not necessarily
indicate that the credit has a higher than normal degree of credit risk. These groups are: banks and bank holding companies,
residential real estate, and commercial real estate.
Banks and Bank Holding Companies. At December 31, 2019, 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 $4.9 billion, federal funds
sold and securities purchased under agreements to resell of $712.8 million, and demand balances maintained at correspondent
banks of $4.3 billion. 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.
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.
124 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential Real Estate. At December 31, 2019, residential real estate loans totaled $6.0 billion, or 20% of total U.S.
loans and leases at December 31, 2019, compared with $6.5 billion, or 22% of total U.S. loans and leases at December 31,
2018. 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 $6.0 billion residential real estate loans at December 31, 2019 , $1.6 billion were in Florida,
$1.2 billion were in California, and $1.0 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 $714.2 million and $824.0 million at December 31,
2019 and 2018, respectively.
Commercial Real Estate. The commercial real estate portfolio consists of commercial mortgages and construction,
acquisition and development loans extended primarily 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.
The table below provides additional detail regarding commercial real estate loan types.
TABLE 85: 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,
2019
2018
$
754.3 $
646.5
573.3
278.0
420.1
811.2
490.7
529.7
254.9
426.6
2,672.2
2,513.1
432.1
95.5
178.2
420.6
127.0
168.1
$
3,378.0 $
3,228.8
2019 Annual Report | Northern Trust Corporation 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Buildings and Equipment
A summary of buildings and equipment is presented below.
TABLE 86: BUILDINGS AND EQUIPMENT
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Total Buildings and Equipment
(In Millions)
Land and Improvements
Buildings
Equipment
Leasehold Improvements
Total Buildings and Equipment
DECEMBER 31, 2019
ORIGINAL
COST
ACCUMULATED
DEPRECIATION
$
14.5 $
0.5 $
NET BOOK
VALUE
14.0
305.8
731.0
416.1
156.0
521.5
306.1
$
1,467.4 $
984.1 $
149.8
209.5
110.0
483.3
DECEMBER 31, 2018
ORIGINAL
COST
ACCUMULATED
DEPRECIATION
NET BOOK
VALUE
$
15.4 $
1.1 $
245.7
649.9
406.0
148.2
457.6
281.9
$
1,317.0 $
888.8 $
14.3
97.5
192.3
124.1
428.2
The charge for depreciation amounted to $103.2 million in 2019, $108.6 million in 2018, and $101.2 million in 2017 in the
consolidated statements of income.
Note 10 – Lease Commitments
At December 31, 2019, Northern Trust was obligated under a number of non-cancelable operating leases, primarily for real
estate. Certain leases contain rent escalation clauses based on market indices, renewal option clauses calling for increased
rentals, and rental payments based on usage. There are no restrictions imposed by any lease agreement regarding the payment
of dividends, debt financing or Northern Trust entering into further lease agreements.
The components of lease costs for the year ended December 31, 2019 were as follows.
TABLE 87: LEASE COST COMPONENTS
(In Millions)
Operating Lease Cost
Variable Lease Cost
Sublease Income
Total Lease Cost
DECEMBER 31, 2019
$
$
102.2
38.7
(6.6)
134.3
126 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a maturity analysis of lease liabilities as of December 31, 2019.
TABLE 88: MATURITY OF LEASE LIABILITIES
(In Millions)
2020
2021
2022
2023
2024
Later Years
Total Lease Payments
Less: Imputed Interest
Present Value of Lease Liabilities
MATURITY OF LEASE
LIABILITIES
101.3
$
85.8
78.5
70.5
59.6
300.0
695.7
(92.6)
603.1
$
As of December 31, 2019, Northern Trust had commitments for operating leases in addition to the above that have not yet
commenced for approximately $40.1 million. These operating leases are for the use of office space with lease terms between
9 and 15 years and are expected to commence early 2020 through late 2021.
Northern Trust uses its incremental borrowing rate to determine the present value of lease payments for operating leases.
Operating lease ROU assets and lease liabilities may include options to extend or terminate the lease only when it is reasonably
certain that Northern Trust will exercise that option. Northern Trust elects not to separate lease and non-lease components of
a contract for its real estate leases. The location and amount of ROU assets and lease liabilities recorded in the consolidated
balance sheets as of December 31, 2019 are presented in the following table.
TABLE 89: LOCATION AND AMOUNT OF LEASE ASSETS AND LIABILITIES
(In Millions)
Assets
Operating Lease Right-of-Use Asset
Liabilities
Operating Lease Liability
LOCATION OF LEASE ASSETS
AND LEASE LIABILITIES ON
THE BALANCE SHEET
DECEMBER 31, 2019
Other Assets
Other Liabilities
$
$
491.6
603.1
The weighted-average remaining lease term and weighted-average discount rate applied to leases as of December 31, 2019
were as follows:
TABLE 90: WEIGHTED-AVERAGE REMAINING LEASE TERM AND DISCOUNT RATE
Operating Leases
Weighted-Average Remaining Lease Term
Weighted-Average Discount Rate
DECEMBER 31, 2019
9.2 years
3.0%
The following table provides supplemental cash flow information related to leases for the year ended December 31, 2019.
TABLE 91: SUPPLEMENTAL CASH FLOW INFORMATION
(In Millions)
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows
Supplemental non-cash information
Right-of-use assets obtained in exchange for new operating lease liabilities
DECEMBER 31, 2019
$
$
101.2
108.3
2019 Annual Report | Northern Trust Corporation 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the provisions of Accounting Standards Codification (ASC) Topic 842, Northern Trust has elected not to restate
comparative periods in the period of adoption. Therefore, disclosure with respect to minimum annual lease commitments as
of December 31, 2018, for all non-cancelable operating leases with a term of one year or more is provided in the table below,
as required by ASC Topic 840.
TABLE 92: 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, 2019 and
2018, including the effect of foreign exchange rates on non-U.S.-dollar-denominated balances, were as follows:
TABLE 93: GOODWILL
(In Millions)
Balance at December 31, 2017
Goodwill Acquired
Foreign Exchange Rates
Balance at December 31, 2018
Goodwill Acquired
Foreign Exchange Rates
Balance at December 31, 2019
CORPORATE &
INSTITUTIONAL
SERVICES
WEALTH
MANAGEMENT
$
$
$
534.5 $
71.1 $
71.4
(7.7)
—
—
598.2 $
71.1 $
23.5
4.0
—
—
625.7 $
71.1 $
TOTAL
605.6
71.4
(7.7)
669.3
23.5
4.0
696.8
The goodwill impairment test is performed at least annually at the reporting-unit level. The Corporation has determined
its reporting units for this purpose to be Corporate & Institutional Services and Wealth Management. Goodwill was tested for
impairment during the fourth quarter of 2019 using a quantitative assessment in which the estimated fair values of the reporting
units are compared to their carrying values. Impairment is deemed to exist if the carrying value of a reporting unit exceeds
its estimated fair value. Based upon the quantitative assessments, there were no impairments to goodwill in 2019.
128 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other
intangible assets subject to amortization as of December 31, 2019 and 2018 were as follows:
TABLE 94: OTHER INTANGIBLE ASSETS
(In Millions)
Gross Carrying Amount
Less: Accumulated Amortization
Net Book Value
DECEMBER 31,
2019
207.2 $
86.6
120.6 $
2018
211.1
72.5
138.6
$
$
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 $16.6 million, $17.4 million, and
$11.4 million for the years ended December 31, 2019, 2018, and 2017, respectively. Amortization for the years 2020, 2021,
2022, 2023, and 2024 is estimated to be $16.7 million, $14.3 million, $9.7 million, $9.4 million, and $9.3 million respectively.
In the third quarter of 2019, Northern Trust completed its acquisition of Belvedere Advisors LLC, a provider of digital
investment advisory and asset management services. The purchase price recorded in connection with the closing of the
acquisition, which is subject to certain performance-related adjustments over a five-year period after the acquisition date,
totaled $17.6 million inclusive of contingent consideration. Goodwill and developed technology associated with the transaction
totaled $9.3 million and $8.3 million, respectively.
In the first quarter of 2019, Northern Trust completed the purchase accounting related to its acquisition of BEx LLC, a
provider of foreign exchange software solutions. The purchase price recorded in connection with the closing of the acquisition
totaled $37.9 million. Goodwill and developed technology associated with the acquisition totaled $12.5 million and $25.0
million, respectively.
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 associated
development resources, for a total purchase price of $73.0 million. Goodwill and incremental developed technology associated
with the acquisition in 2018 totaled $71.4 million and $1.6 million, respectively.
Note 12 – Deposits
The table below provides the scheduled maturity of total time deposits in denominations of $100,000 or greater at December 31,
2019.
TABLE 95: REMAINING MATURITY OF TIME DEPOSITS $100,000 OR MORE
(In Millions)
1 Year or Less
Over 1 Year to 2 Years
Over 2 Years to 3 Years
Over 3 Years to 4 Years
Over 4 Years to 5 Years
Over 5 Years
Total
U.S. OFFICE
NON-U.S. OFFICES
DECEMBER 31, 2019
CERTIFICATES OF DEPOSIT
OTHER TIME
TOTAL
$
$
673.6 $
196.6
7.4
3.8
4.2
0.9
1,018.9 $
—
—
—
—
—
1,692.5
196.6
7.4
3.8
4.2
0.9
886.5 $
1,018.9 $
1,905.4
As of December 31, 2018, there were $1.3 billion of time deposits in denominations of $100,000 or greater, of which $580.9
million were Certificates of Deposit and $758.6 million were non-U.S.
2019 Annual Report | Northern Trust Corporation 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Senior Notes and Long-Term Debt
Senior Notes. A summary of senior notes outstanding at December 31, 2019 and 2018 is presented below.
TABLE 96: SENIOR NOTES
($ In Millions)
Corporation-Senior Notes
(1)(3)
Fixed Rate Due Nov. 2020
Fixed Rate Due Aug. 2021
Fixed Rate Due Aug. 2022
Fixed Rate Due Aug. 2028
Fixed Rate Due May. 2029
(4)
(5)
(6)
(7)(10)
(8)(10)
Total Senior Notes
DECEMBER 31,
RATE
2019
2018
3.45% $
499.9 $
3.38
2.38
3.65
3.15
499.4
499.4
547.2
527.1
499.7
499.1
499.2
513.3
—
$
2,573.0 $
2,011.3
Long-Term Debt. A summary of long-term debt outstanding at December 31, 2019 and 2018 is presented below.
TABLE 97: LONG-TERM DEBT
($ In Millions)
Corporation-Subordinated Debt
(3)
3.95% Notes due Oct. 2025
(1)(9)(10)
3.375% Fixed-to-Floating Rate Notes due May 2032
(2)
Total Corporation Subordinated Debt
Long-Term Debt Qualifying as Risk-Based Capital
DECEMBER 31,
2019
2018
$
$
$
798.7 $
349.4
1,148.1 $
1,099.5 $
763.1
349.3
1,112.4
1,099.5
(1) Not redeemable prior to maturity, except for senior notes due Aug. 2028 and senior notes due May 2029, 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) As of December 31, 2019, debt issue costs of $2.2 million and $1.3 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.
(4) Notes issued at a discount of 0.117%
(5) Notes issued at a discount of 0.437%
(6) Notes issued at a discount of 0.283%
(7) Notes issued at a discount of 0.125%
(8) Notes issued at a discount of 0.094%
(9) Notes issued at a discount of 0.114%
(10) 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, 2019, increases in the carrying values of the senior and subordinated notes outstanding of $126.9 million were recorded. As of December 31,
2018, net adjustments in the carrying values of subordinated notes outstanding of $29.3 million were recorded.
