Northern
Trust
Annual Report on Form 10-K
For the Year Ended December 31, 2020
NORTHERN TRUST CORPORATION
50 SOUTH LA SALLE STREET \ CHICAGO, ILLINOIS 60603
N O RT H E R N T RU ST. CO M
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
2020
2019
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 Stock3
Per Common Share
Net Income — Basic
Net Income — Diluted
Cash Dividends Declared per Common Share
Book Value — End of Period
Market Value — 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
Financial Ratios and Metrics
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (Fully Taxable Equivalent Basis2)
$
$
6,135.2
1,209.3
592.0
56.2
5.48
5.46
2.80
51.87
93.14
$ 158,531.6
170,003.9
143,878.0
11,688.3
$ 124,132.9
136,811.1
108,511.1
11,192.6
$
14,532.5
11,262.8
7,424.5
1,405.3
$
$
6,105.9
1,492.2
565.9
46.4
6.66
6.63
2.60
46.82
106.24
$ 125,236.6
136,828.4
109,120.6
11,091.0
$ 107,109.4
117,551.4
89,786.0
10,648.4
$ 12,050.4
9,233.5
5,894.6
1,231.3
11.2%
0.88
51.3
1.19
14.9%
1.27
39.2
1.60
—%
(19)
5
21
(18)%
(18)
8
11
(12)
27%
24
32
5
16%
16
21
5
21%
22
26
14
CAPITAL RATIOS
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Tier 1 Leverage
Supplementary Leverage
DECEMBER 31, 2020
DECEMBER 31, 2019
Standardized
Approach
Advanced
Approach
Standardized
Approach
Advanced
Approach
12.8%
13.9
15.6
7.6
N/A
13.4%
14.5
15.9
7.6
8.6
12.7%
14.5
16.3
8.7
N/A
13.2%
15.0
16.8
8.7
7.6
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.
A reconciliation of these measures prepared in accordance with GAAP to those presented on a fully taxable equivalent basis is available in the enclosed Annual Report on Form 10-K for the
year ended December 31, 2020.
3 Dividends on Preferred Stock in 2020 includes $11.5 million related to the difference between the redemption amount of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock,
which was redeemed in the first quarter of 2020, and its carrying value.
The 2020 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.
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, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 001-36609
____________________________________________________________
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________________
Delaware
(State or other jurisdiction of incorporation or organization)
36-2723087
(I.R.S. Employer Identification No.)
50 South La Salle Street
Chicago, Illinois
(Address of principal executive offices)
60603
(Zip Code)
Registrant’s telephone number, including area code: (312) 630-6000
____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $1.66 2/3 Par Value
Depositary Shares, each representing 1/1,000th interest in a
share of Series E Non-Cumulative Perpetual Preferred Stock
Trading Symbol
NTRS
NTRSO
Name of Each Exchange On Which Registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
____________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock as of June 30, 2020 (the last business day of the registrant’s most recently completed second
quarter), based upon the last sale price of the common stock at June 30, 2020 as reported by The NASDAQ Stock Market LLC, held by non-affiliates was
approximately $16.4 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, 2021, 208,314,381 shares of common stock, $1.66 2/3 par value, were outstanding.
Portions of the registrant’s Proxy Statement for its 2021 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
Business
Item 1
Risk Factors
Item 1A
Unresolved Staff Comments
Item 1B
Properties
Item 2
Legal Proceedings
Item 3
Item 4
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
25
26
26
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30
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i
2020 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, 2020, the Bank had consolidated assets of $169.6 billion and common bank equity
capital of $10.8 billion.
The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a network of offices in
22 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, 2020, the Corporation had consolidated total assets of $170.0 billion and stockholders’ equity of
$11.7 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, 2020, total C&IS assets under custody/administration, assets
under custody, and assets under management were $13.65 trillion, $10.39 trillion, and $1.06 trillion, 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 $879.4 billion, $875.1 billion, and $347.8
billion, respectively, at December 31, 2020. 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
2020 Annual Report | Northern Trust Corporation 1
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; multi-asset and alternative asset classes (such as private equity and hedge funds of funds); and
multi-manager advisory services and products. Asset Management’s activities also include overlay services and other risk
management services. Asset Management operates internationally through subsidiaries and distribution arrangements and
its revenue and expense are fully allocated to C&IS and Wealth Management. As discussed above, Northern Trust
managed $1.41 trillion in assets as of December 31, 2020, including $1.06 trillion for C&IS clients and $347.8 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
2 2020 Annual Report | Northern Trust Corporation
(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 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
The following items provide a brief description of certain provisions of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), as implemented through final rules promulgated by the Federal Reserve
Board and other agencies and amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (the
Regulatory Relief Act), 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.
On March 29, 2019, the Federal Reserve Board and the FDIC provided joint written feedback to the Corporation
regarding the resolution plan submitted by the Corporation in December 2017, pursuant to Section 165(d) of the Dodd-
Frank Act (the 2017 165(d) Plan). The joint written feedback stated that the Federal Reserve Board and FDIC did not
identify shortcomings or deficiencies in the 2017 165(d) Plan. The Corporation is required to submit its next Section 165(d)
resolution plan by December 17, 2021, and it must address the informational content specified in a guidance letter issued
by the Federal Reserve Board and FDIC in December 2020.
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.
On January 19, 2021, the FDIC announced that it will resume requiring resolution plan submissions for insured depository
institutions with $100 billion or more in assets. The FDIC announcement indicated that no firm will be required to submit a
resolution plan without at least 12 months advance notice provided to the firm. To date, the Bank has not received notice
from the FDIC indicating its next resolution plan submission date.
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
2020 Annual Report | Northern Trust Corporation 3
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, 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 is required to register as a swap dealer and its swap
dealer activities 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. Several of the SEC’s requirements
for security-based swap dealers came into effect on April 6, 2020. Under those requirements, persons or entities must begin
counting security-based swap activities on August 6, 2021, and may be required to register with the SEC as a security-
based swap dealer after October 6, 2021. The Corporation does not expect that it, or any of its affiliates, will be required to
register as a security-based swap dealer with the SEC.
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 and managerial 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
the capital plan rules and capital adequacy standards of the Federal Reserve Board, including the stress capital buffer
requirement, discussed further at “—Capital Adequacy Requirements” below. 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 other 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 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 and severely adverse scenarios provided by the appropriate
banking regulator. Results from the Corporation’s and the Bank’s annual company-run stress tests are reported to the
appropriate regulators and made publicly available.
The Corporation submitted its capital plan for the Federal Reserve Board’s 2020 CCAR exercise in April 2020 and, in
November 2020, resubmitted the plan at the Federal Reserve Board’s request to reflect stresses from the COVID-19
4 2020 Annual Report | Northern Trust Corporation
pandemic. On June 25, 2020, the Federal Reserve Board imposed restrictions that were designed to cause large bank
holding companies to preserve capital, including suspending share repurchases, capping dividend payments, and only
allowing common stock dividends according to a formula based on recent income. On December 18, 2020, the Federal
Reserve Board extended a portion of these restrictions to limit share repurchases and dividend payments based on recent
income. These restrictions apply for the first quarter of 2021 and may be extended further.
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 25, 2020.
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 a “core” banking organization that is required to use
the advanced approaches methodologies to calculate and disclose publicly its 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.
The Bank’s risk-based and leverage capital ratios at December 31, 2020, were well above the 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, 2020
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
12.8 %
13.4 %
13.9 %
14.5 %
15.6 %
15.9 %
7.6 %
7.6 %
13.0 %
13.8 %
13.0 %
13.8 %
14.5 %
15.0 %
7.0 %
7.0 %
4.5 %
4.5 %
6.0 %
6.0 %
8.0 %
8.0 %
4.0 %
4.0 %
SUPPLEMENTARY
LEVERAGE(1)
ADVANCED
APPROACH
8.6 %
7.7 %
3.0 %
N/A
N/A
6.0 %
6.0 %
10.0 %
10.0 %
N/A
N/A
N/A
6.5 %
6.5 %
8.0 %
8.0 %
10.0 %
10.0 %
5.0 %
5.0 %
3.0 %
Northern
Corporation
Trust
Northern
The
Company
Trust
Minimum
ratio
required
“Well-capitalized”
minimum
as
applicable
ratios,
Northern
Corporation
Trust
The
Northern
Trust Company
(1) In November 2019, the Federal Reserve and other U.S. federal banking agencies adopted a final rule that established a deduction for central bank deposits from the total
leverage exposures of custodial banking organizations, including Northern Trust Corporation and The Northern Trust Company, equal to the lesser of (i) the total amount of
funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the
custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. The rule became effective on April 1, 2020.
Further, on April 1, 2020, the Federal Reserve issued an interim final rule that requires bank holding companies, including Northern Trust Corporation, to deduct, on a
temporary basis, deposits with the Federal Reserve and investments in U.S. Treasury securities from their total leverage exposure. The U.S. Treasury securities deduction is
applied in addition to the central bank deposits relief referred to above. This rule became effective on April 1, 2020 and will remain in effect through the first quarter of 2021.
On May 15, 2020, the U.S. federal banking agencies released an interim final rule that permits insured depository institutions of bank holding companies also to temporarily
exclude deposits with the Federal Reserve and investments in U.S. Treasury securities from their total leverage exposure. The Northern Trust Company did not elect to take this
deduction.
The supplementary leverage ratios at December 31, 2020 for the Northern Trust Corporation and The Northern Trust Company reflect the impact of these final rules.
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 is also
subject to a stress capital buffer, which integrates forward-looking stress test results with non-stress capital requirements,
and the Bank is also subject to a capital conservation buffer, which respectively requires the Corporation and the Bank to
2020 Annual Report | Northern Trust Corporation 5
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 buffer requirement for advanced
approaches banking organizations, such as the Corporation and the Bank, is 2.5%.
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%.
As a result of the stress test results published by the Federal Reserve on June 25, 2020, the Corporation’s stress capital
buffer requirement for the 2020 capital plan cycle was set at 2.5%. The 2020 stress capital buffer became effective October
1, 2020, and results in a common equity tier 1 capital ratio minimum requirement of 7.0%.
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, 2020, 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 and the Bank, to maintain a stable funding profile in
relation to the composition of their assets and off-balance sheet activities. The Federal Reserve Board adopted a final rule
in October 2020 implementing the NSFR and the Corporation and the Bank will be required to comply with the NSFR
requirement on July 1, 2021.
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.
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. 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
6 2020 Annual Report | Northern Trust Corporation
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. In September 2020, the Federal Reserve Board
issued an advance notice of proposed rulemaking regarding potential changes to the regulations issued under the CRA, but
has not taken further action to date.
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 revenue for the preceding fiscal year, whichever is greater. In the United
States, the California Consumer Privacy Act (CCPA) was adopted by the State of California and became effective January
1, 2020, and then enforceable on July 1, 2020. The CCPA substantially increased 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 state Attorney 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. On November 3, 2020, the California Privacy Rights Act of 2020 (CPRA), which amends and supersedes
portions of the CCPA, was approved by a majority of California voters. Among other changes, the CPRA will establish the
California Privacy Protection Agency to administer, implement, and enforce the CCPA and CPRA. The CPRA is expected
to be fully operative beginning in 2023, and will apply to personal information collected on or after January 1, 2022.
However, the CCPA, including its implementing regulations, remains in effect until the CPRA is operative.
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 (UK) 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
2020 Annual Report | Northern Trust Corporation 7
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 or the UK. 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 planning related to
the UK’s departure from the EU, commonly referred to as “Brexit,” such entity is subject to the prudential supervision of
the European Central Bank and the CSSF. Moreover, Northern Trust’s non-EU 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 EU legislation.
Effective January 31, 2020, the UK is no longer a member of the EU. EU legislation as it applied to the UK on
December 31, 2020 is now a part of UK domestic legislation, under the control of the UK’s Parliament and Assemblies.
The following items provide a brief description of certain recently implemented and in-progress regulatory changes in
the EU and the UK 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 European Commission (Commission) published a proposal for a revision of the CRD (CRD V)
and the CRR (CRR II). EU member states were required to implement the requirements in the CRD V into their national
law by December 28, 2020, with most of the measures to apply from December 29, 2020. Most of the CRR II will apply
from June 28, 2021. 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. On
September 13, 2018, the 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 EU subsequently approved the
delay of the CSDR until February 1, 2022. Since then, the Commission’s 2021 work program and its 2020 Capital Markets
Union Action Plan announced an intention to bring forward a legislative proposal which would include simplifying the
CSDR and to make it more proportionate and less burdensome for stakeholders. In December 2020, the Commission
published a Consultation Paper which seeks stakeholder input into its legislative proposals to ensure the overall objectives
of CSDR are fulfilled in a more proportionate, efficient and effective manner.
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. The reporting obligations under the SFTR have been phased in
from April 11, 2020, with the final phase commencing on January 11, 2021.
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 UK 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 UK. 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
8 2020 Annual Report | Northern Trust Corporation
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. On July 24, 2020, the Commission adopted a
legislative proposal (COM (2020) 337 final) (2020/0154 (COD)) for a regulation amending the BMR regarding designation
of replacement benchmarks where certain widely-used benchmarks have ceased, including the London Interbank Offered
Rate (LIBOR). The proposed regulation would provide for a statutory replacement rate to be available by the time a
benchmark ceases. The proposed regulation is working its way through the European Parliament and the Council of the EU
and is expected to be adopted by such institutions the day following its publication in the EU’s Official Journal.