Note 14 – 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 2019, 30% 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
130 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019 and 2018.
TABLE 98: 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 15 – Stockholders’ Equity
DECEMBER 31,
2019
154.3 $
123.4
277.7 $
2018
154.2
123.4
277.6
$
$
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, 2019, the following shares of preferred stock were outstanding: 16,000 shares of Series C Non-
Cumulative Perpetual Preferred Stock (the “Series C Preferred Stock”), 5,000 shares of Series D Non-Cumulative Perpetual
Preferred Stock (the “Series D Preferred Stock”), and 16,000 shares of Series E Non-Cumulative Perpetual Preferred Stock
(the “Series E Preferred Stock”). Further information with respect to each of these series is as follows.
Series C Preferred Stock. As of December 31, 2019, the Corporation had issued and outstanding 16 million depositary
shares, each representing 1/1,000th ownership interest in a share of Series C Preferred Stock, issued in August 2014. Equity
related to Series C Preferred Stock as of December 31, 2019 and 2018 totaled $388.5 million. Series C Preferred Stock had
no par value and had a liquidation preference of $25,000 (equivalent to $25 per depositary share).
Dividends on the Series C Preferred Stock, which were not mandatory, accrued and were 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%. On October 22, 2019, the Corporation declared a cash dividend of $365.625 per
share of Series C Preferred Stock payable on January 1, 2020, to stockholders of record as of December 15, 2019.
The Series C Preferred Stock had no maturity date and was redeemable at the Corporation’s option in whole, or in part,
on any dividend payment date on or after October 1, 2019. On January 2, 2020, the proceeds from the Series E Preferred Stock
issuance described below were used to fund the redemption of all outstanding shares of the Corporation's Series C Preferred
Stock.
Series D Preferred Stock. As of December 31, 2019, the Corporation had issued and outstanding 500,000 depositary
shares, each representing a 1/100th ownership interest in a share of Series D Preferred Stock, issued in August 2016. Equity
related to Series D Preferred Stock as of December 31, 2019 and 2018 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 first 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 first day of January, April, July and
October of each year, commencing on January 1, 2027.
The Series D Preferred Stock has no maturity date and is redeemable at the Corporation’s option in whole, or in part, on
any dividend payment date on or after October 1, 2026. The Series D Preferred Stock is redeemable at the Corporation’s option
in whole, but not in part, including prior to October 1, 2026, within 90 days of a regulatory capital treatment event, as described
in the Series D Preferred Stock Certificate of Designation.
2019 Annual Report | Northern Trust Corporation 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares of the Series D Preferred Stock rank senior to the Corporation’s common stock, and will rank at least equally with
any other series of preferred stock it may issue (except for any senior series that may be issued with the requisite consent of
the holders of the Series D Preferred Stock) and all other parity stock, with respect to the payment of dividends and distributions
upon liquidation, dissolution or winding up.
Series E Preferred Stock. On November 5, 2019, the Corporation issued and sold 16 million depositary shares, each
representing 1/1,000th ownership interest in a share of Series E Preferred Stock. Shares of the Series E Preferred Stock have
no par value and a liquidation preference of $25,000 (equivalent to $25 per depositary share). The aggregate proceeds from
the public offering of the depositary shares, net of underwriting discounts, commissions and offering expenses, were $391.4
million. As noted above, on January 2, 2020, the proceeds from the Series E Preferred Stock issuance were used to fund the
redemption of all outstanding shares of the Corporation's Series C Preferred Stock.
Dividends on the Series E Preferred Stock, which are not mandatory, will accrue and be payable on the liquidation
preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January,April, July and October of each
year, commencing on April 1, 2020, at a rate per annum equal to 4.70%.
The Series E Preferred Stock has no maturity date and is redeemable at the Corporation's option in whole, or in part, on
any dividend payment date on or after January 1, 2025. The Series E Preferred Stock is redeemable at the Corporation’s option
in whole, but not in part, including prior to January 1, 2025, within 90 days of a regulatory capital treatment event, as described
in the Series E Preferred Stock Certificate of Designation.
Shares of the Series E Preferred Stock rank senior to the Corporation’s common stock, and will rank at least equally with
any other series of preferred stock it may issue (except for any senior series that may be issued with the requisite consent of
the holders of the Series E Preferred Stock) and all other parity stock, with respect to the payment of dividends and distributions
upon liquidation, dissolution or winding up.
Common Stock. The Corporation's current stock repurchase authorization to repurchase up to 25.0 million shares was
approved by the Board of Directors in July 2018. 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 repurchase authorization approved by the Board of Directors has no expiration
date.
Under the Corporation’s 2019 capital plan, which was reviewed without objection by the Federal Reserve, the Corporation
may repurchase up to $828.5 million of common stock after December 31, 2019 through June 30, 2020.
The average price paid per share for common stock repurchased in 2019, 2018, and 2017 was $93.40, $102.69, and
$90.25, respectively.
An analysis of changes in the number of shares of common stock outstanding follows:
TABLE 99: SHARES OF COMMON STOCK
Balance at January 1
Incentive Plan and Awards
Stock Options Exercised
Treasury Stock Purchased
Balance at December 31
2019
2018
2017
219,012,050
226,126,674
228,605,485
1,688,931
786,931
(11,778,866)
1,310,778
575,662
(9,001,064)
1,320,129
1,997,362
(5,796,302)
209,709,046
219,012,050
226,126,674
132 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 – Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of accumulated other comprehensive income (loss) (AOCI) at December 31,
2019, 2018, and 2017, and changes during the years then ended.
TABLE 100: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(In Millions)
Balance at December 31, 2016
Net Change
Balance at December 31, 2017
Reclassification of Certain Tax Effects from AOCI
Net Change
Balance at December 31, 2018
Net Change
Balance at December 31, 2019
NET UNREALIZED
GAINS (LOSSES) ON
DEBT SECURITIES
AVAILABLE FOR SALE (1)
NET UNREALIZED
(LOSSES) GAINS
ON CASH FLOW
HEDGES
NET FOREIGN
CURRENCY
ADJUSTMENTS
NET PENSION AND
OTHER
POSTRETIREMENT
BENEFIT
ADJUSTMENTS
TOTAL
$
$
$
$
(32.4) $
(42.4)
(74.8) $
(17.8)
(22.3)
(114.9) $
228.9
114.0 $
6.1 $
(1.6)
4.5 $
0.9
(1.4)
4.0 $
(7.7)
(3.7) $
(18.5) $
16.7
(1.8) $
47.5
22.2
67.9 $
49.9
117.8 $
(325.2) $
(370.0)
(17.0)
(44.3)
(342.2) $
(414.3)
(55.9)
(12.6)
(25.3)
(14.1)
(410.7) $
(453.7)
(12.1)
259.0
(422.8) $
(194.7)
(1) Includes net unrealized gains (losses) on debt securities transferred from available for sale to held to maturity during the years ended December 31, 2019, 2018, and 2017.
TABLE 101: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
(In Millions)
Unrealized Gains (Losses) on Debt Securities
Available for Sale
Unrealized Gains (Losses) on Debt Securities
Available for Sale
Reclassification Adjustment for Losses (Gains)
Included in Net Income (1)
BEFORE
TAX
TAX
EFFECT
AFTER BEFORE
TAX
TAX EFFECT
AFTER BEFORE
TAX
TAX
TAX
EFFECT
AFTER
TAX
TAX
$ 306.1
$
(78.0) $
228.1
$
(31.9) $
9.2
$
(22.7) $
(70.2) $
26.9
$
(43.3)
1.1
(0.3)
0.8
0.5
(0.1)
0.4
1.4
(0.5)
0.9
Net Change
$ 307.2
$
(78.3) $
228.9
$
(31.4) $
9.1 $
(22.3) $
(68.8) $
26.4 $
(42.4)
Unrealized (Losses) Gains on Cash Flow Hedges
Foreign Exchange Contracts
Interest Rate Contracts
$
14.9
$
(3.7) $
11.2
$
70.5 $
(17.6) $
52.9 $
32.5 $
(19.5) $
13.0
1.5
(0.3)
1.2
(1.2)
0.3
(0.9)
1.3
(0.8)
0.5
Reclassification Adjustment for (Gains) Losses
Included in Net Income (2)
Net Change
Foreign Currency Adjustments
(26.7)
6.6
(20.1)
(71.1)
17.7
(53.4)
(24.5)
9.4
(15.1)
$
(10.3) $
2.6 $
(7.7) $
(1.8) $
0.4
$
(1.4) $
9.3
$
(10.9) $
(1.6)
Foreign Currency Translation Adjustments
$
6.4 $
(1.6) $
4.8 $ (107.8) $
1.5
$ (106.3) $
156.5
$
(3.1) $
153.4
Long-Term Intra-Entity Foreign Currency
Transaction (Losses) Gains
Net Investment Hedge Gains (Losses)
(0.5)
59.7
0.1
(0.4)
(1.8)
0.5
(1.3)
2.0
(0.7)
1.3
(14.2)
45.5
173.0
(43.2)
129.8
(223.2)
85.2
(138.0)
Net Change
$
65.6 $
(15.7) $
49.9 $
63.4 $
(41.2) $
22.2 $
(64.7) $
81.4
$
16.7
Pension and Other Postretirement Benefit
Adjustments
Net Actuarial (Losses) Gains
$
(36.8) $
7.9 $
(28.9) $
(54.9) $
9.6 $
(45.3) $
(58.4) $
25.4
$
(33.0)
Reclassification Adjustment for Losses (Gains)
Included in Net Income (3)
Amortization of Net Actuarial Loss
Amortization of Prior Service Cost
Net Change
Total Net Change
22.4
(0.2)
(5.4)
17.0 $
36.6 $
(3.6) $
33.0
—
(0.2) $
(0.3) $
— $
(0.3)
26.0
(0.1)
(9.9)
—
16.1
(0.1)
$
(14.6) $
2.5 $
(12.1) $
(18.6) $
6.0 $
(12.6) $
(32.5) $
15.5 $
(17.0)
$ 347.9 $
(88.9) $ 259.0 $
11.6 $
(25.7) $
(14.1) $ (156.7) $ 112.4 $
(44.3)
(1) The before-tax reclassification adjustment out of AOCI related to the realized gains (losses) on debt securities available for sale is recorded as Investment Security Gains
(Losses), net within the consolidated statements of income.
(2) See Note 27, "Derivative Financial Instruments" for the location of the reclassification adjustment related to cash flow hedges.
(3) The before-tax reclassification adjustment out of AOCI related to pension and other postretirement benefit adjustments is recorded in Employee Benefits expense within the
consolidated statements of income.
2019 Annual Report | Northern Trust Corporation 133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Net Income per Common Share
The computations of net income per common share are presented below.
TABLE 102: 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,
2019
2018
2017
214,525,547
223,148,335
228,257,664
$
1,492.2 $
1,556.4 $
1,199.0
46.4
1,445.8
16.9
46.4
1,510.0
20.1
49.8
1,149.2
18.8
$
1,428.9 $
1,489.9 $
1,130.4
6.66
6.68
4.95
214,525,547
223,148,335
228,257,664
1,075,602
1,339,991
1,396,737
215,601,149
224,488,326
229,654,401
$
1,428.9 $
1,490.0 $
1,130.5
6.63
6.64
4.92
Note: For the years ended December 31, 2019 and, 2018 there were no common stock equivalents excluded in the computation of diluted net income per share. Common stock
equivalents of 115,491 for the year ended December 31, 2017 were not included in the computation of diluted net income per common share because their inclusion would have
been antidilutive.
Note 18 – 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.
134 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following table presents revenues disaggregated by major revenue source.
TABLE 103: 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 Trading Income
Treasury Management Fees
Security Commissions and Trading Income
Other Operating Income
Investment Security Gains (Losses), net
Total Other Noninterest Income
Total Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
$
1,636.4 $
1,930.6
87.7
197.4
1,589.1
1,862.6
102.8
199.2
$
$
$
$
3,852.1 $
3,753.7
250.9 $
44.5
103.6
145.5
(1.4)
543.1 $
307.2
51.8
98.3
127.5
(1.0)
583.8
4,395.2 $
4,337.5
Trust, investment and other servicing fees and treasury management fees represent revenue from contracts with clients. For
the year ended December 31, 2019, revenue from contracts with clients also includes $87.1 million of the $103.6 million total
securities commissions and trading income and $41.8 million of the $145.5 million total other operating income. For the year
ended December 31, 2018, 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.
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, 2019 and 2018.
TABLE 104: CLIENT RECEIVABLES
(In Millions)
Trust Fees Receivable, net
Other
Total Client Receivables
DECEMBER 31,
2019
801.9 $
101.1
903.0 $
2018
742.5
90.1
832.6
$
$
2019 Annual Report | Northern Trust Corporation 135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 – Net Interest Income
The components of net interest income were as follows:
TABLE 105: 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,
2019
2018
2017
$
1,153.4 $
1,098.8 $
1,070.7
3.8
72.4
199.6
905.2
7.0
70.0
240.4
919.1
594.1
9.8
63.8
182.6
$
$
$
$
2,499.9 $
2,321.4 $
1,769.4
488.9 $
384.6 $
182.1
25.9
6.4
181.7
72.6
38.3
8.2
50.3
7.8
150.1
53.4
45.0
7.5
10.4
6.0
50.7
46.9
39.2
4.9
822.0 $
698.7 $
340.2
1,677.9 $
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 20 – Other Operating Income
The components of other operating income were as follows:
TABLE 106: OTHER OPERATING INCOME
(In Millions)
Loan Service Fees
Banking Service Fees
Other Income
Total Other Operating Income
FOR THE YEAR ENDED DECEMBER 31,
2019
48.0 $
45.6
51.9
2018
48.9 $
46.4
32.2
2017
50.7
48.6
58.2
145.5 $
127.5 $
157.5
$
$
Other income of $51.9 million in 2019 increased from $32.2 million in 2018, primarily due to income related to a bank-owned
life insurance program implemented during 2019, higher miscellaneous income, and the prior-year impairment of a community
development equity investment previously held at cost, partially offset by a charge related to the decision made in 2019 to
sell substantially all of the lease portfolio.
136 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 – Other Operating Expense
The components of other operating expense were as follows:
TABLE 107: 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,
2019
$
104.2 $
9.9
42.8
16.6
156.3
2018
98.3 $
27.4
33.6
17.4
153.9
$
329.8 $
330.6 $
2017
95.4
34.7
42.8
11.4
147.3
331.6
Other operating expense in 2019 as compared to 2018 primarily reflects decreased FDIC insurance premiums, partially offset
by higher staff-related expense and business promotion expense.
Note 22 – 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 108: 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
Valuation Allowance
Other
Provision for Income Taxes
FOR THE YEAR ENDED DECEMBER 31,
2019
21.0%
2018
21.0%
2017
35.0%
$
408.3
$
411.1 $
571.9
(11.5)
4.6
(17.5)
55.0
—
—
29.5
(16.5)
(6.9)
(7.3)
(16.8)
66.3
(4.8)
(24.4)
(0.8)
(15.0)
(9.6)
(50.0)
(31.6)
40.7
(53.1)
—
0.3
(33.7)
$
451.9
$
401.4 $
434.9
Income tax expense for the twelve months ended December 31, 2019 and 2018 was $451.9 million and $401.4 million,
representing an effective tax rate of 23.2% and 20.5%, respectively. For the twelve months ended December 31, 2019, the
provision for income taxes included an increase in the U.S. taxes payable on the income of the Corporation’s non-U.S. branches.
This increase included a valuation allowance against deferred tax assets as management believes the foreign tax credit
carryforward generated in 2019 will not be fully realized.
For the twelve months ended December 31, 2018, the provision for income taxes included income tax benefits recorded
in 2018 associated with the timing of tax deductions for software development-related expenses and the implementation of
the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017, partially offset by a change in the earnings mix in
tax jurisdictions in which the Corporation operates.
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.
2019 Annual Report | Northern Trust Corporation 137
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 109: 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 included a 2018 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-
U.S. subsidiaries, offset by a $12.7 million net provision recorded in 2018 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 2012.
Included in Other Liabilities within the consolidated balance sheets at December 31, 2019 and 2018 were $25.3 million
and $21.9 million of unrecognized tax benefits, respectively. If recognized, 2019 and 2018 net income would have increased
by $22.7 million and $19.8 million, respectively, resulting in a decrease of those years’ effective income tax rates. A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
TABLE 110: 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
$
2019
21.9 $
0.9
4.0
(1.5)
—
2018
27.7 $
0.5
1.7
(7.8)
(0.2)
$
25.3 $
21.9 $
2017
17.2
9.9
6.2
(5.4)
(0.2)
27.7
Unrecognized tax benefits had net increases of $3.4 million, resulting in a remaining balance of $25.3 million at December 31,
2019, compared to net decreases of $5.8 million resulting in a remaining balance of $21.9 million at December 31, 2018. 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 benefit for interest and penalties of $1.3 million, net of tax, was included in the provision for income taxes for the year
ended December 31, 2019. This compares to a provision for interest and penalties of $0.3 million, net of tax, and $0.1 million,
net of tax, for the year ended December 31, 2018 and 2017, respectively. As of December 31, 2019 and 2018, the liability for
the potential payment of interest and penalties totaled $8.4 million and $9.2 million, net of tax, respectively.
138 2019 Annual Report | Northern Trust Corporation
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 111: PROVISION FOR INCOME TAXES
(In Millions)
Current Tax Provision:
Federal
State
Non-U.S.
Total
Deferred Tax Provision:
Federal
State
Non-U.S.
Total
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
$
216.4 $
132.8 $
50.7
150.5
417.6
95.4
162.7
390.9
$
16.5 $
33.8 $
16.5
1.3
34.3
(13.8)
(9.5)
10.5
347.3
38.3
125.4
511.0
(96.4)
24.6
(4.3)
(76.1)
Provision for Income Taxes
$
451.9 $
401.4 $
434.9
In addition to the amounts shown above, tax charges and benefits have been recorded directly to stockholders’ equity for the
following:
TABLE 112: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY
(In Millions)
Tax Effect of Other Comprehensive Income
FOR THE YEAR ENDED DECEMBER 31,
2019
88.9
2018
25.7
2017
(112.4)
Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and
the tax bases of assets and liabilities. Deferred tax assets and liabilities have been computed as follows:
TABLE 113: 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
Other Assets
Gross Deferred Tax Assets
Valuation Reserve
Deferred Tax Assets, net of Valuation Reserve
Net Deferred Tax Liabilities
DECEMBER 31,
2019
2018
$
36.9 $
249.4
99.8
8.3
66.4
206.7
667.5
26.1
147.0
173.1
(29.8)
143.3
$
524.2 $
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
Northern Trust had various state net operating loss carryforwards as of December 31, 2019 and 2018. The income tax
benefits associated with these loss carryforwards were approximately $1.0 million as of December 31, 2019 and $0.3 million
2019 Annual Report | Northern Trust Corporation 139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2018. A valuation allowance related to the loss carryforwards of $0.3 million was recorded at December 31,
2019 and 2018, as management believes the net operating losses will not be fully realized.
The Corporation generated a foreign tax credit carryforward during the twelve months ended December 31, 2019. A
valuation allowance related to the credit carryforward of $29.5 million was recorded at December 31, 2019, as management
believes that the foreign tax credit carryforward will not be fully realized.
Note 23 – Employee Benefits
The Corporation and certain of its subsidiaries provide various benefit programs, including defined benefit pension,
postretirement health care, and defined contribution plans. Adescription 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 benefits
under the U.S. Qualified 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, 2019
and 2018 amounted to $128.8 million and $129.9 million, respectively. Contributions of $3.0 million and $21.9 million were
made to the “Rabbi” Trust in 2019 and 2018, respectively.
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. Qualified
Plan, Non-U.S. Pension Plans, and U.S. Non-Qualified Plan for 2019, 2018, and 2017. Prior service costs are being amortized
on a straight-line basis over 11 years for the U.S. Qualified Plan and 10 years for the U.S. Non-Qualified Plan.
TABLE 114: EMPLOYEE BENEFIT PLAN STATUS
($ 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. QUALIFIED PLAN
NON-U.S. PENSION PLANS
U.S. NON-QUALIFIED PLAN
2019
2018
2019
2018
2019
2018
$
1,181.9
$
980.6 $
204.7
$
178.4 $
131.5
$
120.9
1,323.4
1,601.2
1,092.0
1,380.1
211.1
190.1
183.5
166.7
149.2
—
135.6
—
$
277.8
$
288.1 $
(21.0) $
(16.8) $
(149.2) $
(135.6)
3.37%
4.47%
1.40%
2.16%
4.97
5.25
4.39
6.00
1.50
1.72
1.75
2.39
3.37%
4.97
N/A
4.47%
4.39
N/A
TABLE 115: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
(In Millions)
Net Actuarial Loss
Prior Service (Benefit) Cost
Gross Amount in Accumulated Other Comprehensive
Income
Income Tax Effect
Net Amount in Accumulated Other Comprehensive
Income
U.S. QUALIFIED PLAN
NON-U.S. PENSION PLANS
U.S. NON-QUALIFIED PLAN
2019
2018
2019
2018
2019
$
426.7 $
435.4 $
46.5 $
41.2 $
82.5 $
(1.0)
(1.4)
3.0
425.7
105.7
434.0
108.5
49.5
6.2
3.6
44.8
6.0
0.2
82.7
20.4
2018
65.8
0.4
66.2
16.4
$
320.0 $
325.5 $
43.3 $
38.8 $
62.3 $
49.8
140 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 116: NET PERIODIC PENSION EXPENSE
U.S. QUALIFIED PLAN
NON-U.S. PENSION PLANS
U.S. NON-QUALIFIED PLAN
($ In Millions)
Service Cost
Interest Cost
Expected Return on Plan Assets
Settlement Expense
Amortization:
Net Actuarial Loss
Prior Service (Benefit) Cost
2019
2018
2017
2019
2018
2017
2019
2018
$
41.6
$
41.4 $
38.3 $
47.2
(86.9)
—
17.2
(0.4)
44.3
45.9
(88.2)
(93.8)
—
—
28.2
(0.4)
19.0
(0.4)
2.0
3.9
(4.4)
—
0.6
0.3
2.4
$
1.7 $
0.4 $
4.0
(4.4)
0.5
0.9
0.2
4.0
(4.5)
1.1
1.3
0.1
4.1
5.8
—
—
5.6
0.2
$
4.3 $
5.3
N/A
—
7.4
0.2
$
2.9 $
2.4 $
15.7
$
17.2 $
14.8
2017
3.7
5.2
N/A
—
5.7
0.2
Net Periodic Pension Expense
$
18.7
$
25.3 $
9.0 $
Weighted-Average Assumptions:
Discount Rates
4.47%
3.79%
4.46%
2.16%
2.08%
2.33%
4.47%
3.79%
4.46%
Rate of Increase in Compensation
Level
Expected Long-Term Rate of
Return on Assets
4.39
4.39
4.39
1.75
1.75
1.75
4.39
4.39
4.39
6.00
6.00
6.75
2.39
2.61
3.13
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.