Sustainable Finance Disclosure Regulations. On December 29, 2019, the EU Sustainable Finance Disclosure
Regulations (SFDR) entered into force. SFDR aims to prevent “greenwashing” (conveying a misleading or false
impression a product is more environmentally favorable than it actually is) by requiring disclosure of how sustainability
risks and environmental, societal and governance (ESG) factors are part of the investment and business processes of asset
managers. Mandatory disclosures are required to be published at product and manager levels in a variety of ways, including
on websites, in pre-contractual documents (e.g. prospectuses) and in annual reports. Certain significant provisions apply
from March 10, 2021.
Taxonomy Regulation. On July 12, 2020, Regulation (EU) 2020/852 (Taxonomy Regulation) entered into force. The
Taxonomy Regulations are part of the EU’s recent measures designed to encourage environmentally sustainable investment
decision making and introduce a technical framework to ascertain how sustainable an economic activity is. The Taxonomy
Regulations apply to financial market participants including Market in Financial Instruments Directive (MiFID) firms,
Undertakings for the Collective Investment in Transferable Securities (UCITS) management companies, and alternative
investment fund managers, and will require them to make further pre-contractual and periodic disclosures. The
Commission has delayed the application of “Level 2” measures and it is expected that the implementation date will be
delayed to January 2022.
European Deposit Insurance Scheme. On October 11, 2017, the 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
EU Council and Parliament continue to consider the legislative proposal for the EDIS regulation, which was published by
the Commission in November 2015. The 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 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 Commission Implementing Regulation (EU) 2018/1212 of
September 3, 2018 set out minimum requirements for implementing SRD II, which have applied 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 central securities depositories published on July 20, 2017, and
entered into force on April 1, 2020, changes were introduced by two EU regulations modifying the existing Alternative
Investment Fund Managers Directive (AIFMD) and 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
2020 Annual Report | Northern Trust Corporation 9
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, 2020, each of our non-U.S.
banking subsidiaries had capital ratios above their specified minimum requirements.
Human Capital Management
Northern Trust recognizes that our employees are critical to our success, which includes meeting clients’ needs and
supporting our communities. We take our search for, and retention of, top talent seriously. To attract and retain talent, we
manage programs to develop a diverse pipeline of future leaders and help employees advance their careers. The discussion
below outlines Northern Trust’s human capital objectives, which include talent management, compensation, and diversity,
equity and inclusion.
EMPLOYEES
Northern Trust employed approximately 20,900 full-time equivalent staff members as of December 31, 2020. The regional
breakout of our workforce is 46% North America, 35% Asia Pacific, and 19% Europe, Middle East, and Africa.
TALENT ACQUISITION, DEVELOPMENT, AND MANAGEMENT
Our employees are critical to our success, and represent one of our biggest assets. We pride ourselves in attracting
strong talent and have identified development of diverse talent as one of our top corporate strategic priorities. Our focus on
work/life balance, diversity, and career mobility also contribute to our employer brand.
Sourcing and Recruitment. We target our talent identification, sourcing methods, and recruiting strategies to specific
locations using several channels: job boards, colleges, professional networks, associations and online social networks. We
base hiring decisions on a variety of factors including relevant experience, educational background, diversity, past
accomplishments, professional licensing, and strong evidence of integrity and ethical behavior.
Onboarding. Northern Trust is committed to helping all new hires succeed. New employees begin their
onboarding journey with a comprehensive learning roadmap that orients them to our company story, business, and
culture. Orientation programs also augment the onboarding experience by providing global, regional, and/or local
information along with networking activities to help connect new hires to each other and other colleagues.
Learning and Development. An integrated partnership between our enterprise-wide and functional learning and
development teams ensure we deliver holistic training solutions. Through our online learning portal, all employees can
access a curated portfolio of professional and custom training solutions specific to managers, top talent, and client-
servicing staff. Our Future Focused Skills offerings prepare employees to serve our clients in a digital economy. Many of
our programs are interactive, include peer networking, and offer direct access to expert facilitators. Training is offered in
self-paced, mobile, virtual and instructor-led formats.
Talent Cultivation and Review. Northern Trust is committed to identifying and developing a deep pipeline of diverse,
top talent at all levels across the globe to meet our evolving business needs. Annually, managers conduct talent
assessments, and business and regional leadership teams hold talent reviews focused on specific topics, such as workforce
needs, diversity, top talent, readiness for promotion, internal movement, and succession plans. Robust talent review
meetings are held with our senior management and our Board of Directors each year.
Performance Management. Northern Trust’s annual performance management process includes goal setting, a mid-
year review process, multi-rater feedback, and a year-end review. Priorities are set by our Chief Executive Officer and
applied to each business, department, team and individual. Managers are encouraged to provide regular feedback and
coaching to drive performance and results.
Engagement and Recognition. Building an inclusive, connected and engaged employee culture is essential. We invite
all employees to provide management with anonymous feedback about their everyday experiences at work through an
annual Employee Engagement Survey. Survey results are thoroughly evaluated to identify strengths, progress, and
opportunities. If warranted, actions are identified and taken to further strengthen employee engagement. We also foster an
“attitude of gratitude” through our online Celebrate Great recognition platform that allows employees to recognize one
another for everyday contributions.
TOTAL REWARDS
Our compensation and benefit programs are designed to be market competitive and positioned around the median of
the local market, enabling us to attract and retain talent needed to deliver on Northern Trust’s strategy.
10 2020 Annual Report | Northern Trust Corporation
Compensation Programs. Our compensation programs are intended to motivate our employees to deliver the highest-
quality service to our clients and achieve the greatest collective business results. They are designed, implemented and
communicated to promote behaviors that are consistent with Northern Trust’s desired culture, character and our values of
service, expertise, and integrity.
Northern Trust’s base salary programs enable us to attract and retain talent by providing a competitive level of fixed
pay reflecting each employee’s position, experience, qualifications and tenure. Additionally, all employees are eligible for
incentive compensation to reward performance that delivers superior team or individual results. Incentive compensation is
linked to both financial and non-financial performance criteria, including risk considerations, as determined by our Board
of Directors and senior management. Select senior leaders and individual contributors may receive a percentage of their
incentive in Northern Trust stock to encourage retention of key talent and to align rewards with company performance.
Employee Benefits. While the exact composition of the employee benefit package varies by country, our benefit
programs are designed to be locally competitive, to meet the needs of our employees and their families, and to reflect
cultural values of the organization. Typical programs include retirement benefits, health care benefits, paid time off,
income protection benefits such as disability and life insurance, leaves of absence, and access to our Employee Assistance
Program. In recent years, we have expanded our focus on employee well-being by providing: additional programs and
resources to improve wellness, manage stress, build resiliency, and be attuned to mental health issues; access to flexible or
voluntary benefits; and enhancements to various parental leave offerings.
DIVERSITY, EQUITY, AND INCLUSION (DE&I)
Northern Trust embraces diversity and recognizes the strength it brings to our employees, clients, shareholders, and
local communities. We are committed to building an inclusive culture in which all individuals are welcomed, respected,
supported, and valued so that they can fully participate in, and contribute to, our success.
Embedding DE&I. Our DE&I vision is embedded at all levels of our organization, with women and ethnic minorities
representing half of our executive officers and more than half of our Board of Directors. Our Board, through its Corporate
Governance Committee, also engages in active oversight of our DE&I strategies, programs, and principles. Our Head of
Corporate Social Responsibility and Global Diversity, Equity and Inclusion serves as an Executive Vice President, and
reports directly to our Chairman, President and Chief Executive Officer. The following table presents further detail with
respect to the gender and ethnic diversity of our Board of Directors and executive officers.
TABLE 2: BOARD OF DIRECTORS AND EXECUTIVE OFFICERS REPRESENTATION
Board of Directors
Executive Officers
DECEMBER 31, 2020
FEMALE
MALE
WHITE
BLACK
HISPANIC
ASIAN
23%
33%
77%
67%
61%
83%
23%
17%
8%
—%
8%
—%
Progress and Accountability. Tracking and measuring our DE&I efforts is key to a successful strategy. We utilize a
global DE&I dashboard to track the organization’s progress and integrate these metrics as part of our overall corporate
strategy and goals. To drive accountability for increasing diversity representation across the organization, we measure
representation in relation to our hiring, retention and promotion practices. Each business unit evaluates this data, and acts
as needed, to improve overall diversity within their organization. Our executive leaders report their progress through the
DE&I Executive Council co-chaired by our Chief Executive Officer and our Head of Corporate Social Responsibility and
Global Diversity, Equity and Inclusion. Our Global Executive DE&I Council is responsible for providing strategic
oversight and defining and driving accountability on the global DE&I priorities.
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.
2020 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, counterparties and/or applicable regulators 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.”
COVID-19 Pandemic-Related Risks
Our business, results of operations, and financial condition generally have been, and will continue to be, adversely
affected by the ongoing COVID-19 pandemic.
The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on global
economic and market conditions, including heightened volatility in financial markets; global supply chain disruptions; and
the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many
businesses, lost revenues, and increased unemployment.
These conditions have impacted—and/or may in the future impact—our business, results of operations, and financial
condition negatively, including through lower net interest income resulting from lower interest rates; increased provisions
for credit losses; lower revenue from certain of our fee-based businesses; impairments on the securities we hold; and
decreased demand for certain of our products and services. Additionally, our liquidity and regulatory capital could be
adversely impacted by volatility and disruptions in the capital and credit markets; volatility in foreign exchange rates;
deposit flows; and client draws on lines of credit. Our business operations may also be disrupted if significant portions of
our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other
restrictions in connection with the pandemic. Further, work-from-home and other modified business practices may
introduce additional operational risks, including resiliency, cybersecurity, and execution risks, which may result in
inefficiencies or delays, and may affect our ability to, or the manner in which we, conduct our business activities.
While governmental authorities have taken unprecedented measures to provide economic assistance to individual
households and businesses, stabilize the markets, and support economic growth, the ultimate success of these measures is
unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic. Further, some
measures may have a negative impact on our business, while our participation in other measures could result in reputational
harm, litigation, or regulatory and government actions, proceedings, or penalties.
The extent to which the COVID-19 pandemic continues to impact our business, results of operations and financial
condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not
limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, the
distribution, acceptance and efficacy of a vaccine, and how quickly and to what extent normal economic and operating
conditions can resume. The ongoing pandemic may also have the effect of heightening many of the other risks described in
this section entitled “Risk Factors” and any subsequent filings with the SEC.
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
12 2020 Annual Report | Northern Trust Corporation
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 absolute or relative investment performance in
funds or client accounts that we manage or in investment products that we design or provide 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. In response to the COVID-19 pandemic, the
Federal Reserve Board further reduced interest rates, which generally had already been low relative to historical levels.
This has had, and may continue to have, a negative impact on our net interest margin, which is the difference between what
we earn on our assets and the interest rates we pay for deposits and other sources of funding. Low-interest-rate
environments also have a negative impact on our fees earned on certain of our products. For example, we have waived
certain fees associated with money market mutual funds due to the low level of short-term interest rates. Low net interest
margins and fee waivers each negatively impact our earnings.
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.
Further, although we have policies and procedures in place to assess and mitigate potential impacts of interest rate
risks, if our assumptions about any number of variables are incorrect, these policies and procedures to mitigate risk may be
ineffective, which could impact earnings negatively.
Please see “Market Risk” in the “Risk Management” section included in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” 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.
The UK ceased to be a member state of the EU on January 31, 2020, and the transition period provided for in the
withdrawal agreement entered by the UK and the EU ended on December 31, 2020. In December 2020, the UK and the EU
agreed on a trade and cooperation agreement that will apply provisionally after the end of the transition period until it is
ratified by the parties to the agreement. On December 30, 2020, the UK passed legislation giving effect to the trade and
cooperation agreement, with the EU expected to formally adopt the agreement in early 2021. While the trade and
cooperation agreement covers the general objectives and framework of the relationship between the UK and the EU, it
generally does not address the regulation of financial services. Instead, the parties adopted a declaration of their intention to
agree by March 2021 upon a Memorandum of Understanding establishing a framework for regulatory cooperation on
financial services.
2020 Annual Report | Northern Trust Corporation 13
Consequently, the ultimate impact of Brexit on the Corporation and the Bank remains uncertain and will depend on the
terms of the post-Brexit relationships that remain to be negotiated between the UK and other EU nations, particularly in the
area of financial services. 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, 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 while 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 UK and EU businesses.
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.
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,” 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 clients’ earnings, such that market and other factors that reduce our clients’ earnings from investments or
trading activities also reduce our revenues.
14 2020 Annual Report | Northern Trust Corporation
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 pandemics, geopolitical events, political unrest,
natural disasters 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 our geographic
footprint, product pipeline and client types evolve—and consequently fail to enhance our controls and business continuity
plans to address those changes in an adequate or timely fashion. If our controls and business continuity plans do not
address the factors noted above and operate to mitigate the associated risks successfully, such factors may have a negative
impact on our business, financial condition or results of operations. In addition, an important aspect of managing our
operational risk is creating a risk culture in which all employees fully understand that there is risk in every aspect of our
business and the importance of managing risk as it relates to their job functions. We continue to enhance our risk
management program to support our risk culture, ensuring that it is sustainable and appropriate for our role as a major
financial institution. Nonetheless, if we fail to provide the appropriate environment that sensitizes all of our employees to
managing risk, our business could be impacted adversely.
Failures of our technological systems or breaches of our security measures, including, but not limited to, those resulting
from cyber-attacks, may result in losses.