TABLE 117: CHANGE IN PROJECTED BENEFIT OBLIGATION
U.S. QUALIFIED PLAN
NON-U.S. PENSION PLANS
U.S. NON-QUALIFIED PLAN
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Employee Contributions
Plan Amendment
Actuarial Loss (Gain)
Settlement
Benefits Paid
Foreign Exchange Rate Changes
2019
2018
2019
2018
2019
$
1,092.0 $
1,209.9 $
183.5 $
198.3 $
135.6 $
41.6
47.2
—
—
213.3
—
(70.7)
—
41.4
44.3
—
—
(112.4)
—
(91.2)
—
2.0
3.9
0.6
(0.4)
20.9
—
(3.6)
4.2
1.7
4.0
0.4
1.3
(9.3)
(2.7)
(1.1)
(9.1)
4.1
5.8
—
—
22.0
—
(18.3)
—
2018
144.5
4.3
5.3
—
—
(9.7)
—
(8.8)
—
Ending Balance
$
1,323.4 $
1,092.0 $
211.1 $
183.5 $
149.2 $
135.6
Actuarial losses of $256.2 million in 2019 were primarily caused by decreases in discount rates. Actuarial gains of $131.4
million in 2018 were primarily caused by increases in discount rates.
TABLE 118: ESTIMATED FUTURE BENEFIT PAYMENTS
(In Millions)
2020
2021
2022
2023
2024
2025-2029
U.S. QUALIFIED PLAN
NON-U.S.PENSION PLANS U.S. NON-QUALIFIED PLAN
$
81.0 $
3.9 $
82.9
84.3
91.1
89.6
469.7
4.2
4.2
4.6
4.9
29.9
15.0
16.7
18.4
20.3
16.2
60.8
2019 Annual Report | Northern Trust Corporation 141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 119: CHANGE IN PLAN ASSETS
U.S. QUALIFIED PLAN
NON-U.S PENSION PLANS
(In Millions)
2019
2018
2019
Fair Value of Assets at Beginning of Period
$
1,380.1 $
1,506.4 $
166.7 $
Actual Return on Assets
Employer Contributions
Employee Contributions
Settlement
Benefits Paid
Foreign Exchange Rate Changes
Fair Value of Assets at End of Period
291.8
—
—
—
(70.7)
—
(85.1)
50.0
—
—
(91.2)
—
18.6
3.1
0.6
—
(3.6)
4.7
2018
178.7
(2.3)
2.6
0.4
(2.7)
(1.1)
(8.9)
$
1,601.2 $
1,380.1 $
190.1 $
166.7
The minimum required and maximum remaining deductible contributions for the U.S. Qualified Plan in 2020 are estimated
to be zero and $275.0 million, respectively.
During 2017, the investment strategy employed for Northern Trust's U.S. Qualified 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 U.S. Qualified Plan's projected benefit obligation funded ratio. In general, as the U.S. Qualified Plan’s projected
benefit obligation funded ratio increases beyond an established threshold, the U.S. Qualified Plan’s allocation to liability-
hedging assets will increase while the allocation to return-seeking assets will decrease. Conversely, a decrease in the U.S.
Qualified Plan’s projected benefit obligation funded ratio beyond an established threshold will result in a decrease in the U.S.
Qualified 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, 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
U.S. Qualified Plan’s investment objectives. Risk tolerance is established through careful consideration of the U.S. Qualified
Plan liabilities, funded status, and corporate financial condition. The intent of this strategy is to protect the U.S. Qualified
Plan's healthy funded status and generate returns, which in combination with minimal voluntary contributions are expected
to outpace the U.S. Qualified Plan's liability growth over the long run.
The target allocation of the U.S. Qualified Plan assets since February 2019 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% private 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, private 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 U.S. Qualified Plan is prohibited. The U.S. Qualified 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 U.S. Qualified Plan
invests in one hedge fund of funds, which invests, either directly or indirectly, in diversified portfolios of funds or other pooled
investment vehicles.
Investments in private 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 U.S. Qualified 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,
142 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to hedge foreign currency exposure or interest rate risk, or to alter the duration of a portfolio. There were five derivatives held
by the U.S. Qualified Plan at December 31, 2019. There were four derivatives held by the U.S. Qualified Plan at December 31,
2018.
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 U.S. Qualified 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 U.S. Qualified
Plan is ranked against a universe of peers and compared to a relative benchmark. Total U.S. Qualified 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 U.S. Qualified Plan performance.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used
by Northern Trust for the U.S. Qualified Plan assets measured at fair value.
Level 1 – Quoted, active market prices for identical assets or liabilities. The U.S. Qualified Plan’s Level 1 investments
are comprised of a mutual fund and domestic common stocks. The U.S. Qualified 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 U.S. Qualified 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 U.S.
Qualified 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 estimated
value reported by the underlying funds as well as any other considerations that may, in their judgment, increase or decrease
such estimated value.
The U.S. Qualified Plan’s Level 3 assets are also comprised of real estate funds, which invest in real estate assets. The
investment in properties by the real estate funds are carried at fair value, which is estimated based on the price that would be
received to sell an asset in an orderly transaction between marketplace participants at the measurement date. The valuation
plan for each real estate investment is subject to review on an annual basis which is based on either an external appraisal from
appraisal firms or internal valuations prepared by the real estate fund's investment advisor.
While Northern Trust believes its valuation methods for U.S. Qualified 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.
2019 Annual Report | Northern Trust Corporation 143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair values of Northern Trust’s U.S. Qualified Plan assets, by major asset category, and
their level within the fair value hierarchy defined by GAAP as of December 31, 2019 and 2018.
TABLE 120: FAIR VALUE OF U.S. QUALIFIED PLAN ASSETS
(In Millions)
Domestic Common Stock
Domestic Corporate Bonds
Foreign Corporate Bonds
U.S. Government Obligations
Non-U.S. Government Obligations
Domestic Municipal and Provincial Bonds
Foreign Municipal and Provincial Bonds
Collective Trust Funds
Mutual Funds
Northern Trust Private Equity Funds
Northern Trust Hedge Funds
Real Estate Funds
Cash and Other
Total Assets at Fair Value
(In Millions)
Domestic Common Stock
Domestic Corporate Bonds
Foreign Corporate Bonds
U.S. Government Obligations
Non-U.S. Government Obligations
Domestic Municipal and Provincial Bonds
Foreign Municipal and Provincial Bonds
Collective Trust Funds
Mutual Funds
Exchange Traded Fund
Northern Trust Private Equity Funds
Northern Trust Hedge Funds
Cash and Other
Total Assets at Fair Value
DECEMBER 31, 2019
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$
12.3
$
—
$
—
$
—
—
—
—
—
—
—
112.8
—
—
—
2.6
254.6
45.0
168.3
18.8
23.1
0.3
866.6
—
—
—
—
—
—
—
—
—
—
—
—
—
20.3
30.2
46.3
—
12.3
254.6
45.0
168.3
18.8
23.1
0.3
866.6
112.8
20.3
30.2
46.3
2.6
$
127.7 $
1,376.7 $
96.8 $
1,601.2
DECEMBER 31, 2018
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$
27.7
$
—
$
—
$
—
—
—
—
—
—
—
92.4
0.1
—
—
2.3
227.6
34.2
155.5
15.1
22.7
2.0
745.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25.5
29.2
—
27.7
227.6
34.2
155.5
15.1
22.7
2.0
745.8
92.4
0.1
25.5
29.2
2.3
$
122.5 $
1,202.9 $
54.7 $
1,380.1
The following table presents the changes in Level 3 assets for the years ended December 31, 2019 and 2018.
TABLE 121: CHANGE IN U.S. QUALIFIED PLAN LEVEL 3 ASSETS
PRIVATE EQUITY FUNDS
HEDGE FUNDS
REAL ESTATE FUNDS
(In Millions)
Fair Value at January 1
Actual Return on Plan Assets
(1)
$
Realized Gain
Purchases
Sales
2019
25.5 $
(2.8)
7.4
0.1
(9.9)
2018
29.3 $
(1.5)
8.7
0.3
(11.3)
2019
29.2 $
1.2
—
—
(0.2)
2018
44.6 $
(2.7)
2.4
—
(15.1)
2019
— $
0.2
—
46.1
—
Fair Value at December 31
$
20.3 $
25.5 $
30.2 $
29.2 $
46.3 $
(1) The return on plan assets represents the change in the unrealized gain (loss) on assets still held at December 31.
2018
—
—
—
—
—
—
144 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A building block approach is employed for Northern Trust’s U.S. Qualified Plan in determining the long-term rate of return
for plan assets. Historical markets and long-term historical relationships between equities, fixed income and other asset classes
are studied using the widely accepted capital market principle that assets with higher volatility generate a greater return over
the long-run. Current market factors such as inflation expectations and interest rates are evaluated before long-term capital
market assumptions are determined. The long-term portfolio rate of return is established with consideration given to
diversification and rebalancing. The rate is reviewed against peer data and historical returns to verify the return is reasonable
and appropriate. Based on this approach and the U.S. Qualified Plan’s target asset allocation, the expected long-term rate of
return on assets as of the U.S. Qualified Plan’s December 31, 2019 measurement date was set at 5.25%.
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
health care 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,
2019 and 2018, the net periodic postretirement benefit cost of the plan for 2019 and 2018, and the change in the accumulated
postretirement benefit obligation during 2019 and 2018.
TABLE 122: 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 123: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
(In Millions)
Net Actuarial (Gain) Loss
Prior Service Cost
Gross Amount in Accumulated Other Comprehensive Income
Income Tax Effect
$
$
$
DECEMBER 31,
2019
25.2 $
3.6
28.8 $
DECEMBER 31,
2019
(5.4) $
—
(5.4)
(1.4)
Net Amount in Accumulated Other Comprehensive Income
$
(4.0) $
TABLE 124: NET PERIODIC POSTRETIREMENT EXPENSE (BENEFIT)
(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,
$
2019
— $
1.2
—
(1.1)
—
2018
— $
1.3
—
—
—
$
0.1 $
1.3 $
2018
23.5
4.6
28.1
2018
(6.5)
—
(6.5)
(2.2)
(4.3)
2017
0.1
1.4
—
—
—
1.5
2019 Annual Report | Northern Trust Corporation 145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 125: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Actuarial Loss (Gain)
Net Claims Paid
Ending Balance
FOR THE YEAR ENDED DECEMBER 31,
$
2019
28.1 $
—
1.2
0.2
(0.7)
$
28.8 $
2018
34.4
—
1.3
(6.7)
(0.9)
28.1
Northern Trust uses the aggregate Pri-2012 mortality table with a 2012 base year and proposed future improvements under
scale MP-2019, as released by the Society of Actuaries in October 2019. These assumptions were updated at December 31,
2019 from the aggregate table RP-2014 and improvement scale MP-2018.
TABLE 126: ESTIMATED FUTURE BENEFIT PAYMENTS
(In Millions)
2020
2021
2022
2023
2024
2025-2029
TOTAL
POSTRETIREMENT
MEDICAL
BENEFITS
$
2.5
2.4
2.3
2.2
2.1
9.6
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 3.37% at
December 31, 2019, and 4.47% at December 31, 2018. For measurement purposes, a 6.25% annual increase in the cost of
pre-age 65 medical benefits and post-age 65 medical benefits were assumed for 2019. For drug claims, an 8.25% annual
increase in cost was assumed for 2019. These rates are both assumed to gradually decrease until they reach 4.50% in 2027.
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
$57.6 million in 2019, $54.4 million in 2018, and $53.4 million in 2017.
Note 24 – 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 127: 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
146 2019 Annual Report | Northern Trust Corporation
FOR THE YEAR ENDED DECEMBER 31,
2019
81.4 $
1.4
25.1
107.9 $
26.7 $
2018
96.3 $
2.6
32.0
130.9 $
32.5 $
2017
87.3
9.0
31.7
128.0
48.7
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019, there was $77.7 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 non-
qualified 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, 2019, shares available for future grant under the 2017 Plan, including shares forfeited
under the 2012 Plan and 2002 Plan, totaled 18,234,658.
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 years ended December 31, 2019 and 2018. The weighted-average assumptions
used for options granted during the year ended December 31, 2017 are as follows:
TABLE 128: 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
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.
2019 Annual Report | Northern Trust Corporation 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about stock options granted, vested, and exercised in the years ended
December 31, 2019, 2018, and 2017.
TABLE 129: STOCK OPTIONS GRANTED, VESTED, AND EXERCISED
(In Millions, Except Per Share Information)
Weighted Average Grant-Date Per Share Fair Value of Stock Options Granted
$
Grant-Date Fair Value of Stock Options Vested
Stock Options Exercised
Intrinsic Value as of Exercise Date
Cash Received
Tax Deduction Benefits Realized
FOR THE YEAR ENDED DECEMBER 31,
2019
— $
6.6
35.4
44.0
35.2
2018
— $
8.1
28.5
32.6
27.7
2017
19.18
7.3
74.7
108.0
73.1
The following is a summary of changes in nonvested stock options for the year ended December 31, 2019.
TABLE 130: CHANGES IN NONVESTED STOCK OPTIONS
NONVESTED OPTIONS
Nonvested at December 31, 2018
Granted
Vested
Forfeited or Cancelled
Nonvested at December 31, 2019
WEIGHTED- AVERAGE
GRANT-DATE
FAIR VALUE
PER SHARE
SHARES
757,738 $
—
(372,799)
—
384,939 $
17.36
—
17.26
—
17.45
A summary of the status of stock options at December 31, 2019, and changes during the year then ended, are presented in the
table below.
TABLE 131: STATUS OF STOCK OPTIONS AND CHANGES
($ In Millions Except Per Share Information)
Options Outstanding, December 31, 2018
Granted
Exercised
Forfeited, Expired or Cancelled
Options Outstanding, December 31, 2019
Options Exercisable, December 31, 2019
WEIGHTED AVERAGE
EXERCISE PRICE
PER SHARE
SHARES
WEIGHTED AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC VALUE
2,481,061 $
—
(786,931)
2,806
1,696,936 $
1,311,997 $
61.90
—
55.91
53.10
64.77
61.42
4.1 $
3.8 $
70.4
58.5
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 2019 predominately vest at a rate equal to 25% each year for four years on the anniversary
of the first day of the month following the month in which the grant date falls. Restricted stock unit grants totaled 855,112,
815,314, and 863,308, with weighted average grant-date fair values of $91.89, $103.74, and $88.19 per share, for the years
ended December 31, 2019, 2018, and 2017, respectively. The total fair value of restricted stock units vested during the years
ended December 31, 2019, 2018, and 2017, was $89.3 million, $66.4 million, and $88.7 million, respectively.
A summary of the status of outstanding restricted stock unit awards at December 31, 2019, and changes during the year
then ended, is presented in the following table.
148 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 132: OUTSTANDING RESTRICTED STOCK UNIT AWARDS
($ In Millions)
Restricted Stock Unit Awards Outstanding, December 31, 2018
Granted
Distributed
Forfeited
Restricted Stock Unit Awards Outstanding, December 31, 2019
Units Convertible, December 31, 2019
NUMBER
AGGREGATE
INTRINSIC VALUE
3,121,842 $
261.0
855,112
(1,271,190)
(61,002)
2,644,762 $
23,435 $
281.0
2.5
The following is a summary of nonvested restricted stock unit awards at December 31, 2019, and changes during the year
then ended.
TABLE 133: NONVESTED RESTRICTED STOCK UNIT AWARDS
NONVESTED RESTRICTED
STOCK UNITS
Nonvested at December 31, 2018
Granted
Vested
Forfeited
Nonvested at December 31, 2019
WEIGHTED AVERAGE WEIGHTED AVERAGE
GRANT- DATE FAIR REMAINING VESTING
TERM (YEARS)
VALUE PER UNIT
NUMBER
2,977,120 $
855,112
(1,147,020)
(61,002)
2,624,210 $
79.92
91.89
72.17
77.64
87.26
1.9
1.7
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 at the end of a three-year performance period, subject to the attainment of
specified performance targets that are a function of return on equity. For performance stock units outstanding as of December 31,
2019, and granted in 2017, 2018, or 2019, 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 3-year average annual return on equity target. Distribution of the
shares is then made after vesting.
Performance stock unit grants totaled 213,044, 242,232, and 231,269 for the years ended December 31, 2019, 2018, and
2017, respectively, with weighted average grant-date fair values of $93.00, $104.72, and $69.80. Performance stock units
outstanding at target level performance totaled 667,741, 797,531, and 817,432 at December 31, 2019, 2018, and 2017,
respectively. Performance stock units had aggregate intrinsic values of $70.9 million, $66.7 million, and $81.7 million, and
weighted average remaining vesting terms of 1.0 year, 1.0 year, and 1.1 years, at December 31, 2019, 2018, and 2017,
respectively.
Non-employee Director Stock Awards. Stock units with total values of $1.3 million (14,232 units), $1.2 million (11,363
units), and $1.2 million (13,354 units) were granted to non-employee directors in 2019, 2018, and 2017, 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 $1.4 million, $1.3 million, and $1.3 million in 2019, 2018, and 2017, 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 25 – 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 $326.1 million in 2019, $326.5 million in 2018, and
$289.8 million in 2017.
2019 Annual Report | Northern Trust Corporation 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26 – 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 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,
2019, 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.
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 certain litigation related to interchange fees involving Visa (the covered litigation), 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, and September 27, 2019, Visa deposited an additional $600 million and $300 million, respectively,
into an escrow account previously established with respect to the covered litigation. As a result of the additional contributions
to the escrow account, the rate at which Visa Class B common shares will convert into Visa Class A common shares was
reduced.
150 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2018, Visa reached a proposed class settlement agreement covering damage claims but not injunctive relief
claims regarding the covered litigation. In December 2019, the district court granted final approval for the proposed class
settlement agreement. Certain merchants have opted out of the class settlement and are pursuing claims separately, while other
merchants have appealed the approval order granted by the district court. 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, 2019 and 2018.
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, 2019 and 2018, 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 27 – 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, and swaps related to
the sale of certain Visa Class B common shares. Please refer to Note 1, “Summary of Significant Accounting Policies” for the
significant accounting policies for derivative financial instruments.
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.
2019 Annual Report | Northern Trust Corporation 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the notional and fair values of all derivative financial instruments as of December 31, 2019
and 2018.
TABLE 134: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
23.3
1.2
57.8
14.5
96.8
0.2
32.8
33.0
(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
DECEMBER 31, 2019
DECEMBER 31, 2018
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
ASSET(1) LIABILITY(2)
NOTIONAL
VALUE
ASSET(1)
LIABILITY(2)
$
4,538.2
$
20.3
$
20.9
$
4,590.4
$
29.8
$
200.0
0.2
0.2
600.0
0.2
1,661.5
2,873.8
8.5
73.7
11.5
11.9
2,648.2
3,475.1
13.8
292.4
Total Derivatives Designated as Hedging under GAAP
$
9,273.5 $
102.7 $
44.5 $
11,313.7 $
336.2 $
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
$
$
176.5
$
640.3
816.8
$
0.9
$
—
0.7
$
122.2
$
33.4
483.4
0.9
$
34.1
$
605.6
$
0.5
$
1.3
1.8
$
Client-Related and Trading Derivatives
Foreign Exchange Contracts
Interest Rate Contracts
$
291,533.6
$
3,151.7
$
3,158.1
$
281,864.4
$
2,159.4
$
2,190.0
8,976.8
132.4
76.3
7,711.2
66.1
68.6
Total Client-Related and Trading Derivatives
$ 300,510.4 $
3,284.1 $
3,234.4 $ 289,575.6 $
2,225.5 $
2,258.6
Total Derivatives Not Designated as Hedging under
GAAP
Total Gross Derivatives
Less: Netting(4)
$ 301,327.2 $
3,285.0 $
3,268.5 $ 290,181.2 $
2,227.3 $
2,291.6
$ 310,600.7 $
3,387.7
$
3,313.0
$ 301,494.9 $
2,563.5
$
2,388.4
2,338.0
1,618.4
1,357.1
1,796.3
Total Derivative Financial Instruments
$
1,049.7 $
1,694.6
$
1,206.4 $
592.1
(1) Derivative assets are reported in Other Assets on the consolidated balance sheets.
(2) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets.
(3) This line includes swaps related to sales of certain Visa Class B common shares and total return swap contracts.
(4) See further detail in Note 28, "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, and equity price. 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, 2019, 2018, and
2017 as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated that
net losses of $2.9 million and net gains of $2.7 million will be reclassified into net income within the next twelve months
152 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $0.1 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, 2019, 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 year ended December 31, 2017.
The following table provides fair value and cash flow hedge derivative gains and losses recognized in income during the
years ended December 31, 2019, 2018 and 2017.
TABLE 135: 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 gains (losses)
recognized on fair
value hedges
Gains (Losses) on
cash flow hedges
recognized on
Foreign Exchange
Contracts
Net gains (losses)
reclassified from
AOCI to net
income
Interest Rate
Contracts
Net gains (losses)
reclassified from
AOCI to net
income
Total gains (losses)
reclassified from
AOCI to net income
on cash flow hedges
INTEREST INCOME
INTEREST EXPENSE
OTHER OPERATING
INCOME
OTHER OPERATING
EXPENSE
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
$2,499.9
$2,321.4
$1,769.4
$ 822.0
$ 698.7
$ 340.2
$ 145.5
$ 127.5
$ 157.5
$ 329.8
$ 330.6
$ 331.6
(95.9)
13.9
8.8
99.4
(9.5)
(24.3)
95.9
(13.9)
(8.8)
(99.4)
9.5
24.3
—
—
—
—
—
—
—
—
—
—
—
—
21.2
17.8
(9.6)
5.2
7.9
27.7
—
—
—
—
—
—
$ 21.2 $ 17.8 $
(9.6) $
5.2 $
7.9 $ 27.7 $ — $ — $ — $ — $ — $ —
26.4
67.4
19.3
—
—
—
0.8
3.9
5.0
—
—
(0.1)
(0.5)
(0.2)
0.3
—
—
—
—
—
—
—
—
—
$ 25.9 $ 67.2 $ 19.6 $ — $ — $ — $
0.8 $
3.9 $
5.0 $ — $ — $
(0.1)
2019 Annual Report | Northern Trust Corporation 153
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, 2019 and 2018.