Any failure, interruption or breach in the security of our systems could severely disrupt our operations. Our systems
involve the use of clients’ and our proprietary and confidential information, and security breaches, including cyber-attacks,
could expose us to a risk of theft, loss or other misappropriation of this information. Our security measures may be
breached due to the actions of outside parties, employee error, failure of our controls with respect to granting access to our
systems, malfeasance or otherwise, and, as a result, an unauthorized party may obtain access to our or our clients’
proprietary and confidential information, resulting in the theft, loss, destruction, gathering, monitoring, 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 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. 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 evolving
proliferation of new technologies, the use of the internet, mobile devices, and cloud 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
2020 Annual Report | Northern Trust Corporation 15
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. We and our clients have been, and expect to continue to be, subject to a wide variety of cyber-attacks
and threats, including computer viruses, ransomware and other malicious code, distributed denial of service attacks, and
phishing attacks, and it is possible that we could suffer material losses resulting from a breach. 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, successful cyber-attacks may 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 could be the subject of legal claims or proceedings related to security incidents, including regulatory investigations
and actions. Further, the market perception of the effectiveness of our security measures could be harmed, our reputation
could suffer and we could lose clients in conjunction with security incidents, 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. For example, in the third quarter of 2020 we incurred a $43.4 million charge related to a
corporate action processing error. Given the high volume of transactions we process, errors that affect earnings may be
repeated or compounded before they are discovered and corrected.
Our dependence on technology, and the need to update frequently our technology infrastructure, exposes us to risks that
also can result in losses.
Our businesses depend on information technology infrastructure, both internal and external, to record and process, among
other things, a large volume of increasingly complex transactions and other data, in many currencies, on a daily basis,
across numerous and diverse markets and jurisdictions. Due to our dependence on technology and the important role it
plays in our business operations, we must constantly improve and update our information technology infrastructure.
Upgrading, replacing, and modernizing these systems can require significant resources and often involves implementation,
integration and security risks that could cause financial, reputational and operational harm. Failure to ensure adequate
review and consideration of critical business and regulatory issues prior to and during the introduction and deployment of
key technological systems or failure to align operational capabilities adequately with evolving client commitments and
expectations may have a negative impact on our results of operations. The failure to respond properly to, and invest in,
changes and advancements in technology could limit our ability to attract and retain clients, prevent us from offering
products and services comparable to those offered by our competitors, inhibit our ability to meet regulatory requirements or
otherwise have a material adverse effect on our operations.
16 2020 Annual Report | Northern Trust Corporation
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.
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. Our non-U.S. operations accounted for 28% of
our revenue in 2020. 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.
2020 Annual Report | Northern Trust Corporation 17
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.
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.
Pandemics, natural disasters, global climate change, acts of terrorism and global conflicts may have a negative impact
on our business and operations.
Pandemics, natural disasters, global climate change, acts of terrorism, global conflicts or other similar events have in the
past, and may in the future have, a negative impact on our business and operations. While we have in place business
continuity plans, such events may 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. Please see “COVID-19
Pandemic-Related Risks” in this “Risk Factors” section for a description of risks associated with the ongoing COVID-19
pandemic.
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 2020 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 increased, 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 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.
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. On November 30, 2020, ICE
Benchmark Administration (“IBA”), the administrator of U.S. Dollar LIBOR (“USD LIBOR”) and other IBORs,
announced that, following required consultations, (i) it intends to cease publication of 1-week and 2-month USD LIBOR at
the end of 2021 and (ii) subject to compliance with applicable regulations, including as to representativeness, it does not
intend to cease publication of the remaining USD LIBOR tenors until June 30, 2023. Globally, financial market
participants have begun to transition away from LIBOR and other IBORs to alternative reference rates, and following the
IBA’s announcement, U.S. regulators, including the Federal Reserve Board, issued statements encouraging banks to stop
entering into new USD LIBOR contracts “as soon as practicable,” and by no later than December 31, 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, experience operational
disruptions or result in client disputes or litigation, 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
2020 Annual Report | Northern Trust Corporation 19
regulations and other regulatory changes, see “Supervision and Regulation—Liquidity Standards” in Item 1, “Business.”
Any substantial, unexpected or prolonged changes in the level or cost of liquidity could affect our business adversely.
If the Bank is unable to supply the Corporation with funds over time, the Corporation could be unable to meet its
various obligations.
The Corporation is a legal entity separate and distinct from the Bank and the Corporation’s other subsidiaries. The
Corporation relies on dividends paid to it by the Bank to meet its obligations and to pay dividends to stockholders of the
Corporation. There are various legal limitations on the extent to which the Bank and the Corporation’s other subsidiaries
can supply funds to the Corporation by dividend or otherwise. Dividend payments by the Bank to the Corporation in the
future will require continued generation of earnings by the Bank and could require regulatory approval under certain
circumstances. For more information on dividend restrictions, see “Supervision and Regulation—Payment of Dividends” in
Item 1, “Business.”
We may need to raise additional capital in the future, which may not be available to us or may only be available on
unfavorable terms.
We may need to raise additional capital to provide sufficient resources to meet our business needs and commitments, to
accommodate the transaction and cash management needs of our clients, to maintain our credit ratings in response to
regulatory changes, including capital rules, or for other purposes. However, our ability to access the capital markets, if
needed, will depend on a number of factors, including the state of the financial markets. Rising interest rates, disruptions in
financial markets, negative perceptions of our business or our financial strength, or other factors may impact our ability to
raise additional capital, if needed, on terms acceptable to us. Any diminished ability to raise additional capital, if needed,
could subject us to liability, restrict our ability to grow, require us to take actions that would affect our earnings negatively
or otherwise affect our business and our ability to implement our business plan, capital plan and strategic goals adversely.
Any downgrades in our credit ratings, or an actual or perceived reduction in our financial strength, could affect our
borrowing costs, capital costs and liquidity adversely.
Rating agencies publish credit ratings and outlooks on our creditworthiness and that of our obligations or securities,
including long-term debt, short-term borrowings, preferred stock and other securities. Our credit ratings are subject to
ongoing review by the rating agencies and thus may change from time to time based on a number of factors, including our
own financial strength, performance, prospects and operations as well as factors not under our control, such as rating-
agency-specific criteria or frameworks for our industry or certain security types, which are subject to revision from time to
time, and conditions affecting the financial services industry generally.
Downgrades in our credit ratings may affect our borrowing costs, our capital costs and our ability to raise capital and,
in turn, our liquidity adversely. A failure to maintain an acceptable credit rating also may preclude us from being
competitive in certain products. Additionally, our counterparties, as well as our clients, rely on our financial strength and
stability and evaluate the risks of doing business with us. If we experience diminished financial strength or stability, actual
or perceived, a decline in our stock price or a reduced credit rating, our counterparties may be less willing to enter into
transactions, secured or unsecured, with us, our clients may reduce or place limits on the level of services we provide them
or seek other service providers, or our prospective clients may select other service providers, all of which may have other
adverse effects on our business.
The risk that we may be perceived as less creditworthy relative to other market participants is higher in a market
environment in which the consolidation, and in some instances failure, of financial institutions, including major global
financial institutions, could result in a smaller number of larger counterparties and competitors. If our counterparties
perceive us to be a less viable counterparty, our ability to enter into financial transactions on terms acceptable to us or our
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 2020 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. These regulations cover a variety of matters, including required
capital levels, prohibited activities, and privacy and data protection. Some of these requirements are directed specifically at
protecting depositors of the Bank, the federal deposit insurance fund and the banking system as a whole, not our
stockholders or other security holders. 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.
For example, we are unable to predict what, if any, changes to the laws and regulations applicable to the financial
services industry may be enacted by the new U.S. Congress in conjunction with the new U.S. presidential administration
under unified party control, and what the impact of any such changes will be upon our business, financial condition, and
results of operations. Moreover, the turnover of the U.S. presidential administration is expected to result in certain changes
in the leadership and senior staffs of the federal banking agencies which are likely to impact the rulemaking, supervision,
examination and enforcement priorities and policies of such agencies, the potential impacts of which, if any, we cannot
predict at this time.
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, regulators, tax authorities and courts
have increasingly sought to hold financial institutions liable for the misconduct of their clients where such regulators and
courts have determined that the financial institution should have detected that the client was engaged in wrongdoing, even
though the financial institution had no direct knowledge of the wrongdoing.
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.
2020 Annual Report | Northern Trust Corporation 21
We may be impacted adversely by regulatory enforcement matters.
In the ordinary course of our business, we are subject to various supervisory, governmental and enforcement inquiries,
examinations, 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 both supervisory and enforcement matters, we may
face limits on our ability to conduct or expand our business, be required to implement corrective actions that increase the
costs of conducting business, or become subject to civil or criminal penalties or other remedial sanctions, any of which
could result in reputational damage or otherwise have an adverse impact on us.
We may fail to set aside adequate reserves for, or otherwise underestimate our liability relating to, pending and
threatened claims, with a negative effect on our earnings.
We estimate our potential liability for pending and threatened claims and record reserves when appropriate pursuant to
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.
22 2020 Annual Report | Northern Trust Corporation
We are subject to intense competition in all aspects of our businesses, which could have a negative effect on our ability
to maintain satisfactory prices and grow our earnings.
We provide a broad range of financial products and services in highly competitive markets. We compete against large,
well-capitalized, and geographically diverse companies that are capable of offering a wide array of financial products and
services at competitive prices. In certain businesses, such as foreign exchange trading, electronic networks present a
competitive challenge. Additionally, technological advances and the growth of internet-based commerce have made it
possible for other types of institutions to offer a variety of products and services competitive with certain areas of our
business. Many of these nontraditional service providers have fewer regulatory constraints and some have lower cost
structures. The same may be said for competitors based in non-U.S. jurisdictions, where legal and regulatory environments
may be more favorable than those applicable to the Corporation and the Bank as U.S.-domiciled financial institutions.
These competitive pressures may have a negative effect on our earnings and ability to grow. Pricing pressures, as a result of
the willingness of competitors to offer comparable or improved products or services at a lower price, also may result in a
reduction in the price we can charge for our products and services, which could have, and in some cases has had, a negative
effect on our ability to maintain or increase our profitability.
Damage to our reputation could have a direct and negative effect on our ability to compete, grow and generate revenue.
The failure to meet client expectations or fiduciary or other obligations, operational failures, litigation, regulatory actions or
fines, the 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
2020 Annual Report | Northern Trust Corporation 23
responses to those identified risks, including pricing, is key to the success of our efforts at innovation and investment in
new product and service offerings.
Our success with large, complex clients requires an understanding of the market and legal, regulatory and accounting
standards in various jurisdictions.
A significant portion of our business involves providing certain services to large, complex clients which require an
understanding of the market and legal, regulatory and accounting standards in various jurisdictions. Any failure to
understand, address or comply with those standards appropriately could affect our growth prospects or affect our reputation
negatively. We identify and manage risk through our business strategies and plans and our risk management practices and
controls. If we fail to identify and manage significant risks successfully, we could incur financial loss, suffer damage to our
reputation that could restrict our ability to grow or conduct business profitably, or become subject to regulatory penalties or
constraints that could limit some of our activities or make them significantly more expensive. In addition, our businesses
and the markets in which we operate are continuously evolving. We may fail to understand fully the implications of
changes in legal or regulatory requirements, our businesses or the financial markets or fail to enhance our risk framework
to address those changes in a timely fashion. If our risk framework is ineffective, either because it fails to keep pace with
changes in the financial markets, legal and regulatory requirements, our businesses, our counterparties, clients or service
providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with
applicable regulatory or contractual mandates or expectations. These risks are magnified as client requirements become
more complex and as our increasingly global business requires end-to-end management of operational and other processes
across multiple time zones and many inter-related products and services.
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 the course of our business, we are sometimes subject to challenges from U.S. and non-U.S. tax authorities, including
states and municipalities, regarding the amount of taxes due. These challenges may result in adjustments to the timing or
amount of taxable income or deductions or the allocation of income among tax jurisdictions, all of which may require a
greater provision for taxes or otherwise affect earnings negatively.
Changes in accounting standards may be difficult to predict and could have a material impact on our consolidated
financial statements.
New accounting standards, changes to existing accounting standards, or changes in the interpretation of existing accounting
standards by the Financial Accounting Standards Board, the International Accounting Standards Board, the SEC or bank
regulatory agencies, or otherwise reflected in GAAP, potentially could have a material impact on our financial condition
and results of operations. These changes are difficult to predict and in some cases we could be required to apply a new or
revised standard retroactively, resulting in the revised treatment of certain transactions or activities, or even the restatement
of consolidated financial statements for prior periods.
Our ability to return capital to stockholders is subject to the discretion of our Board of Directors and may be limited by
U.S. banking laws and regulations, applicable provisions of Delaware law, or our failure to pay full and timely
dividends on our preferred stock and the terms of our outstanding debt.
Holders of our common stock are entitled to receive only such dividends and other distributions of capital as our Board of
Directors may declare out of funds legally available for such payments under Delaware law. Although we have declared
cash dividends on shares of our common stock historically, we are not required to do so. In addition to the approval of our
Board of Directors, our ability to take certain actions, including our ability to pay dividends, repurchase stock, and make
other capital distributions, is dependent upon, among other things, their payment being made in accordance with the capital
plan rules and capital adequacy standards of the Federal Reserve Board. On June 25, 2020, the Federal Reserve Board
24 2020 Annual Report | Northern Trust Corporation
imposed restrictions that were designed to cause large bank holding companies to preserve capital, including suspending
share repurchases, capping dividend payments, and only allowing common stock dividends according to a formula based
on recent income. On December 18, 2020, the Federal Reserve Board extended a portion of these restrictions to limit share
repurchases and dividend payments based on recent income. These restrictions will apply for the first quarter of 2021 and
may be extended further.
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” and “Supervision
and Regulation—Capital Planning and Stress Testing” in Item 1, “Business.”
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 is one office
building 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 22 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 five facilities: a leased facility at 333 South Wabash
Avenue 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 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.
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,” and which
information is incorporated herein by reference.