TABLE 136: HEDGED ITEMS IN FAIR VALUE HEDGES
(In Millions)
Available for Sale Debt Securities(3)
Senior Notes and Long-Term Subordinated Debt
Total
DECEMBER 31, 2019
DECEMBER 31, 2018
CARRYING VALUE OF
THE HEDGED ITEMS
ACCOUNTING BASIS CARRYING VALUE OF
THE HEDGED ITEMS
ADJUSTMENT(1)
CUMULATIVE
HEDGE
CUMULATIVE HEDGE
ACCOUNTING BASIS
ADJUSTMENT(2)
$
$
2,981.0 $
1,748.5
4,729.5 $
3.3 $
126.9
130.2 $
3,831.6 $
1,248.8
5,080.4 $
99.4
29.3
128.7
(1) The cumulative hedge accounting basis adjustment includes $1.5 million related to discontinued hedging relationships of available for sale debt securities as of December 31,
2019. There are no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31,
2019.
(2) There are no amounts related to discontinued hedging relationships as of December 31, 2018.
(3) Carrying value represents amortized cost.
Net Investment Hedges. Certain foreign exchange contracts 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.
Net investment hedge gains of $59.7 million and $173.0 million were recognized in AOCI related to foreign exchange contracts
for the years ended December 31, 2019 and 2018, respectively. There was no ineffectiveness recognized in earnings for net
investment hedges during the year ended December 31, 2017.
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 sales of certain Visa Class B common
shares were entered into pursuant to which Northern Trust retains the risks associated with the ultimate conversion of the Visa
Class B common shares into Visa Class A common shares. Total return swaps are entered into to manage the equity price risk
associated with certain investments.
Changes in the fair value of derivative instruments not designated as hedges under GAAP are recognized currently in
income. 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, 2019, 2018, and 2017 for derivative instruments not designated as hedges under
GAAP.
TABLE 137: 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
DERIVATIVE GAINS (LOSSES)
LOCATION RECOGNIZED IN INCOME
AMOUNT OF DERIVATIVE GAINS (LOSSES)
RECOGNIZED IN INCOME
2019
2018
2017
Other Operating Income
Other Operating Income
$
$
(1.6) $
(4.1) $
(20.0)
(19.2)
(21.6) $
(23.3) $
8.2
(13.3)
(5.1)
Foreign Exchange Trading Income
250.9
307.2
209.9
Security Commissions and Trading
Income
12.9
7.7
263.8 $
314.9 $
10.7
220.6
242.2 $
291.6 $
215.5
$
$
(1) This line includes swaps related to the sale of certain Visa Class B common shares and total return swap contracts.
154 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 28 – 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, 2019 and 2018.
TABLE 138: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
GROSS
RECOGNIZED
ASSETS
GROSS
AMOUNTS
OFFSET IN THE
BALANCE
SHEET(2)
NET AMOUNTS
PRESENTED IN
THE BALANCE
SHEET
GROSS
AMOUNTS
NOT OFFSET IN
THE BALANCE
SHEET
NET
AMOUNT(4)
December 31, 2019
(In Millions)
Derivative Assets (1)
Foreign Exchange Contracts Over the Counter
(OTC)
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
—
—
16.5
0.3
16.8
—
—
—
12.7
2.7
15.4
340.5
148.0
1.0
489.5
543.4
1,032.9
580.8
49.0
0.1
—
629.9
561.1
1,191.0
$
2,691.1
$
2,334.1
$
357.0
$
16.5
$
151.9
1.0
3.9
—
148.0
1.0
506.0
Total Derivatives Subject to a Master Netting Arrangement
2,844.0
2,338.0
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
543.7
—
543.7
3,387.7
2,338.0
1,049.7
Securities Purchased under Agreements to Resell (3)
$
707.8 $
— $
707.8 $
707.8 $
—
GROSS
RECOGNIZED
ASSETS
GROSS
AMOUNTS
OFFSET IN THE
BALANCE
SHEET(2)
NET AMOUNTS
PRESENTED IN
THE BALANCE
SHEET
GROSS
AMOUNTS
NOT OFFSET IN
THE BALANCE
SHEET
NET
AMOUNT(4)
$
1,902.3 $
1,308.8 $
593.5 $
12.7 $
December 31, 2018
(In Millions)
Derivative Assets (1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Other Financial Derivative
71.6
24.5
1.3
22.6
24.4
1.3
49.0
0.1
—
642.6
Total Derivatives Subject to a Master Netting Arrangement
1,999.7
1,357.1
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
563.8
—
563.8
2,563.5
1,357.1
1,206.4
Securities Purchased under Agreements to Resell(3)
$
1,031.2 $
— $
1,031.2 $
1,031.2 $
—
(1) Derivative assets are reported in Other Assets in the consolidated balance sheets. Other Assets (excluding derivative assets) totaled $7.4 billion and $4.6 billion as of December 31,
2019 and 2018, respectively.
(2) Including cash collateral received from counterparties.
(3) 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 $5.0 million and $134.0 million as of December 31, 2019 and 2018, respectively.
(4) 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, 2019 and 2018.
2019 Annual Report | Northern Trust Corporation 155
December 31, 2019
(In Millions)
Derivative Liabilities (1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Other Financial Derivatives
December 31, 2018
(In Millions)
Derivative Liabilities (1)
Foreign Exchange Contracts OTC
Interest Rate Swaps OTC
Interest Rate Swaps Exchange Cleared
Other Financial Derivatives
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, 2019 and 2018.
TABLE 139: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
GROSS
RECOGNIZED
LIABILITIES
GROSS
AMOUNTS
OFFSET IN THE
BALANCE
SHEET(2)
NET AMOUNTS
PRESENTED IN
THE BALANCE
SHEET
GROSS
AMOUNTS
NOT OFFSET IN
THE BALANCE
SHEET
NET
AMOUNT(3)
$
2,181.6 $
1,548.6 $
633.0 $
0.1 $
Total Derivatives Subject to a Master Netting Arrangement
2,312.4
1,618.4
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
1,000.6
3,313.0
—
1,618.4
96.7
0.7
33.4
57.3
—
12.5
39.4
0.7
20.9
694.0
1,000.6
1,694.6
—
—
—
0.1
—
0.1
Securities Sold under Agreements to Repurchase
$
489.7 $
— $
489.7 $
489.7 $
—
GROSS
RECOGNIZED
LIABILITIES
GROSS
AMOUNTS
OFFSET IN THE
BALANCE
SHEET(2)
NET AMOUNTS
PRESENTED IN
THE BALANCE
SHEET
GROSS
AMOUNTS
NOT OFFSET IN
THE BALANCE
SHEET
NET
AMOUNT(3)
$
1,821.0 $
1,751.7 $
69.3 $
— $
Total Derivatives Subject to a Master Netting Arrangement
1,947.0
1,796.3
Total Derivatives Not Subject to a Master Netting
Arrangement
Total Derivatives
441.4
—
2,388.4
1,796.3
68.8
24.4
32.8
19.0
24.4
1.2
49.8
—
31.6
150.7
441.4
592.1
—
—
—
—
—
—
Securities Sold under Agreements to Repurchase
$
168.3 $
— $
168.3 $
168.3 $
(1) Derivative liabilities are reported in Other Liabilities in the consolidated balance sheets. Other Liabilities (excluding derivative liabilities) totaled $3.1 billion and $2.5 billion
as of December 31, 2019 and 2018, respectively.
(2) Including cash collateral deposited with counterparties.
(3) 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, 2019 and 2018.
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 under GAAP.
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
156 2019 Annual Report | Northern Trust Corporation
632.9
39.4
0.7
20.9
693.9
1,000.6
1,694.5
69.3
49.8
—
31.6
150.7
441.4
592.1
—
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, or equity prices 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 $196.3 million and $2.0
million, respectively, as of December 31, 2019, and $27.6 million and $91.5 million, respectively, as of December 31, 2018,
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 $766.2 million and $324.1 million at December 31, 2019 and 2018, respectively. Cash collateral amounts deposited with
derivative counterparties on those dates included $327.1 million and $316.5 million, respectively, posted against these
liabilities, resulting in a net maximum amount of termination payments that could have been required at December 31, 2019
and 2018 of $439.1 million and $7.6 million, respectively. Accelerated settlement of these liabilities would not have a material
effect on the consolidated financial position or liquidity of Northern Trust.
Note 29 – Off-Balance-Sheet Financial Instruments, Guarantees and Other Commitments
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.
Financial Guarantees are issued by Northern Trust to guarantee the performance of a client to a third party under certain
arrangements.
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.
Custody Securities Lent with Indemnification involves Northern Trust lending securities owned by clients to borrowers
who are reviewed and approved by the Northern Trust Capital Markets Credit Committee, as part of its securities custody
activities and at the direction of its clients. 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 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, 2019 and 2018 subject to indemnification was $138.1 billion and $128.9 billion, respectively.
Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management
2019 Annual Report | Northern Trust Corporation 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
believes that the exposure to credit loss from this activity is not significant and no liability was recorded at December 31,
2019, or 2018 related to these indemnifications.
The following table provides details of Northern Trust's off-balance sheet financial instruments as of December 31, 2019
and 2018.
TABLE 140: SUMMARY OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
(In Millions)
Legally Binding Commitments to Extend Credit(1)
Standby Letters of Credit and Financial Guarantees(2)(3)
Commercial Letters of Credit
Custody Securities Lent with Indemnification
DECEMBER 31,
2019
2018
$
24,406.2 $
25,023.0
2,416.7
32.3
2,486.2
32.3
138,085.9
128,904.8
(1) These amounts exclude $243.6 million and $242.3 million of commitments participated to others at December 31, 2019 and 2018, respectively.
(2) These amounts include $44.5 million and $72.3 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2019 and 2018,
respectively.
(3) At December 31, 2019, $1.4 billion of the standby letters of credit will expire within one year or less and $845.9 million in one to five years.
Note 30 – 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, 2019 and 2018, the carrying amounts of these
investments, which are included in loans and leases in the consolidated balance sheets, were $42.6 million and $56.8 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 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, 2019 and 2018, the
carrying amounts of these investments in community development projects that generate tax credits, included in Other Assets
158 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the consolidated balance sheets, totaled $749.3 million and $602.4 million, respectively, of which $700.3 million and $549.8
million are VIEs as of December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, liabilities related to
unfunded commitments on investments in tax credit community development projects, included in Other Liabilities in the
consolidated balance sheets, totaled $376.2 million and $321.0 million, respectively, of which $354.3 million and $279.5
million related to undrawn commitments on VIEs as of December 31, 2019 and 2018, 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 $67.4 million and $63.0 million,
respectively, as of December 31, 2019 and 2018.
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.
Periodically, Northern Trust makes seed capital investments to certain funds. As of December 31, 2019, Northern Trust
had $112.0 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. 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.
Note 31 – 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.
The following table presents Northern Trust's pledged assets.
TABLE 141: TYPE OF PLEDGED ASSETS
(In Billions)
Securities
Obligations of States and Political Subdivisions
Government Sponsored Agency and Other Securities
Loans
Total Pledged Assets
FOR THE YEAR ENDED DECEMBER 31,
2019
1.0 $
33.4
7.7
42.1 $
2018
0.6
30.9
8.1
39.6
$
$
Collateral required for these purposes totaled $8.5 billion and $9.3 billion at December 31, 2019 and 2018, respectively.
The following table presents the available for sale debt securities pledged as collateral that are included in pledged assets.
TABLE 142: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES INCLUDED IN PLEDGED ASSETS
(In Millions)
Debt Securities
Available for Sale
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE
DERIVATIVE CONTRACTS
DECEMBER 31, 2019 DECEMBER 31, 2018 DECEMBER 31, 2019 DECEMBER 31, 2018
$
487.1 $
151.5 $
14.4 $
29.0
The secured parties to these transactions have the right to repledge or sell the securities as it relates to $487.2 million and
$151.5 million of the pledged collateral as of December 31, 2019 and 2018, respectively.
Northern Trust accepts financial assets as collateral that it is and is not permitted to repledge or sell. The collateral is
generally obtained under certain repurchase agreements and derivative contracts. The following table presents the fair value
of securities accepted as collateral. There was no repledged or sold collateral at December 31, 2019 or 2018.
2019 Annual Report | Northern Trust Corporation 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 143: ACCEPTED COLLATERAL
(In Millions)
Collateral that may be repledged or sold
Repurchase agreements
Derivative contracts
Collateral that may not be repledged or sold
Repurchase agreements
$
FOR THE YEAR ENDED DECEMBER 31,
2019
707.8 $
16.8
—
2018
426.2
15.4
605.0
Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $1.5 billion in 2019 as compared to
$1.7 billion in 2018.
Note 32 – 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. These transactions must be on terms and
conditions that are, or in good faith would be, offered to non-affiliated companies (i.e. on terms not less favorable to the Bank
than market terms). Further, extensions of credit must be secured fully with qualifying collateral and are limited to 10% of
the Bank’s capital and surplus for transactions with a single affiliate and to 20% of the Bank’s capital and surplus with all
affiliates. 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 33 – 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.
Reporting segment financial information, presented on an internal management-reporting basis, is determined by
accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets,
liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under
the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and
other product characteristics on an instrument level. 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
160 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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." 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.
Effective January 1, 2019, Northern Trust implemented several enhancements to its FTP methodology, including the
allocation of contingent liquidity charges to C&IS and Wealth Management client instruments and products. These
methodology enhancements affect the results of each reporting segment. Due to the lack of historical information, segment
results for periods ended prior to January 1, 2019 have not been revised to reflect the methodology enhancements.
Also effective January 1, 2019, all revenues, expenses and average assets are allocated to C&IS and Wealth Management
with the exception of non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation,
restructuring, and tax adjustments not directly attributable to a specific reporting segment.
For reporting periods ended prior to January 1, 2019, income and expense associated with the wholesale funding activities
and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive-level
compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and were reported in Treasury
and Other.
Reporting segment results are subject to reclassification when organizational changes are made. The results are also
subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.
The following tables reflect the earnings contribution and average assets of Northern Trust’s reporting segments for the
years ended December 31, 2019, 2018, and 2017.
TABLE 144: CORPORATE AND INSTITUTIONAL SERVICES RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Total Noninterest Income
Net Interest Income(1)
Revenue(1)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes
(1)
Provision for Income Taxes
(1)
Net Income
Percentage of Consolidated Net Income
Average Assets
(1) Stated on an FTE basis.
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
$
2,211.5
$
2,173.1 $
1,984.6
232.2
178.2
2,621.9
918.7
3,540.6
1.9
2,605.5
933.2
219.4
233.4
183.0
2,589.5
992.2
3,581.7
1.9
2,421.4
1,158.4
255.3
$
713.8
$
903.1 $
197.9
176.1
2,358.6
733.8
3,092.4
3.4
2,194.5
894.5
279.5
615.0
48%
58%
51%
$
87,557.1
$
82,996.5 $
80,105.6
2019 Annual Report | Northern Trust Corporation 161
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
$
1,640.6
$
1,580.6 $
1,449.7
18.7
131.1
1,790.4
792.0
2,582.4
(16.4)
1,531.6
1,067.2
271.1
4.2
102.7
1,687.5
816.5
2,504.0
(16.4)
1,460.0
1,060.4
262.1
$
796.1
$
798.3 $
3.1
103.9
1,556.7
736.2
2,292.9
(31.4)
1,405.3
919.0
347.2
571.8
53%
51%
48%
$
29,994.3
$
26,163.7 $
26,599.9
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
$
(17.1)
$
60.5
$
—
(17.1)
6.4
(23.5)
(5.8)
(144.8)
(84.3)
135.5
(219.8)
(74.8)
2017
30.8
5.0
35.8
169.6
(133.8)
(146.0)
$
$
(17.7)
$
(145.0) $
12.2
(1)%
(9)%
1%
—
$
13,786.4
$
12,901.9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 145: WEALTH MANAGEMENT RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Total Noninterest Income
Net Interest Income(1)
Revenue(1)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes
(1)
Provision for Income Taxes
(1)
Net Income
Percentage of Consolidated Net Income
Average Assets
(1) Stated on an FTE basis.
TABLE 146: TREASURY AND OTHER RESULTS OF OPERATIONS
($ In Millions)
Noninterest Income
Net Interest Income(1)
Revenue(1)
Noninterest Expense
Income (Loss) before Income Taxes
(1)
Provision (Benefit) for Income Taxes
(1)
Net Income
Percentage of Consolidated Net Income
Average Assets
(1) Stated on an FTE basis.
162 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 147: CONSOLIDATED FINANCIAL INFORMATION
(In Millions)
Noninterest Income
Trust, Investment and Other Servicing Fees
Foreign Exchange Trading Income
Other Noninterest Income
Total Noninterest Income
Net Interest Income(1)
Revenue(1)
Provision for Credit Losses
Noninterest Expense
Income before Income Taxes
(1)
Provision for Income Taxes
(1)
Net Income
Average Assets
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
$
3,852.1 $
3,753.7 $
3,434.3
250.9
292.2
4,395.2
1,710.7
6,105.9
(14.5)
4,143.5
1,976.9
484.7
307.2
276.6
4,337.5
1,663.9
6,001.4
(14.5)
4,016.9
1,999.0
442.6
209.9
301.9
3,946.1
1,475.0
5,421.1
(28.0)
3,769.4
1,679.7
480.7
$
$
1,492.2 $
1,556.4 $
1,199.0
117,551.4 $
122,946.6 $
119,607.4
(1) Stated on an FTE basis. The consolidated figures include $32.8 million, $41.2 million, and $45.8 million, of FTE adjustments for 2019, 2018, and 2017, 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.
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 148: DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE
(In Millions)
2019
Non-U.S.
U.S.
Total
2018
Non-U.S.
U.S.
Total
2017
Non-U.S.
U.S.
Total
TOTAL ASSETS
TOTAL
REVENUE(1)
INCOME BEFORE
INCOME TAXES
NET INCOME
$
$
$
$
$
$
27,888.6 $
108,939.8
136,828.4 $
32,712.9 $
99,499.6
132,212.5 $
30,325.3 $
108,265.2
138,590.5 $
1,889.5 $
4,183.6
6,073.1 $
2,018.1 $
3,942.1
5,960.2 $
1,709.7 $
3,665.6
5,375.3 $
600.0 $
1,344.1
1,944.1 $
786.4 $
1,171.4
1,957.8 $
613.5 $
1,020.4
1,633.9 $
451.0
1,041.2
1,492.2
625.7
930.7
1,556.4
430.0
769.0
1,199.0
(1) Total revenue is comprised of net interest income and noninterest income.
2019 Annual Report | Northern Trust Corporation 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 34 – 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, 2019 and 2018, 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, 2019 and 2018, 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, 2019, that management believes
have adversely affected the capital categorization of any Northern Trust subsidiary bank.
The table below provides capital ratios for the Corporation and the Bank determined by Basel III phased in requirements.
TABLE 149: RISK-BASED AND LEVERAGE CAPITAL AMOUNTS AND RATIOS
($ In Millions)
Common Equity Tier 1 Capital
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
DECEMBER 31, 2019
DECEMBER 31, 2018
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
BALANCE
RATIO BALANCE
RATIO BALANCE
RATIO BALANCE
RATIO
$ 8,898.7
12.7% $ 8,898.7
13.2% $ 8,729.8
12.9% $ 8,729.8
8,476.0
12.3
8,476.0
13.0
8,722.5
13.1
8,722.5
13.7%
14.1
Northern Trust Corporation
The Northern Trust Company
N/A
4,472.0
N/A
6.5
N/A
4,230.0
N/A
6.5
N/A
4,335.9
N/A
6.5
N/A
4,007.4
N/A
6.5
Tier 1 Capital
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
Total Capital
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
Tier 1 Leverage
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
10,152.0
8,476.0
14.5
12.3
10,152.0
8,476.0
4,205.3
5,504.0
11,456.7
9,610.4
7,008.8
6,880.1
6.0
8.0
16.3
14.0
10.0
10.0
4,051.6
5,206.2
11,332.3
9,486.0
6,752.7
6,507.7
10,152.0
8,476.0
8.7
7.3
10,152.0
8,476.0
15.0
13.0
6.0
8.0
16.8
14.6
10.0
10.0
8.7
7.3
9,596.7
8,722.5
4,070.2
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
9,596.7
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
Northern Trust Corporation
The Northern Trust Company
N/A
5,835.4
N/A
5.0
N/A
5,835.4
N/A
5.0
N/A
5,998.6
N/A
5.0
N/A
5,998.6
Supplementary Leverage (1)
Northern Trust Corporation
The Northern Trust Company
Minimum to qualify as well-capitalized:
Northern Trust Corporation
The Northern Trust Company
N/A
N/A
N/A
N/A
N/A
N/A
10,152.0
8,476.0
N/A
N/A
N/A
3,983.6
7.6
6.4
N/A
3.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
9,596.7
8,722.5
N/A
4,077.2
(1) Effective January 1, 2018, a minimum supplementary leverage ratio of 3 percent became applicable.
15.0
14.1
6.0
8.0
16.9
15.8
10.0
10.0
8.0
7.3
N/A
5.0
7.0
6.4
N/A
3.0
164 2019 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 35 – Northern Trust Corporation (Corporation only)
Condensed financial information is presented below. Investments in wholly-owned subsidiaries are carried on the equity
method of accounting.