ITEM 3 – LEGAL PROCEEDINGS
The information presented under the caption “Legal Proceedings” in Note 26, “Commitments and Contingent Liabilities,”
included under Item 8, “Financial Statements and Supplementary Data,” is incorporated herein by reference.
2020 Annual Report | Northern Trust Corporation 25
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
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 55, joined Northern Trust in 2011 and has served as Chairman of the Board
since January 2019, as Chief Executive Officer since 2018 and as President since 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 44, joined Northern Trust in 2008 and has served as an Executive Vice President
since November 2020 and as 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 55, 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 56, joined Northern Trust in 2007 and has served as Executive Vice
President and President of Corporate & Institutional Services since 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 59, joined Northern Trust in 1985 and has served as Executive Vice President
and President of Wealth Management since 2014. Prior to that, Mr. Fradkin served as President of Corporate &
Institutional Services from 2009 to 2014. From 2004 to 2009, he served as Chief Financial Officer.
Mark C. Gossett - Mr. Gossett, age 59, 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
also previously served as the Chief Risk Officer of 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 63, joined Northern Trust in 2014 and has served as Executive Vice President and
General Counsel since that time and as Corporate Secretary since 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 60, 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 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 51, joined Northern Trust in 1999 and has served as Executive Vice President and
Chief Information Officer since 2018. Prior to that, Mr. South served as Chief Business Architect from 2014 to 2018 and as
Chief Operating Officer of Operations & Technology from 2013 to 2014.
Joyce M. St. Clair - Ms. St. Clair, age 61, joined Northern Trust in 1992 and has served as Executive Vice President
and Chief Human Resources Officer since 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.
26 2020 Annual Report | Northern Trust Corporation
Shundrawn A. Thomas - Mr. Thomas, age 47, joined Northern Trust in 2004 and has served as Executive Vice
President and President of Asset Management since 2017. Prior to that, Mr. Thomas served as Executive Vice President
and Head of the Funds and Managed Accounts Group from 2014 to 2017 and as Head of the Exchange-Traded Funds
Group from 2010 to 2014. Mr. Thomas 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 49, 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 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.
2020 Annual Report | Northern Trust Corporation 27
PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on The NASDAQ Stock Market LLC under the symbol “NTRS.” There were 1,643
shareholders of record as of January 31, 2021.
The following table shows certain information relating to the Corporation’s purchases of common stock for the three
months ended December 31, 2020.
TABLE 3: REPURCHASES OF COMMON STOCK IN THE FOURTH QUARTER OF 2020
PERIOD
October
1
November
December
Total
- 31, 2020
1
1
- 30, 2020
- 31, 2020
(Fourth Quarter)
TOTAL
OF
NUMBER
SHARES
PURCHASED
—
—
—
—
$
$
AVERAGE
PAID
PRICE
PER SHARE
—
—
—
—
OF
TOTAL
OF
PURCHASED
NUMBER
SHARES
AS
PART
A
PUBLICLY
ANNOUNCED PLAN
—
—
—
—
UNDER
SHARES
NUMBER
MAXIMUM
OF
THAT
MAY YET
BE
PURCHASED
THE PLAN
6,487,647
6,487,647
6,487,647
6,487,647
On March 16, 2020, the Corporation suspended its share repurchase program, previously 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 authorization approved by the Board of Directors has
no expiration date. Beginning in the second quarter of 2020, the Federal Reserve announced certain measures to ensure that
large financial institutions, including Northern Trust, remain resilient despite the economic uncertainty resulting from the
ongoing COVID-19 pandemic. Specifically, for the third and fourth quarters of 2020, no share repurchases were permitted
by these institutions. On December 18, 2020, the Federal Reserve again extended its capital distribution limits into the first
quarter of 2021 with certain modifications, which include continuing to limit dividend payments based on recent income
and limiting share repurchases based on recent income. During the first quarter of 2021, the Corporation restarted its share
repurchase program in accordance with such limitations. For more information, please refer to Note 15, “Stockholders’
Equity,” provided in Item 8, “Financial Statements and Supplementary Data.”
28 2020 Annual Report | Northern Trust Corporation
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The following graph 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, 2020.
The cumulative total stockholder return assumes the investment of $100 in the Corporation’s common stock and in each
index on December 31, 2015 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, 2015 with Reinvestment of Dividends
Northern Trust
S&P 500
KBW Bank Index
DECEMBER 31,
$
2015
100 $
100
100
2016
126 $
112
129
2017
144 $
136
152
2018
123 $
130
125
2019
160 $
171
171
2020
146
203
153
2020 Annual Report | Northern Trust Corporation 29
Five-Year Cumulative Total ReturnNorthern TrustS&P 500KBW Bank Index201520162017201820192020$75$100$125$150$175$200$225
ITEM 6 – SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31,
2020
2019
2018
2017
2016
CONDENSED STATEMENTS OF INCOME ($ 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(1)
Assets Under Custody
Assets Under Management
SELECTED RATIOS AND METRICS
Financial Ratios and Metrics:
$
$
$
$
$
$
$
$
$
4,657.6
1,443.2
6,100.8
125.0
4,348.2
1,627.6
418.3
1,209.3
56.2
1,153.1
5.48
5.46
2.80
51.87
93.14
158,531.6
170,003.9
143,878.0
3,122.4
1,189.3
11,688.3
124,132.9
136,811.1
108,511.1
3,233.8
1,189.2
11,192.6
14,532.5
11,262.8
1,405.3
$
$
$
$
$
$
$
$
$
4,395.2
$
4,337.5
$
3,946.1
$
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
12,050.4
9,233.5
1,231.3
$
$
$
$
$
$
$
$
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
10,125.3
7,593.9
1,069.4
$
$
$
$
$
$
$
$
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
10,722.6
8,084.6
1,161.0
$
$
$
$
$
$
$
$
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
8,541.3
6,720.5
942.4
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Average Stockholders’ Equity to Average Assets
11.2 %
0.88
51.3
8.2
14.9 %
1.27
39.2
9.1
16.2 %
1.27
29.2
8.3
12.6 %
1.00
32.5
8.3
11.9 %
0.89
34.3
7.9
Capital Ratios:
DECEMBER 31, 2020
DECEMBER 31, 2019
DECEMBER 31, 2018
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
Common
Equity
Tier
1 Capital
12.8 %
13.4 %
12.7 %
13.2 %
12.9 %
13.7 %
Tier
1 Capital
Total Capital
Tier
1 Leverage
Supplementary Leverage
(2)
13.9
15.6
7.6
N/A
14.5
15.9
7.6
8.6
14.5
16.3
8.7
N/A
15.0
16.8
8.7
7.6
DECEMBER
31, 2017
DECEMBER
31, 2016
14.1
16.1
8.0
N/A
15.0
16.9
8.0
7.0
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
WELL-CAPITALIZED
RATIOS
MINIMUM
CAPITAL RATIOS
Common
Equity
Tier 1 Capital
12.6 %
13.5 %
11.8 %
12.4 %
Tier 1 Capital
Total Capital
Tier 1 Leverage
Supplementary Leverage
(2)
13.8
15.8
7.8
N/A
14.8
16.7
7.8
6.8
12.9
14.5
8.0
N/A
13.7
15.1
8.0
6.8
N/A
6.0
10.0
N/A
N/A
4.5 %
6.0
8.0
4.0
3.0
(1)For the purposes of disclosing Assets Under Custody/Administration, to the extent that both custody and administration services are provided, the value of the assets is
included only once.
(2) Effective January 1, 2018, the Corporation and Bank are subject to a minimum supplementary leverage ratio of 3 percent. Refer to the “Supervision and Regulation—Capital
Adequacy Requirements” section of Item 1, “Business” for further information on the supplementary leverage ratio.
30 2020 Annual Report | Northern Trust Corporation
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
The following is management’s discussion and analysis of the financial condition and results of operations (MD&A) of
Northern Trust Corporation (Corporation) for the year ended December 31, 2020. The following should be read in
conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should
read the section entitled “Forward-Looking Statements.”
BUSINESS OVERVIEW
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
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.
its
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 22 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,” “its,” or similar terms refers to the Corporation and its subsidiaries on a consolidated basis.
COVID-19 PANDEMIC AND RECENT EVENTS
The COVID-19 pandemic presented health and economic challenges on an unprecedented scale during the year ended
December 31, 2020. During this time, Northern Trust focused on the health and well-being of its workforce, meeting its
clients’ needs and supporting its communities. Although planning is underway to return to the office when conditions
permit, the vast majority of staff is expected to continue to work remotely for some time to come.
Workforce
As governments implement plans to reopen their respective jurisdictions, Northern Trust has begun its return-to-office
(RTO) planning under the oversight of its COVID Executive Committee composed of senior leadership across various
functions. Plans for RTO were developed on a location-by-location basis based on business unit needs. Northern Trust
considers site readiness, transportation options, technology capabilities, and workforce alignment, and has plans for the
return of a small portion of each office’s population in the initial RTO phase to allow for optimal social distancing. To
ensure the health and well-being of Northern Trust’s workforce, clients and visitors, several social distancing elements and
other protective measures were implemented, such as temperature screenings, where allowable by law, distribution of
personal protective equipment, and workforce health self-certifications. Several offices returned portions of their workforce
in the second half of 2020.
Client Service
Northern Trust offered assistance to its clients affected by the COVID-19 pandemic by lending under a government lending
program and providing payment deferrals. The Corporation continues to assess developments in government actions meant
to support the economy, as further discussed below.
U.S. Small Business Administration’s Paycheck Protection Program
During the second quarter of 2020, Northern Trust became a lender under the Paycheck Protection Program, as amended
(PPP), which is administered by the U.S. Small Business Administration (SBA), an agency of the U.S. Department of the
Treasury, which works with financial institutions in providing loans to small businesses. The PPP, which is meant to aid
small businesses during the COVID-19 pandemic, was created under the Coronavirus Aid, Relief, and Economic Security
(CARES) Act, which was signed into law on March 27, 2020.
As of December 31, 2020, Northern Trust had 1,087 outstanding loans totaling $207.1 million under the PPP. 41 loans
totaling $6.7 million underwent the loan forgiveness process, with 36 loans totaling $6.7 million being fully forgiven as of
December 31, 2020.
The original timeframe for PPP lending expired on June 30, 2020, when Congress acted to extend PPP lending for a 5-
week period to allow small businesses additional time to apply for the remaining PPP funds allocated by Congress in
connection with the CARES Act. Northern Trust continued to lend under the PPP through the new August 8, 2020
deadline. The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) amended
the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until
2020 Annual Report | Northern Trust Corporation 31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31. 2021. For further information on the PPP, please refer to Note 6, “Loans and Leases,” provided in Item 8,
“Financial Statements and Supplementary Data.”
Troubled Debt Restructuring (TDR) Relief
Due to the economic environment arising from the COVID-19 pandemic, there have been two forms of relief provided to
lenders exempting certain loan modifications which would otherwise be classified as TDRs from such classification. The
first of these forms of relief is provided by certain interagency guidance from various banking regulators, including the
Federal Reserve Board, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the
Currency, and the Consumer Financial Protection Bureau (Interagency Guidance). The other is provided under section
4013 of the CARES Act. Northern Trust has elected to apply each of these forms of relief, when applicable, in providing
borrowers with qualifying loan modifications, including payment deferrals, in response to the COVID-19 pandemic. For
further information on TDRs, please refer to Note 6, “Loans and Leases,” provided in Item 8, “Financial Statements and
Supplementary Data.”
Community Support
COVID-19 Relief Support
Through December 31, 2020, Northern Trust provided $2.5 million in COVID-19 relief support to numerous organizations
serving those most affected by the pandemic. Grantees include Americares, Doctors Without Borders, Feeding America,
the Global FoodBanking Network, the Irish Red Cross, Meals on Wheels, NHS Charities Together, the Solidarity Response
Fund for the World Health Organization, United Way Worldwide, World Food Program, and other COVID-19 relief funds
in Chicago and Illinois to benefit those in need.
Small Business Support
Through December 31, 2020, Northern Trust provided $110.5 million in low-cost funding to assist Community
Development Financial Institutions (CDFIs), which are instrumental in providing loans to small businesses and non-profit
organizations under the PPP. The funding helps meet urgent demand among small businesses and non-profit groups by
providing flexible terms and low rates. CDFIs provide loans, investments, financial services and technical assistance to
underserved populations and communities. This funding, which is reported in Debt Securities Held to Maturity on the
consolidated balance sheets, is separate and distinct from the $207.1 million of outstanding principal of loans made under
the PPP.
Additional COVID-19 economic and market-related impacts to the Corporation’s financial condition and results of
operations are discussed throughout this Annual Report on Form 10-K.
FINANCIAL OVERVIEW
Net Income decreased $282.9 million, or 19%, to $1.21 billion in 2020 from $1.49 billion in 2019. Earnings per diluted
common share was $5.46 in 2020 compared to $6.63 in 2019. Return on average common equity decreased to 11.2% in
2020 from 14.9% in 2019.
Revenue increased $27.7 million to $6.10 billion in 2020 from $6.07 billion in the prior year, primarily driven by
increases in Trust, Investment and Other Servicing Fees of 4%, Other Operating Income of 33%, Foreign Exchange
Trading Income of 16%, and Security Commissions and Trading Income of 29%, partially offset by a decrease in Net
Interest Income of 14%.
Client assets under custody/administration (AUC/A) increased 21% from $12.05 trillion as of December 31, 2019 to
$14.53 trillion as of December 31, 2020, primarily reflecting net inflows, favorable markets, and favorable currency
translation. Client assets under custody, a component of AUC/A, increased 22% from $9.23 trillion as of December 31,
2019 to $11.26 trillion as of December 31, 2020. Client assets under custody included $7.42 trillion of global custody
assets as of December 31, 2020, which increased 26% from $5.89 trillion as of December 31, 2019. Client assets under
management increased 14% to $1.41 trillion as of December 31, 2020 from $1.23 trillion at December 31, 2019 due to
favorable markets and net inflows.
Trust, Investment and Other Servicing Fees, which represent the largest component of total revenue, increased 4% to
$4.00 billion in 2020, from $3.85 billion in 2019, primarily due to new business and favorable markets, partially offset by
money market mutual fund fee waivers.
Foreign Exchange Trading Income of $290.4 million in 2020 increased 16% from $250.9 million in 2019, primarily
driven by higher client volumes and increased market volatility, partially offset by lower foreign exchange swap activity in
Treasury.
Security Commissions and Trading Income of $133.2 million in 2020 increased 29% from $103.6 million in 2019,
primarily driven by higher core brokerage revenue and revenue from interest rate swaps.
32 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operating Income of $194.0 million in 2020 increased 33% from $145.5 million in 2019, primarily due to
higher income related to a bank-owned life insurance program implemented during 2019, a charge in the prior year related
to the decision made to sell substantially all of the lease portfolio, and higher miscellaneous income.
Net Interest Income on a fully taxable equivalent (FTE) basis of $1.48 billion in 2020, decreased $233.1 million, or
14%, from $1.71 billion in 2019, due to a decreased net interest margin, partially offset by higher levels of average earning
assets. The net interest margin on an FTE basis decreased to 1.19% in 2020 from 1.60% in 2019, primarily due to lower
interest rates.
The Corporation adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—Credit Losses:
Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) on January 1, 2020, which significantly changed
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. Upon adoption of ASU 2016-13, the Corporation
recorded a $13.7 million increase in the Allowance for Credit Losses with a corresponding cumulative effect adjustment to
decrease Retained Earnings by $10.1 million, net of income taxes. For more information on the adoption of ASU 2016-13,
please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and
Supplementary Data.”
The Provision for Credit Losses in 2020 was $125.0 million as compared to a credit provision of $14.5 million in
2019. The provision for 2020 reflected an increase in the reserve evaluated on a collective basis. The increase in the
collective basis reserve was primarily driven by current and projected economic conditions and downgrades in the
portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with increases
primarily in the commercial and institutional and commercial real estate portfolios. The prior-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. Loans and Leases of $33.8 billion as of
December 31, 2020 increased from $31.4 billion as of December 31, 2019. Net charge-offs for the year ended
December 31, 2020 were $3.2 million, compared to net recoveries of $0.7 million for the year ended December 31, 2019.
Nonaccrual assets increased to $132.4 million as of December 31, 2020 from $86.8 million as of December 31, 2019.
Noninterest Expense of $4.35 billion in 2020 increased $204.7 million, or 5%, from $4.14 billion in 2019, primarily
reflecting increased Compensation, Equipment and Software, Employee Benefits, Occupancy, and Other Operating
Expense, partially offset by lower Outside Services. Noninterest Expense in 2020 included severance-related charges of
$55.0 million in connection with a reduction in force, a $43.4 million charge related to a corporate action processing error,
and Occupancy expense related to an early lease exit arising from a workplace real estate strategy of $11.9 million.
The Provision for Income Taxes in 2020 totaled $418.3 million, representing an effective tax rate of 25.7%. The
Provision for Income Taxes in 2019 totaled $451.9 million, representing an effective tax rate of 23.2%. The increase in the
effective tax rate was primarily driven by $26.8 million of tax expense related to the reversal of tax benefits previously
recognized through earnings and higher taxes payable on the income of the Corporation’s non-U.S. branches.
Northern Trust continued to maintain a strong capital position during 2020, with all capital ratios exceeding those
required for classification as “well-capitalized” under federal bank regulatory capital requirements. Total Stockholders’
Equity increased 5% from $11.1 billion in 2019 to $11.7 billion at year-end 2020. During the fourth quarter of 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.
The Corporation suspended its open-market share repurchase program on March 16, 2020. Prior to the suspension,
2,743,876 shares of common stock were repurchased on the open market at a total cost of $246.4 million. Subsequent to
the suspension, the only shares repurchased were shares of common stock withheld upon the vesting of share-based
compensation to satisfy tax withholding obligations. During the year ended December 31, 2020, the Corporation
repurchased 3,276,589 shares of common stock, including 532,713 shares withheld related to share-based compensation, at
a total cost of $299.8 million. During the year ended December 31, 2020, the Northern Trust quarterly common stock
dividend remained unchanged from the end of the prior year at $0.70 per share. During the first quarter of 2021, the
Corporation restarted its share repurchase program in accordance with limitations established by the Federal Reserve.
CONSOLIDATED RESULTS OF OPERATIONS
The following information summarizes our consolidated results of operations for 2020 compared to 2019. For a discussion
related to the consolidated results of operations for 2019 compared to 2018, 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
2020 Annual Report | Northern Trust Corporation 33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ended December 31, 2019 (2019 Form 10-K), which was filed with the United States Securities and Exchange Commission
on February 25, 2020.
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 2020 of $6.10 billion increased from $6.07 billion in 2019. Noninterest Income represented 76% and 72%
of total revenue in 2020 and 2019, respectively, and totaled $4.66 billion in 2020, which increased 6% from $4.40 billion in
2019.
Noninterest Income in 2020 increased primarily reflecting higher Trust, Investment and Other Servicing Fees, Other
Operating Income, Foreign Exchange Trading Income, and Security Commissions and Trading Income. Trust, Investment
and Other Servicing Fees of $4.00 billion in 2020 increased $142.9 million, or 4%, from $3.85 billion in 2019, primarily
due to new business and favorable markets, partially offset by money market mutual fund fee waivers. Foreign Exchange
Trading Income in 2020 of $290.4 million increased $39.5 million, or 16%, compared with $250.9 million in 2019,
primarily driven by higher client volumes and increased market volatility, partially offset by lower foreign exchange swap
activity in Treasury. Security Commissions and Trading Income of $133.2 million in 2020 increased 29% from $103.6
million in 2019, primarily driven by higher core brokerage revenue and revenue from interest rate swaps. Other Operating
Income of $194.0 million in 2020 increased 33% from $145.5 million in the prior year, primarily due to higher income
related to a bank-owned life insurance program implemented during 2019, a charge in the prior year related to the decision
made to sell substantially all of the lease portfolio, and higher miscellaneous income.
Net Interest Income on an FTE basis in 2020 of $1.48 billion decreased $233.1 million, or 14%, from $1.71 billion in
2019, due to a decreased net interest margin, partially offset by higher levels of average earning assets. The net interest
margin on an FTE basis decreased to 1.19% in 2020 from 1.60% in 2019, primarily due to lower interest rates. Average
earning assets increased $17.0 billion, or 16%, from $107.1 billion in 2019 to $124.1 billion in 2020, primarily reflecting
higher levels of short-term interest bearing deposits, Securities, and Loans and Leases.
Additional information regarding Northern Trust’s revenue by type is provided in the following table.
TABLE 4: REVENUE
($ In Millions)
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
Total Noninterest Income
Net Interest Income
Total Revenue
FOR THE YEAR ENDED DECEMBER 31,
2020
2019
2018
$
3,995.0 $
3,852.1 $
290.4
45.4
133.2
194.0
(0.4)
250.9
44.5
103.6
145.5
(1.4)
$
$
4,657.6 $
4,395.2 $
1,443.2
1,677.9
6,100.8 $
6,073.1 $
3,753.7
307.2
51.8
98.3
127.5
(1.0)
4,337.5
1,622.7
5,960.2
Trust, Investment and Other Servicing Fees
Trust, Investment and Other Servicing Fees were $4.00 billion in 2020 compared with $3.85 billion in 2019, and are based
primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending
volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are
performed on a monthly or quarterly basis in arrears. Low-interest-rate environments have historically had a negative
impact on fees earned on certain products.
Beginning in the second quarter of 2020, the Corporation began to waive a portion of certain fees associated with
money market mutual funds due to the current low-interest-rate environment. Northern Trust voluntarily waived
$29.3 million of money market mutual fund fees for the year ended December 31, 2020, of which $23.6 million was
waived in the fourth quarter of 2020, related to the low-interest-rate environment. These fee waivers, which are expected to
continue in the low-interest-rate environment in which the yields in certain funds remain insufficient to pay the stated fees
associated with such funds, will adversely impact Trust, Investment and Other Servicing Fees within the C&IS and Wealth
Management reporting segments. Northern Trust did not waive any money market mutual fund fees due to interest rates in
the year ended December 31, 2019.
34 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S
DISCUSSION
AND
ANALYSIS
OF
FINANCIAL
CONDITION
AND
RESULTS
OF OPERATIONS
The
components
of
Trust,
Investment
and
Other
Servicing
Fees
are
provided
in
the
following table.
TABLE
5:
TRUST,
INVESTMENT
AND
OTHER
SERVICING
FEES
($
In Millions)
C&IS
Trust,
Investment
and
Other
Servicing Fees
FOR
THE
YEAR
ENDED
DECEMBER 31,
CHANGE
2020
2019
2018
2020 / 2019
2019 / 2018
Custody
and
Fund Administration
$
1,586.1
$
1,549.3
$
1,501.1
2 %
Investment Management
Securities Lending
Other
Total
C&IS Trust, Investment
and
Other
Servicing Fees
Wealth
Management
Trust,
Investment
and
Other Servicing Fees
Central
East
West
Global
Family Office
$
$
Total
Wealth Management Trust, Investment
and
Other
Servicing Fees $
Total
Consolidated
Trust,
Investment
and Other Servicing Fees
$
3 %
2
(15)
(3)
511.1
88.0
136.4
445.7
87.2
129.3
436.8
102.0
133.2
15
1
6
2,321.6 $
2,211.5
$
2,173.1
5 %
2 %
607.3 $
619.3
$
442.1
337.7
286.3
422.2
330.9
268.2
607.8
401.7
320.0
251.1
1,673.4
3,995.0
$
$
1,640.6
3,852.1
$
$
1,580.6
3,753.7
(2)%
2 %
5
2
7
2 %
4 %
5
3
7
4 %
3 %
Corporate & Institutional Services
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, the largest
component of C&IS 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 are based generally on market values of client assets under management throughout the
period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag.
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.
Custody and fund administration fees increased from 2019 to 2020 primarily due to new business and favorable
currency translation, partially offset by unfavorable non-U.S. markets. Investment management fees increased from 2019 to
2020 primarily due to new business and favorable markets, partially offset by money market mutual fund fee waivers.
The following tables provide a breakdown of the C&IS assets under custody and under management.
TABLE 6: C&IS ASSETS UNDER CUSTODY
($
In Billions)
North America
Europe,
Middle
East,
and Africa
Asia Pacific
Securities Lending
DECEMBER 31,
CHANGE
2020
2019
2018
2020 / 2019
2019 / 2018
$
5,746.4
$
4,516.0
$
3,478.2
976.2
186.9
2,998.5
820.3
163.0
3,693.4
2,538.6
589.2
149.8
27 %
22 %
16
19
15
18
39
9
Total
Assets
Under Custody
$
10,387.7
$
8,497.8
$
6,971.0
22 %
22 %
2020 Annual Report | Northern Trust Corporation 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 7: C&IS ASSETS UNDER MANAGEMENT
($
In Billions)
North America
Europe,
Middle
East,
and Africa
Asia Pacific
Securities Lending
DECEMBER 31,
2020
2019
$
676.8
$
588.4
$
143.5
50.3
186.9
125.2
40.9
163.0
Total
Assets
Under Management
$
1,057.5
$
917.5
$
2018
493.1
113.3
34.6
149.8
790.8
CHANGE
2020 / 2019
2019 / 2018
15 %
19 %
15
23
15
11
18
9
15 %
16 %
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 $186.9 billion and $163.0 billion at December 31, 2020 and 2019, respectively.
Wealth Management
Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and
one-quarter lagged asset values. Wealth Management fees increased from 2019 to 2020, primarily due to favorable markets
and new business, partially offset by money market mutual fund fee waivers. The following tables provide a summary of
Wealth Management assets under custody and under management.
TABLE 8: WEALTH MANAGEMENT ASSETS UNDER CUSTODY
($
In Billions)
Global
Family Office
Central
East
West
DECEMBER 31,
2020
2019
$
600.7
$
474.1
$
120.0
89.1
65.3
115.1
81.7
64.8
Total
Assets
Under Custody
$
875.1
$
735.7
$
TABLE
9:
WEALTH
MANAGEMENT
ASSETS
UNDER MANAGEMENT
2018
405.5
88.2
72.7
56.5
622.9
CHANGE
2020 / 2019
2019 / 2018
27 %
17 %
4
9
1
31
12
15
19 %
18 %
($
In Billions)
Global
Family Office
Central
East
West
DECEMBER 31,
CHANGE
2020
$
114.0
$
109.3
73.3
51.2
2019
94.2
$
104.4
66.8
48.4
2018
83.5
96.2
57.0
41.9
2020 / 2019
2019 / 2018
21 %
13 %
5
10
6
9
17
16
Total
Assets
Under Management
$
347.8
$
313.8
$
278.6
11 %
13 %
The Wealth Management regions shown 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.
Market Indices
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 10: EQUITY MARKET INDICES
S&P 500
MSCI
EAFE
(U.S. dollars)
MSCI
EAFE
(local currency)
DAILY AVERAGES
YEAR-END
2020
3,218
1,853
1,074
2019
2,912
1,891
1,118
CHANGE
11 %
(2)
(4)
2020
3,756
2,148
1,174
2019
3,231
2,037
1,190
CHANGE
16 %
5
(1)
36 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 11: FIXED INCOME MARKET INDICES
Barclays
Capital
U.S.