TABLE 150: CONDENSED BALANCE SHEETS
(In Millions)
ASSETS
Cash on Deposit with Subsidiary Bank
Advances to Wholly-Owned Subsidiaries – Banks
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
DECEMBER 31,
2019
2018
$
2,559.1 $
2,370.0
9,349.8
163.0
1,444.7
866.8
2,910.0
9,585.2
182.9
803.1
15,886.6 $
14,348.0
$
$
2,573.0 $
1,148.1
277.7
796.8
4,795.6
1,273.4
408.6
1,013.1
11,656.7
(194.7)
(3,066.1)
11,091.0
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
$
15,886.6 $
2019 Annual Report | Northern Trust Corporation 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 151: 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
TABLE 152: CONDENSED 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
Equity in Undistributed Net Income of Subsidiaries
Change in Prepaid Expenses
Change in Accrued Income Taxes
Other Operating Activities, net
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale, Maturity and Redemption of Debt Securities – Available for Sale
Advances to Wholly-Owned Subsidiaries
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
Proceeds from Senior Notes
Proceeds from Issuance of Preferred Stock - Series E
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
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
166 2019 Annual Report | Northern Trust Corporation
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
$
2,024.1
$
1,200.9
$
0.4
115.1
20.2
—
91.9
(8.7)
2,159.8
1,284.1
121.6
28.6
150.2
2,009.6
24.3
2,033.9
(559.9)
18.2
97.3
17.0
114.3
1,169.8
24.6
1,194.4
336.7
25.3
525.0
—
58.2
18.1
601.3
76.5
25.9
102.4
498.9
43.7
542.6
632.6
23.8
$
$
1,492.2 $
1,556.4
$
1,199.0
46.4
46.4
49.8
1,445.8 $
1,510.0 $
1,149.2
FOR THE YEAR ENDED DECEMBER 31,
2019
2018
2017
$
1,492.2 $
1,556.4 $
1,199.0
541.7
(400.4)
114.1
141.9
(362.0)
(0.6)
(141.8)
125.6
1,889.5
1,177.6
—
540.0
—
3.7
543.7
498.0
391.4
(1,100.2)
44.0
(529.7)
(46.4)
2.0
(740.9)
1,692.3
866.8
1.0
(436.5)
(31.2)
(3.1)
(469.8)
497.9
—
(924.3)
32.6
(405.4)
(46.4)
2.1
(843.5)
(135.7)
1,002.5
(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
$
2,559.1 $
866.8 $
1,002.5
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, 2019, 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, 2019, 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, 2019, 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, 2019, 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, 2019, included in this Annual Report on Form 10-K, has
issued an attestation report on the effectiveness of the Corporation’sinternal control over financial reporting as of December 31,
2019.
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.
2019 Annual Report | Northern Trust Corporation 167
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’s (and subsidiaries’) (the Corporation) internal control over financial reporting
as of December 31, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes (collectively, the consolidated financial statements), and
our report dated February 25, 2020 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 25, 2020
168 2019 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 – Information About Our Executive
Officers” 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 2020 Annual Meeting of Stockholders: “Item 1 – Election of Directors,” “Information about the Nominees
for Director,” “Security Ownership by Directors and Executive Officers – Delinquent Section 16(a) Reports,” “Corporate
Governance – Code of Business Conduct and Ethics,” “Corporate Governance – Director Nominations and Qualifications
and Proxy Access,” “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 2020 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 2020 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 2020 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 2020 Annual Meeting of Stockholders.
2019 Annual Report | Northern Trust Corporation 169
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, 2019 and 2018
Consolidated Statements of Income - Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows - Years Ended December 31, 2019, 2018, and 2017
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 Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is incorporated herein by reference.
ITEM 15(a)(3) – EXHIBITS
Exhibit
Number
Description
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
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).
Certificate of Designation of Series E Non-Cumulative Perpetual Preferred Stock of Northern Trust Corporation,
dated October 31, 2019 (incorporated herein by reference to Exhibit 3.1 to the Corporation’s Current Report on
Form 8-K filed November 5, 2019).
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).
Deposit Agreement, dated November 5, 2019, among Northern Trust Corporation, Equiniti Trust Company, as
depositary, 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 November 5, 2019).
170 2019 Annual Report | Northern Trust Corporation
Exhibit
Number
4.4
4.5
10.1**
(i)**
(ii)**
10.2**
10.3**
(i)**
(ii)**
10.4**
10.5**
10.6**
(i)**
(ii)**
Description
Description of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
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).
Northern Trust Corporation Supplemental Thrift-Incentive Plan, as amended and restated effective as of
January 1, 2008 (incorporated herein by reference to Exhibit 10(vii) to the Corporation’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008).
Amendment Number One, dated October 29, 2009 and effective January 1, 2010 (incorporated herein by
reference to Exhibit 10(vi)(1) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2009).
Amendment Number Two, dated August 6, 2015 and effective January 1, 2015 (incorporated herein by reference
to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).
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 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).
2019 Annual Report | Northern Trust Corporation 171
Exhibit
Number
(iii)**
(iv)**
(v)**
(vi)**
(vii)**
Description
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).
Form of 2012 Executive Stock Option Terms and Conditions (incorporated herein by reference to Exhibit 10(i)
to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
Form of 2013 Executive Stock Option Terms and Conditions (incorporated herein by reference to
Exhibit 10.7(xii) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31,
2012).
Form of 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).
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)**
10.8**
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).
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).
10.9**
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**
10.11**
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).
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 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).
10.15**
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).
10.16**
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).
10.17**
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).
172 2019 Annual Report | Northern Trust Corporation
Exhibit
Number
(i)**
(ii)**
(iii)**
(iv)**
(v)**
(vi)**
Description
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).
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).
Form of 2019 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit
10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).
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).
Form of 2019 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.2 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).
10.18**
Northern Trust Corporation Executive Financial Consulting and Tax Preparation Services Plan, as amended and
restated effective January 1, 2008 (which, effective October 1, 2018, was renamed the Northern Trust Corporation
Wealth Planning and Tax Consulting Services Plan) (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).
(i)**
(ii)**
First Amendment, dated and effective October 3, 2017.
Second Amendment, dated September 27, 2019 and effective October 1, 2018.
10.19**
Northern Trust Corporation Non-Employee Director Compensation Plan.
10.20**
Northern Partners Incentive Plan, as amended and restated on January 6, 2020.
10.21**
Letter Agreement with Frederick H. Waddell, dated January 23, 2019 (incorporated herein by reference to Exhibit
10.26 to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018).
10.22**
The Northern Trust Company Death Benefit Plan (incorporated herein by reference to Exhibit 10.1 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
21
23
31.1
31.2
32
101
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Rule 13a-14(a)/15d-14(a) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Rule 13a-14(a)/15d-14(a) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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, 2019, formatted in Inline Extensible Business Reporting Language
(iXBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated
Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity,
(v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
104
The cover page from this Annual Report on Form 10-K, formatted in Inline XBRL.
** Indicates a management contract or a compensatory plan or agreement.
ITEM 16 – FORM 10-K SUMMARY
None.
2019 Annual Report | Northern Trust Corporation 173
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 25, 2020
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/ Jason J. Tyler
Jason J. Tyler
/s/ Lauren Allnutt
Lauren Allnutt
/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
/s/ Siddharth N. (Bobby) Mehta
Siddharth N. (Bobby) Mehta
174 2019 Annual Report | Northern Trust Corporation
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
/s/ Jose Luis Prado
Jose Luis Prado
/s/ Thomas E. Richards
Thomas E. Richards
/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
D
ate: February 25, 2020
Director
Director
Director
Director
Director
Director
2019 Annual Report | Northern Trust Corporation 175
Exhibit 31.1
Certification of CEO Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael G. O’Grady, certify that:
I have reviewed this report on Form 10-K for the year ended December 31, 2019 of Northern Trust Corporation;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 25, 2020
/s/ Michael G. O’Grady
Michael G. O’Grady
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of CFO Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Jason J. Tyler, certify that:
I have reviewed this report on Form 10-K for the year ended December 31, 2019 of Northern Trust Corporation;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 25, 2020
/s/ Jason J. Tyler
Jason J. Tyler
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
Certifications of CEO and CFO Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Northern Trust Corporation (the “Corporation”) on Form 10-K for the period ended December 31,
2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Michael G. O’Grady, as Chief Executive
Officer of the Corporation, and Jason J. Tyler, as Chief Financial Officer of the Corporation, each hereby certifies, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Corporation.
/s/ Michael G. O’Grady
Michael G. O’Grady
Chief Executive Officer
(Principal Executive Officer)
February 25, 2020
/s/ Jason J. Tyler
Jason J. Tyler
Chief Financial Officer
(Principal Financial Officer)
February 25, 2020
This certification accompanies the Report pursuant to section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
Northern Trust Corporation for purposes of section 18 of the Securities Exchange Act of 1934, as amended.
BOARD OF DIRECTORS
Michael G. O’Grady
Chairman, President and Chief Executive Officer
Northern Trust Corporation
Linda Walker Bynoe
President and Chief Executive Officer
Telemat Ltd.
Project management and consulting firm
Susan Crown
Chairman and Chief Executive Officer
Owl Creek Partners, LLC
Private equity firm
Chairman and Founder
Susan Crown Exchange Inc.
Social investment organization
Dean M. Harrison
President and Chief Executive Officer
Northwestern Memorial HealthCare
Primary teaching affiliate of Northwestern University
Feinberg School of Medicine and parent corporation of
Northwestern Memorial Hospital
Jay L. Henderson
Retired Vice Chairman, Client Service
PricewaterhouseCoopers LLP
Professional services firm
Marcy S. Klevorn
Retired Executive Vice President and President,
Mobility
Ford Motor Company
Global automaker
Siddharth N. (Bobby) Mehta
Retired President and Chief Executive Officer
TransUnion
Global risk and information solutions provider
Jose Luis Prado
Vice Chairman
Evans Food Group, Ltd.
Global food company
Thomas E. Richards
Retired President and Chief Executive Officer
CDW Corporation
Provider of integrated information technology solutions
in the United States, Canada and the United Kingdom
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
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
MANAGEMENT GROUP
Michael G. O’Grady
Chairman, President and Chief Executive Officer
Robert P. Browne
Executive Vice President
Chief Investment Officer
Peter B. Cherecwich
President – Corporate & Institutional Services
Steven L. Fradkin
President – Wealth Management
Mark C. Gossett
Executive Vice President
Chief Risk Officer
Susan C. Levy
Executive Vice President
General Counsel and Corporate Secretary
Teresa A. Parker
Executive Vice President
Corporate & Institutional Services
(Europe, Middle East and Africa)
Thomas A. South
Executive Vice President
Chief Information Officer
Joyce M. St. Clair
Executive Vice President
Chief Human Resources Officer
Shundrawn A. Thomas
President – Asset Management
Jason J. Tyler
Executive Vice President
Chief Financial Officer
CORPORATE INFORMATION
ANNUAL MEETING
The 2020 Annual Meeting of Stockholders will be held on
Tuesday, April 21, 2020, at 10:30 A.M. (Central Time) at
50 South La Salle Street, Chicago, Illinois. If you plan to
attend the Annual Meeting, please review the information
regarding attendance contained in the proxy statement
relating to the Annual Meeting.
STOCK LISTING
The common stock of Northern Trust Corporation is
traded on the NASDAQ Global Select Market under the
symbol “NTRS”.
STOCK TRANSFER AGENT, REGISTRAR,
AND DIVIDEND DISBURSING AGENT
EQ Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
General Phone Number: 1-800-468-9716
Internet Site: shareowneronline.com
AVAILABLE INFORMATION
Through our website at northerntrust.com, we make
available free of charge our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and all other reports and all amendments to
those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we file
such material with, or furnish such material to, the SEC.
The contents of our website, the website of the SEC or
any other website referenced herein are not a part of this
document.
INVESTOR RELATIONS
Please direct Investor Relations inquiries to:
Mark M. Bette, Senior Vice President, at
312-444-2301 or mark_bette@ntrs.com; or
Kelly M. Lernihan, Vice President, at 312-
444-7214 or km235@ntrs.com.
NORTHERNTRUST.COM
Information about the Corporation, including financial
performance and products and services, is available on
Northern Trust’s website at northerntrust.com.
The 2019 Northern Trust Corporation Annual Report is printed on 10% recycled paper
made from fiber sourced from well-managed forests and is independently certified to the
Forest Stewardship Council® (FSC) standards.
NORTHERN TRUST CORPORATION
50 SOUTH LA SALLE STREET \ CHICAGO, ILLINOIS 60603
N O RT H E R N T RU ST. CO M