Aggregate
Bond Index
Barclays
Capital
Global
Aggregate
Bond Index
2020
2,392
559
AS
OF
DECEMBER 31,
2019
CHANGE
2,225
512
8 %
9
Client Assets
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. AUC/A and assets under management are a driver of our Trust, Investment and
Other Servicing Fees. For the purposes of disclosing AUC/A, to the extent that both custody and administration services
are provided, the value of the assets is included only once.
At December 31, 2020, AUC/A increased from December 31, 2019, primarily reflecting net inflows, favorable
markets, and favorable currency translation. Assets under custody, a component of AUC/A, at December 31, 2020,
increased from December 31, 2019, and included $7.42 trillion of global custody assets, compared to $5.89 trillion at
December 31, 2019.
The following table presents AUC/A by reporting segment.
TABLE 12: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT
($
In Billions)
Corporate
&
Institutional Services
Wealth Management
DECEMBER 31,
CHANGE
2020
2019
2018
2020 /2019
2019 /2018
$
13,653.1
$
11,311.6 $
9,490.5
879.4
738.8
634.8
21 %
19
21 %
19 %
16
19 %
Total
Assets
Under Custody/Administration
$
14,532.5
$
12,050.4 $
10,125.3
The
following
table
presents
assets
under
custody, a
component
of
AUC/A,
by
reporting segment.
TABLE
13:
ASSETS
UNDER
CUSTODY
BY
REPORTING SEGMENT
($
In Billions)
Corporate
&
Institutional Services
Wealth Management
Total
Assets
Under Custody
DECEMBER 31,
CHANGE
2020
2019
2018
2020 /2019
2019 / 2018
$
10,387.7
$
8,497.8 $
6,971.0
875.1
735.7
622.9
$
11,262.8
$
9,233.5 $
7,593.9
22 %
19
22 %
22 %
18
22 %
Consolidated assets under custody increased from the prior year, primarily reflecting net inflows, favorable markets, and
favorable currency translation.
The following table presents the investment allocation of Northern Trust’s custodied assets by reporting segment.
TABLE 14: ALLOCATION OF ASSETS UNDER CUSTODY
C&IS
2020
WM
TOTAL
C&IS
DECEMBER 31,
2019
WM
TOTAL
C&IS
2018
WM
TOTAL
Equities
46 %
62 %
47 %
45 %
59 %
46 %
44 %
54 %
45 %
Fixed
Income Securities
Cash and
Other Assets
Securities Lending Collateral
36
16
2
15
23
—
34
17
2
37
16
2
18
23
—
35
17
2
39
15
2
20
26
—
37
16
2
2020 Annual Report | Northern Trust Corporation 37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents Northern Trust’s assets under custody by investment type.
TABLE 15: ASSETS UNDER CUSTODY BY INVESTMENT TYPE
DECEMBER 31,
CHANGE
($
In Billions)
Equities
$
Fixed
Income Securities
Cash
and
Other Assets
Securities
Lending Collateral
2020
5,293.9
$
3,870.9
1,911.1
186.9
2019
4,298.6
$
3,236.5
1,535.3
163.1
Total
Assets
Under Custody
$
11,262.8 $
9,233.5
$
2018
3,379.5
2,822.4
1,242.1
149.9
7,593.9
2020 / 2019
2019 / 2018
23 %
20
24
15
22 %
27 %
15
24
9
22 %
The following table presents Northern Trust’s assets under management by reporting segment.
TABLE 16: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT
($
In Billions)
Corporate
&
Institutional Services
Wealth Management
Total
Assets
Under Management
DECEMBER 31,
CHANGE
2020
2019
2018
2020 / 2019
2019 / 2018
$
$
1,057.5
$
917.5 $
347.8
313.8
790.8
278.6
1,405.3
$
1,231.3 $
1,069.4
15 %
11
14 %
16 %
13
15 %
Assets under management at the end of 2020 increased from 2019. The increase primarily reflected favorable markets and
net inflows.
The following tables present the investment allocation and management style of Northern Trust’s assets under management
by reporting segment.
TABLE 17: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
C&IS
2020
WM
TOTAL
C&IS
DECEMBER 31,
2019
WM
TOTAL
C&IS
2018
WM
TOTAL
Equities
52%
52%
52%
53%
53%
53%
51%
47%
50%
Fixed
Income Securities
Cash
and
Other Assets
Securities
Lending Collateral
11
19
18
25
23
—
15
20
13
12
17
18
25
22
—
16
18
13
13
17
19
26
27
—
17
19
14
TABLE 18: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE
Index
Active
Multi-Manager
Other
C&IS
2020
WM
TOTAL
C&IS
DECEMBER 31,
2019
WM
TOTAL
C&IS
2018
WM
TOTAL
58 %
24 %
50 %
59 %
27 %
51 %
57 %
25 %
49 %
38
4
—
39
8
29
38
5
7
37
4
—
36
8
29
37
5
7
38
5
—
39
7
29
38
5
8
38 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Noninterest Income
The components of other noninterest income, and a discussion of significant changes during 2020 and 2019, are provided
below.
TABLE 19: OTHER NONINTEREST INCOME
($
In Millions)
Foreign
Exchange
Trading Income
Treasury
Management Fees
Security
Commissions
and
Trading Income
Other
Operating Income
Investment
Security
Gains
(Losses), net
Total
Other
Noninterest Income
$
FOR
THE
YEAR
ENDED
DECEMBER 31,
CHANGE
2020
2019
$
290.4
$
250.9
$
45.4
133.2
194.0
(0.4)
662.6
$
44.5
103.6
145.5
(1.4)
543.1
$
2018
307.2
51.8
98.3
127.5
(1.0)
583.8
2020 / 2019
2019 / 2018
16 %
2
29
33
N/M
22 %
(18)%
(14)
5
14
N/M
(7)%
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 2020 increased from 2019, primarily driven by higher client volumes and
increased market volatility, partially offset by 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, in
2020 increased from 2019.
Security Commissions and Trading Income
Security Commissions and Trading Income, generated primarily from securities brokerage services provided by Northern
Trust Securities, Inc., in 2020 increased from 2019, primarily driven by higher core brokerage revenue and revenue from
interest rate swaps.
Other Operating Income
The components of Other Operating Income are provided in the following table.
TABLE 20: OTHER OPERATING INCOME
($
In Millions)
Loan
Service Fees
Banking
Service Fees
Other Income
Total
Other
Operating Income
FOR
THE
YEAR
ENDED
DECEMBER 31,
CHANGE
$
$
2020
52.5
$
46.1
95.4
2019
48.0
$
45.6
51.9
2018
48.9
46.4
32.2
194.0
$
145.5
$
127.5
2020 / 2019
2019 / 2018
9 %
1
84
33 %
(2)%
(2)
60
14 %
Other income in 2020 increased from 2019, primarily due to higher income related to a bank-owned life insurance program
implemented during 2019, a charge in the prior year related to the decision made to sell substantially all of the lease
portfolio, and higher miscellaneous income.
Investment Security Gains (Losses), Net
Losses in 2019 included $0.3 million of charges related to the other-than-temporary impairment (OTTI) of certain
Community Reinvestment Act (CRA) eligible held-to-maturity debt securities. ASU 2016-13, adopted on January 1, 2020,
replaced the legacy OTTI model with an estimated credit loss model. Refer to the caption "Investment Security Gains and
Losses” in Note 4, “Securities,” and the caption “Allowance for Debt Securities Held to Maturity Securities Portfolio” in
Note 7, “Allowance for Credit Losses” included under Item 8, “Financial Statements and Supplementary Data.”
2020 Annual Report | Northern Trust Corporation 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and 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.
Short-term borrowings include Federal Funds Purchased, Securities Sold Under Agreements to Repurchase, and Other
Borrowings. Earning assets also are funded by noninterest-related funds, which include demand deposits and Stockholders’
Equity. 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 nonaccruing assets and client compensating deposit
balances used to pay for services impact Net Interest Income.
Net interest margin is the difference between what we earn on our assets and what we pay for deposits and other
sources of funding. The direction and level of interest rates are important factors in our earnings. Net interest margin is
calculated by dividing annualized Net Interest Income by average interest-earning assets.
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 85.
40 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables present an analysis of average daily balances and interest rates affecting Net Interest Income and
an analysis of Net Interest Income changes.
TABLE 21: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE
ON A FULLY TAXABLE EQUIVALENT BASIS)
(1)
($
In Millions)
2020
AVERAGE
BALANCE
INTEREST
AVERAGE
RATE(7)
INTEREST
2019
AVERAGE
BALANCE
AVERAGE
RATE(7)
INTEREST
2018
AVERAGE
BALANCE
AVERAGE
RATE(7)
Other
(2)
$
28.8
$
27,921.4
0.10 %
$
181.7
$
18,527.7
0.98 %
$
207.1
$
23,899.3
0.87 %
INTEREST-EARNING ASSETS
Federal
Reserve
Other
and
Central
Bank
Interest-Bearing
Due
from
and
Deposits
Deposits
and
with Banks(3)
Federal
Funds Sold
Securities
Securities
Purchased
under
Agreements
to Resell
U.S. Government
Obligations
of
States
and
Political Subdivisions
Sponsored Agency
Government
(4)
Other
Total Securities
Loans
and
Leases
(5)
Total
Interest-Earning Assets
Allowance
for
Credit Losses
Cash
and
Due
from
Banks
Buildings
and Equipment
and
Other
Central
Bank
Deposits(6)
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
Federal
Funds Purchased
Securities
Sold
under
Agreements
to Repurchase
Other 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
22.4
5,400.8
—
3.9
2.3
1,253.1
63.0
48.2
4,256.7
2,194.3
409.0
23,970.4
324.1
25,635.1
844.3
56,056.5
778.5
33,498.8
1,677.9
124,132.9
—
—
—
—
—
—
(178.0)
2,603.0
509.3
1,357.5
695.4
7,691.0
0.41
1.37
0.31
1.48
2.20
1.71
1.26
1.51
2.32
1.35
—
—
—
—
—
—
72.4
5,996.7
0.4
17.5
12.8
835.0
110.4
5,296.5
24.4
980.5
583.6
22,634.1
381.6
21,773.3
1,100.0
50,684.4
1,160.7
31,052.8
2,532.7
107,109.4
—
—
—
—
—
—
(111.4)
2,393.6
425.6
1,070.4
682.5
5,981.3
1.21
2.73
2.10
2.09
2.49
2.58
1.75
2.17
3.74
2.36
—
—
—
—
—
70.0
6,022.8
0.4
20.5
32.9
1,478.3
108.3
5,737.1
13.9
725.2
456.0
20,682.7
367.5
23,136.5
945.7
50,281.5
1,106.5
32,028.6
2,362.6
113,731.0
—
—
—
—
—
—
(126.3)
2,534.3
438.5
1,002.0
642.5
4,724.6
1.16
2.18
2.22
1.89
1.91
2.20
1.59
1.88
3.45
2.08
—
—
—
—
—
—
$
—
$136,811.1
— %
$
—
$117,551.4
— %
$
—
$122,946.6
— %
$
47.6
$
23,396.4
0.20 %
$
160.8
$
16,577.8
0.97 %
$
82.0
$
15,149.3
0.54 %
16.5
1,266.4
1.30
16.2
867.5
(15.7)
60,486.3
(0.03)
311.9
54,885.2
48.4
85,149.1
2.2
1.0
45.3
72.7
26.5
4.2
980.9
218.3
6,401.1
3,233.8
1,189.2
277.7
200.3
97,450.1
—
—
—
—
—
23,362.0
4,806.4
11,192.6
0.06
0.22
0.47
0.71
2.24
2.24
1.52
0.21
1.14
—
—
—
488.9
72,330.5
25.9
6.4
1,267.4
339.0
181.7
7,752.5
72.6
38.3
8.2
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
2.05
1.89
2.34
3.04
3.36
2.98
0.96
1.40
—
—
—
7.8
870.6
294.8
58,556.6
384.6
74,576.5
50.3
7.8
2,762.8
525.2
150.1
7,495.5
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
1.82
1.48
2.00
3.13
3.47
2.72
0.79
1.29
—
—
—
Total
Liabilities
and
Stockholders’ Equity
Net
Interest
Income/Margin
(FTE Adjusted)
Net
Interest
Income/Margin (Unadjusted)
$
$
$
—
$136,811.1
— %
$
—
$117,551.4
— %
$
—
$122,946.6
— %
1,477.6
1,443.2
$
$
—
—
1.19 %
$
1,710.7
1.16 %
$
1,677.9
$
$
—
—
1.60 %
$
1,663.9
1.57 %
$
1,622.7
$
$
—
—
1.46 %
1.43 %
Note: Net Interest Income (FTE Adjusted), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans and securities. The adjustments are based on a federal income
tax rate of 21.0%, where the rate is adjusted for applicable state income taxes, net of related federal tax benefit. Total taxable equivalent interest adjustments amounted to $34.4 million in 2020, $32.8
million in 2019 and $41.2 million in 2018. A reconciliation of Net Interest Income and net interest margin on a GAAP basis to Net Interest Income and net interest margin on an FTE basis (each of which is
a non-GAAP financial measure) is provided on page 85. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets. Interest revenue on cash collateral
positions is reported above in Interest-Bearing Due From and Deposits with Banks and in Loans and Leases. Interest Expense on cash collateral positions is reported above in 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 in Other Assets and Other Liabilities, respectively.
(1) 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. On the basis of averages, the percentage of total assets
attributable to foreign activities was 20%, 23% and 25% as of December 31, 2020, 2019 and 2018, respectively. On the basis of averages, the percentage of total liabilities attributable to foreign activities
was 56%, 53% and 54% as of December 31, 2020, 2019 and 2018, respectively. For additional information, refer to the Geographic Area Information section of Note 32, “Reporting Segments and Related
Information,” provided in Item 8, “Financial Statements and Supplementary Data.”
(2) 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 on the consolidated
balance sheets.
(3) 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.
(4) Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets.
(5) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(6) Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits on the consolidated balance sheets.
(7) 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.
2020 Annual Report | Northern Trust Corporation 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 22: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE
(INTEREST AND RATE ON A FULLY TAXABLE
EQUIVALENT BASIS)
2020/2019
CHANGE
DUE
TO
2019/2018
CHANGE
DUE
TO
(In Millions)
Increase
(Decrease)
in
Net
Interest
Income (FTE)
Federal
and Other
Reserve
and
Other
Central
Bank
Deposits
AVERAGE
BALANCE
AVERAGE
RATE
NET
(DECREASE)
INCREASE
AVERAGE
BALANCE
AVERAGE
RATE
NET
(DECREASE)
INCREASE
$
62.5 $
(215.4)
$
(152.9)
$
(58.1)
$
32.7
$
(25.4)
Interest-Bearing
Due
from and Deposits
with Banks
Federal
Funds Sold
Securities
Purchased
under
Agreements to Resell
Securities
U.S. Government
Obligations
of
States
and
Political Subdivisions
Government
Sponsored Agency
Other
Total Securities
Loans
and Leases
Total
Interest Income
Interest-Bearing Deposits
Savings,
Money
Market
and Other
Savings
Certificates
and
Other Time
Non-U.S.
Offices
- Interest Bearing
Total
Interest-Bearing Deposits
Federal
Funds Purchased
Securities
Sold
under
Agreements
to Repurchase
Other Borrowings
Senior Notes
Long-Term Debt
Floating
Rate
Capital Debt
Total
Interest Expense
(Decrease)
Increase
in
Net
Interest
22.0
13.5
—
70.1
271.6
$
$
Income (FTE)
$
$
(6.5)
(0.2)
6.1
(19.0)
26.9
32.7
61.6
102.2
177.6
(43.5)
(0.2)
(19.7)
(28.4)
(3.1)
(207.3)
(119.1)
(357.9)
(559.8)
(50.0)
(0.4)
(13.6)
(47.4)
23.8
(174.6)
(57.5)
(255.7)
(382.2)
(0.3)
—
(36.5)
(5.4)
5.7
45.1
(20.0)
25.4
(89.2)
2.7
—
21.1
7.5
4.8
82.5
34.1
128.9
143.4
$
341.7
$
(1,196.5)
$
(854.8)
$
(158.7)
$
328.8
$
$
48.5
$
(161.7) $
(113.2)
$
8.3
$
70.5
$
(9.3)
29.2
68.4
(4.8)
(1.7)
9.6
(356.8)
(508.9)
(18.9)
(3.7)
0.3
(327.6)
(440.5)
(23.7)
(5.4)
(27.3)
(109.1)
(136.4)
(21.9)
(25.3)
(4.0)
0.1
(11.8)
(4.0)
—
(13.9)
(5.6)
(31.9)
(6.5)
5.3
20.6
(5.6)
—
(691.8)
$
(621.7)
$
(23.7)
$
(504.7)
$
(233.1)
$
(135.0)
$
8.4
31.0
109.9
7.5
5.1
26.3
(1.4)
(1.1)
0.7
147.0
181.8
$
$
2.4
—
(15.4)
2.1
10.5
127.6
14.1
154.3
54.2
170.1
78.8
8.4
17.1
104.3
(24.4)
(1.4)
31.6
19.2
(6.7)
0.7
123.3
46.8
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.
Net Interest Income in 2020 decreased from 2019. Net Interest Income, stated on an FTE basis decreased from 2019,
due to a lower net interest margin, partially offset by higher levels of average earning assets. Average earning assets
increased in 2020 from 2019, primarily reflecting higher levels of short-term interest bearing deposits, Securities, and
Loans and Leases. Funding of the balance sheet reflected higher levels of client deposits. The increase in average client
deposits resulted from the large inflows experienced at the end of the first quarter of 2020, and these balances were largely
maintained throughout the year.
The net interest margin in 2020 decreased from 2019. The net interest margin on an FTE basis in 2020 decreased from
2019, primarily due to lower interest rates. Low levels of market interest rates are expected to continue to impact our net
interest income.
Federal Reserve and Other Central Bank Deposits and Other averaged $27.9 billion in 2020, which increased $9.4
billion, or 51%, from $18.5 billion in 2019, which resulted from significant deposit inflows. The higher level of client
deposits were primarily placed with the Federal Reserve and other central banks and in the securities portfolio. Average
Securities were $56.1 billion and increased $5.4 billion, or 11%, from $50.7 billion in the prior-year period and include
certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $769.6
million, $202.9 million and $63.5 million, respectively, which are recorded in Other Assets on the consolidated balance
sheets. Average taxable Securities were $50.9 billion in 2020 and $43.9 billion in 2019. Average nontaxable Securities,
which represent securities that are primarily exempt from U.S. federal and state income taxes, were $5.2 billion in 2020
and $6.8 billion in 2019. Interest-Bearing Due From and Deposits with Banks averaged $5.4 billion in 2020 and $6.0
billion in 2019.
42 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and Leases averaged $33.5 billion, which increased $2.4 billion, or 8%, from $31.1 billion in 2019, primarily
reflecting higher levels of commercial and institutional, private client, commercial real estate, and non-U.S. loans, partially
offset by a decrease in residential real estate loans. Commercial and institutional loans averaged $10.3 billion and increased
$1.3 billion, or 15%, from $9.0 billion for the prior-year period. Private client loans averaged $11.5 billion and increased
$706.9 million, or 7%, from $10.7 billion for the prior-year period. Commercial real estate loans averaged $3.3 billion and
increased $335.6 million, or 12%, from $2.9 billion for the prior-year period. Non-U.S. loans averaged $2.0 billion and
increased $262.7 million, or 15.3%, from $1.7 billion for the prior-year period. Residential real estate loans averaged $6.1
billion and decreased $180.9 million, or 3%, from $6.3 billion for the prior-year period.
Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits increased $12.8 billion, or
18%, to $85.1 billion in 2020 from $72.3 billion in 2019. Average Interest-Related Funds increased $12.0 billion, or 14%,
to $97.5 billion in 2020 from $85.5 billion in 2019. The balances within short-term borrowing classifications vary based on
funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the
availability of collateral to secure these borrowings. Average net noninterest-related funds increased $5.1 billion, or 23%,
to $26.7 billion in 2020 from $21.6 billion in 2019, primarily resulting from higher levels of Demand and Other
Noninterest-Bearing Deposits and Other Liabilities, partially offset by Other Assets. Average Demand and Other
Noninterest-Bearing Deposits increased $5.9 billion, or 34%, to $23.4 billion in 2020 from $17.5 billion in 2019. The
average rate on total source of funds was 0.16% in 2020 and 0.77% in 2019.
Interest expense for Interest-Bearing Deposits in the current year was driven by low and negative interest rates for
Non-U.S. Offices Interest-Bearing Deposits and low interest rates on domestic Interest-Bearing Deposits. Average Non-
U.S. Offices Interest-Bearing Deposits comprised 71% of total average Interest-Bearing Deposits for the year ended
December 31, 2020.
Stockholders’ Equity averaged $11.2 billion in 2020, compared with $10.6 billion in 2019. The increased
Stockholders’ Equity of $544.2 million, or 5%, was primarily attributable to earnings 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, the redemption of preferred stock during the first quarter of 2020, and dividend
declarations. During the year ended December 31, 2020, the Corporation maintained its quarterly common stock dividend
at $0.70 per share and repurchased 3,276,589 shares of common stock, returning $891.8 million in capital to common
stockholders, compared to $1.7 billion in 2019.
In July 2018, the Board of Directors approved a stock repurchase authorization to repurchase up to 25.0 million shares
of the Corporation’s common stock. 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 Corporation suspended this program on March 16, 2020. Subsequent to the
Corporation suspending its open-market share repurchase program, the only shares repurchased were shares of common
stock withheld upon the vesting of share-based compensation to satisfy tax withholding obligations.
Beginning in the second quarter of 2020, the Federal Reserve announced certain measures to ensure that large financial
institutions, including Northern Trust, remain resilient despite the economic uncertainty resulting from the ongoing
COVID-19 pandemic. Specifically, for the third and fourth quarters of 2020, no share repurchases were permitted by these
institutions and dividend payments were limited to the amount paid in the second quarter and could not exceed the payor’s
average net income for the four preceding quarters. On December 18, 2020, the Federal Reserve again extended its capital
distribution limits into the first quarter of 2021 with certain modifications, which include continuing to limit dividend
payments based on recent income and limiting share repurchases based on recent income. During the first quarter of 2021,
the Corporation restarted its share repurchase program in accordance with such limitations. The repurchase authorization
approved by the Board of Directors has no expiration date, thus the Corporation retains the ability to resume repurchases
thereunder when circumstances warrant and applicable regulations permit. Please refer to Note 15, “Stockholders’ Equity,”
provided in Item 8, “Financial Statements and Supplementary Data.”
2020 Annual Report | Northern Trust Corporation 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Credit Losses
The Corporation adopted ASU No. 2016-13 on January 1, 2020, which significantly changed 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. For more information on the adoption of ASU 2016-13, please refer to Note 2,
“Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.”
The Provision for Credit Losses was a provision of $125.0 million in 2020, as compared to a credit provision of $14.5
million in 2019. The provision for 2020 primarily reflected an increase in the reserve evaluated on a collective basis. The
increase in the collective basis reserve was primarily driven by current and projected economic conditions and downgrades
in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with
increases primarily in the commercial and institutional and commercial real estate portfolios. The prior-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.
Net charge-offs in 2020 totaled $3.2 million resulting from $9.7 million of charge-offs and $6.5 million of recoveries,
compared to net recoveries of $0.7 million in the prior-year resulting from $6.5 million of charge-offs and $7.2 million of
recoveries.
Nonaccrual assets at December 31, 2020 increased 53% from the prior year-end. Residential real estate, commercial
real estate, commercial and institutional, and private client loans accounted for 47%, 31%, 20%, and 2%, respectively, of
nonaccrual loans and leases at December 31, 2020. 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 total nonaccrual loans
and leases at December 31, 2019. For additional discussion of the Allowance for Credit Losses, refer to the “Asset Quality”
section.
Noninterest Expense
Noninterest Expense for 2020 increased from 2019, primarily reflecting increased Compensation, Equipment and Software,
Employee Benefits, Occupancy, and Other Operating Expense, partially offset by lower Outside Services. Noninterest
Expense for 2020 included severance-related charges of $55.0 million in connection with a reduction in force, a
$43.4 million charge related to a corporate action processing error, and Occupancy expense related to an early lease exit
arising from a workplace real estate strategy of $11.9 million.
The components of Noninterest Expense and a discussion of significant changes during 2020 and 2019 are provided below.
TABLE 23: NONINTEREST EXPENSE
($
In Millions)
Compensation
Employee Benefits
Outside Services
Equipment
and Software
Occupancy
Other
Operating Expense
Total
Noninterest Expense
FOR
THE
YEAR
ENDED
DECEMBER 31,
CHANGE
2020
2019
2018
2020 / 2019
2019 / 2018
$
1,947.1
$
1,859.0
$
1,806.9
5 %
3 %
387.7
763.1
673.5
230.1
346.7
355.2
774.5
612.1
212.9
329.8
356.7
739.4
582.2
201.1
330.6
9
(1)
10
8
5
—
5
5
6
—
$
4,348.2
$
4,143.5
$
4,016.9
5 %
3 %
Compensation
Compensation expense, the largest component of Noninterest Expense, increased in 2020 from 2019, primarily reflecting
higher salary expense driven by staff growth and base pay adjustments, $52.5 million of severance-related charges in
connection with a reduction in force, and a one-time supplemental payment to certain employees in response to the
COVID-19 pandemic, partially offset by lower cash-based incentives and long-term performance-based incentive expense.
Staff on a full-time equivalent basis totaled approximately 20,900 at December 31, 2020, up 6% from approximately
19,800 at December 31, 2019.
Employee Benefits
Employee Benefits expense in 2020 increased from 2019, primarily reflecting higher retirement plan expenses.
44 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Outside Services
Outside Services expense in 2020 decreased from 2019, primarily due to lower data processing and consulting services,
partially offset by higher sub-custodian expenses. Included in Outside Services is $2.5 million of outplacement costs
associated with the reduction in force.
Equipment and Software
Equipment and Software expense in 2020 increased from 2019, primarily reflecting higher depreciation and amortization
and software support costs.
Occupancy
Occupancy expense in 2020 increased from 2019, primarily reflecting higher rent arising from workplace real estate
strategies, including $11.9 million of expense related to an early lease exit, partially offset by an asset retirement obligation
reduction resulting from a lease renegotiation.
Other Operating Expense
The components of Other Operating Expense are provided in the following table.
TABLE 24: OTHER OPERATING EXPENSE
($
In Millions)
Business Promotion
Staff Related
FDIC
Other
Other Expenses
Other
Total
Insurance Premiums
Intangibles Amortization
Operating Expense
FOR
THE
YEAR
ENDED
DECEMBER 31,
CHANGE
$
$
2020
59.2
29.4
11.8
16.9
229.4
346.7
$
$
2019
104.2
42.8
9.9
16.6
156.3
329.8
$
$
2018
98.3
33.6
27.4
17.4
153.9
330.6
2020 / 2019
(43)%
(31)
19
2
47
5 %
2019 / 2018
6 %
27
(64)
(4)
2
— %
Other Operating Expense in the current year increased compared to the prior year primarily due to a $43.4 million charge
related to a corporate action processing error as well as increases in mutual fund co-administration fees, partially offset by
lower business promotion expense due to reduced business travel and lower staff-related expense.
Provision for Income Taxes
The 2020 Provision for Income Taxes was $418.3 million, representing an effective rate of 25.7%. This compares with a
Provision for Income Taxes of $451.9 million and an effective rate of 23.2% in 2019. The increase in the effective tax rate
was primarily driven by $26.8 million of tax expense related to the reversal of tax benefits previously recognized through
earnings and higher taxes payable on the income of the Corporation’s non-U.S. branches.
See Note 22, “Income Taxes,” 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 consolidated results of operations by reporting segment for 2020 compared to
2019. For a discussion related to the consolidated results of operations by reporting segment for 2019 compared
to 2018, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
in our 2019 Form 10-K, which was filed with the SEC on February 25, 2020.
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,” 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
2020 Annual Report | Northern Trust Corporation 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 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 presents the earnings and average assets for the Corporation.
TABLE 25: CONSOLIDATED FINANCIAL INFORMATION
($ In Millions)
Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
2020
2019
2018
2020 / 2019
2019 / 2018
Trust, Investment and Other Servicing Fees
$
3,995.0 $
3,852.1 $
3,753.7
4 %
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
$
$
290.4
372.2
4,657.6
1,477.6
6,135.2
125.0
4,348.2
1,662.0
452.7
250.9
292.2
4,395.2
1,710.7
6,105.9
(14.5)
4,143.5
1,976.9
484.7
1,209.3 $
1,492.2 $
307.2
276.6
4,337.5
1,663.9
6,001.4
16
27
6
(14)
—
(14.5)
N/M
4,016.9
1,999.0
442.6
1,556.4
5
(16)
(7)
(19)%
16 %
136,811.1 $
117,551.4 $
122,946.6
3 %
(18)
6
1
3
2
—
3
(1)
10
(4)%
(4)%
(1) Non-GAAP financial measures stated on an FTE basis. The consolidated figures include $34.4 million, $32.8 million, and $41.2 million of FTE adjustments for 2020, 2019,
and 2018, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net
interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided on page 85.
Corporate & Institutional Services
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds,
foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors
around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to:
custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical
services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services;
transition management services; banking and cash management. Client relationships are managed through the Bank and the
Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle
East, and the Asia-Pacific region. The following table summarizes the results of operations of C&IS for the years ended
December 31, 2020, 2019, and 2018 on a management-reporting basis.
46 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 26: C&IS RESULTS OF OPERATIONS
($
In Millions)
Noninterest Income
FOR
THE
YEAR
ENDED
DECEMBER 31,
CHANGE
2020
2019
2018
2020 / 2019
2019 / 2018
Trust,
Investment
and
Other
Servicing Fees
$
2,321.6
$
2,211.5
$
2,173.1
5 %
2 %
Foreign
Exchange
Trading Income
Other
Noninterest Income
Total
Noninterest Income
Interest Income(1)
Net
Revenue(1)
Provision
for
Credit Losses
Noninterest Expense
Income
before
Provision
for
Net Income
(1)
Income Taxes
(1)
Income Taxes
276.3
222.5
2,820.4
665.5
3,485.9
38.1
2,752.7
695.1
174.4
520.7
$
232.2
178.2
2,621.9
918.7
3,540.6
1.9
2,605.5
933.2
219.4
$
713.8
$
233.4
183.0
2,589.5
992.2
3,581.7
1.9
2,421.4
1,158.4
255.3
903.1
19
25
8
(28)
(2)
N/M
6
(26)
(21)
(1)
(3)
1
(7)
(1)
—
8
(19)
(14)
(27)%
(21)%
Percentage
of
Consolidated
Net Income
43 %
48 %
58 %
Average Assets
$
104,790.6
$
87,557.1
$
82,996.5
20 %
5 %
(1) Non-GAAP financial measures stated on an FTE basis.
C&IS Net Income
Net Income decreased in 2020 compared to 2019, primarily due to lower Net Interest Income and higher Noninterest
Expense, partially offset by higher Noninterest Income.
C&IS Trust, Investment and Other Servicing Fees
For an explanation of C&IS Trust, Investment, and Other Servicing Fees, please see the “Trust, Investment, and Other
Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.
C&IS Foreign Exchange Trading Income
Foreign Exchange Trading Income in 2020 increased from 2019, primarily driven by higher client volumes and increased
market volatility.
C&IS Other Noninterest Income
Other Noninterest Income for 2020 increased from 2019, primarily due to Security Commissions and Trading Income and
Other Operating Income.
C&IS Net Interest Income
Net Interest Income on an FTE basis decreased in 2020 from 2019, due to a lower net interest margin, partially offset by an
increase in average earning assets. Net interest margin on an FTE basis decreased to 0.75% from 1.26%. Average earning
assets of $94.6 billion, increased $15.5 billion, or 20%, from $79.1 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 $60.5 billion in 2020, increased from $54.9 billion in 2019.
C&IS Provision for Credit Losses
On January 1, 2020, the Corporation adopted ASU 2016-13. For more information on the adoption, please refer to Note 2,
“Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.” The C&IS
Provision for Credit Losses was a provision of $38.1 million for 2020 and $1.9 million for 2019. The 2020 provision
reflected an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions and
downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic
impacts on the commercial and institutional portfolio. 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.
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, increased in 2020
from 2019. The increase primarily reflects higher expense allocations, including a $43.4 million charge related to a
corporate action processing error, higher Compensation expense, Employee Benefits, Outside Services, and Equipment and
Software expense, partially offset by lower business promotion expense due to reduced business travel and lower staff-
related expenses.
2020 Annual Report | Northern Trust Corporation 47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $879.4
billion, $875.1 billion, and $347.8 billion, respectively, at December 31, 2020. Wealth Management services are delivered
by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in
London, Guernsey, and Abu Dhabi.
The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2020,
2019, and 2018 on a management-reporting basis.
TABLE 27: WEALTH MANAGEMENT RESULTS OF OPERATIONS
($
In Millions)
Noninterest Income
FOR
THE
YEAR
ENDED
DECEMBER 31,
CHANGE
2020
2019
2018
2020 / 2019
2019 / 2018
Trust,
Investment
and
Other
Servicing Fees
$
1,673.4
$
1,640.6
$
1,580.6
Foreign
Exchange
Trading Income
Other
Noninterest Income
Total
Noninterest Income
Interest Income(1)
Net
Revenue(1)
Provision
for
Credit Losses
Noninterest Expense
Income
before
Provision
for
Net Income
(1)
Income Taxes
(1)
Income Taxes
14.1
168.0
1,855.5
812.1
2,667.6
86.9
1,559.7
1,021.0
291.8
729.2
$
18.7
131.1
1,790.4
792.0
2,582.4
(16.4)
1,531.6
1,067.2
271.1
$
796.1
$
4.2
102.7
1,687.5
816.5
2,504.0
1,460.0
1,060.4
262.1
798.3
2 %
(25)
28
4
3
3
2
(4)
8
4 %
N/M
28
6
(3)
3
—
5
1
3
(8)%
— %
(16.4)
N/M
Percentage
of
Consolidated
Net Income
60 %
53 %
51 %
Average Assets
$
32,020.5
$
29,994.3
$
26,163.7
7 %
15 %
(1) Non-GAAP financial measures stated on an FTE basis.
Wealth Management Net Income
Wealth Management Net Income decreased in 2020, primarily reflecting a higher Provision for Credit Losses and higher
Noninterest Expense, partially offset by higher Revenue.
Wealth Management Trust, Investment and Other Servicing Fees
For an explanation of Wealth Management Trust, Investment, and Other Servicing Fees, please see the “Trust, Investment,
and Other Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.
Wealth Management Other Noninterest Income
Other Noninterest Income for 2020 increased from 2019, primarily due to Security Commissions and Trading Income,
Other Operating Income, and Treasury Management Fees.
Wealth Management Net Interest Income
Net Interest Income on an FTE basis for 2020 increased from 2019, primarily attributable to a higher net interest allocation
from Treasury and Other and an increase in earning assets, partially offset by a decrease in the net interest margin. Net
interest margin on an FTE basis decreased to 2.94% from 3.06%. Average earning assets of $29.5 billion in 2020,
increased $1.5 billion, or 5%, from $28.0 billion in 2019. Earning assets and funding sources for the year ended
December 31, 2020 were primarily comprised of loans and domestic interest-bearing deposits, respectively.
48 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wealth Management Provision for Credit Losses
On January 1, 2020, the Corporation adopted ASU 2016-13. For more information on the adoption, please refer to Note 2,
“Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.” The Wealth
Management Provision for Credit Losses was $86.9 million in 2020 as compared to a credit provision of $16.4 million in
2019. The 2020 provision reflected an increase in the reserve evaluated on a collective basis driven by current and
projected economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and
related market and economic impacts, primarily impacting the commercial real estate and commercial and institutional
portfolios. 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.
Wealth Management Noninterest Expense
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, increased in 2020 from 2019.
The increase primarily reflects higher expense allocations and Employee Benefits, partially offset by lower business
promotion expense due to reduced business travel.
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 2020 and 2019 is not directly comparable to information for 2018 due to the
enhanced segment reporting methodology beginning January 1, 2019. Also beginning January 1, 2019, net interest income
and average assets are allocated to the C&IS and Wealth Management reporting segments.
The following table summarizes the results of operations of Treasury and Other for the years ended December 31,
2020, 2019, and 2018 on a management-reporting basis.
TABLE 28: TREASURY AND OTHER RESULTS OF OPERATIONS
($
In Millions)
2020
2019
2018
2020 / 2019
2019 / 2018
FOR
THE
YEAR
ENDED
DECEMBER 31,
CHANGE
Noninterest Income
Income(1)
Interest
Net
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) Non-GAAP financial measures stated on an FTE basis.
$
$
$
(18.3)
$
(17.1)
$
—
(18.3)
35.8
(54.1)
(13.5)
—
(17.1)
6.4
(23.5)
(5.8)
(40.6)
$
(17.7)
$
60.5
(144.8)
(84.3)
135.5
(219.8)
(74.8)
(145.0)
(3)%
—
$
(1)%
(9)%
—
$
13,786.4
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
Treasury and Other Noninterest Income
Noninterest Income in 2020 decreased from 2019 due to higher expenses for existing swap agreements related to Visa Inc.
Class B common shares.
Treasury and Other Noninterest Expense
Noninterest Expense in 2020 increased from 2019, primarily due to costs associated with workplace real estate strategies
and higher Compensation expense related to a one-time supplemental payment to employees in response to the COVID-19
pandemic.
2020 Annual Report | Northern Trust Corporation 49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Management
Asset Management, through the Corporation’s various subsidiaries, supports the C&IS and Wealth Management reporting
segments by providing a broad range of asset management and related services and other products to clients around the
world. Investment solutions are delivered through separately managed accounts, bank common and collective funds,
registered investment companies, exchange traded funds, non-U.S. collective investment funds, and unregistered private
investment funds. Asset Management’s capabilities include active and passive equity; active and passive fixed income;
cash management; multi-asset and alternative asset classes (such as private equity and hedge funds of funds); and multi-
manager advisory services and products. Asset Management’s activities also include overlay services and other risk
management services. Asset Management operates internationally through subsidiaries and distribution arrangements and
its revenue and expense are allocated fully to C&IS and Wealth Management.
At December 31, 2020, Northern Trust managed $1.41 trillion in assets for personal and institutional clients, including
$1.06 trillion for C&IS clients and $347.8 billion for Wealth Management clients. The following table presents
consolidated assets under management as of December 31, 2020, 2019 and 2018 by investment type.
TABLE 29: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
($
In Billions)
Equities
Fixed
Income Securities
Cash
and
Other Assets
Securities
Lending Collateral
Total
Assets
Under Management
DECEMBER 31,
2020
2019
$
733.7
$
650.8
$
204.8
279.9
186.9
193.8
223.6
163.1
2018
534.2
178.3
207.0
149.9
CHANGE
2020 / 2019
2019 / 2018
13 %
22 %
6
25
15
9
8
9
$
1,405.3
$
1,231.3
$
1,069.4
14 %
15 %
Assets under management increased at year-end 2020 from year-end 2019. 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, 2020, 2019 and 2018.
TABLE 30: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT
2020
2019
2018
$
1,231.3
$
1,069.4
$
1,161.0
193.0
65.0
802.4
268.8
193.6
48.1
551.6
260.5
1,329.2
1,053.8
(212.6)
(68.5)
(746.5)
(245.0)
(205.5)
(49.7)
(541.0)
(247.3)
(1,272.6)
(1,043.5)
56.6
10.3
109.1
8.3
117.4
151.1
0.5
151.6
174.7
63.7
484.3
165.6
888.3
(179.2)
(72.5)
(487.4)
(183.3)
(922.4)
(34.1)
(49.3)
(8.2)
(57.5)
$
1,405.3 $
1,231.3
$
1,069.4
($
In Billions)
Balance
as
of
January 1
Inflows
by Product
Equities
Fixed Income
Cash
and
Other Assets
Securities
Lending Collateral
Total Inflows
Outflows by Product
Equities
Fixed Income
Cash
and
Other Assets
Securities Lending Collateral
Total Outflows
Net
Inflows (Outflows)
Market
Performance,
Currency
& Other
Market Performance
& Other
Currency
Total Market
Performance,
Currency & Other
Balance
as of
December 31
50 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED BALANCE SHEET REVIEW
The following tables summarize selected consolidated balance sheet information.
TABLE 31: SELECT CONSOLIDATED BALANCE SHEET INFORMATION
Bank
Deposits
and
with Banks(2)
($
In Billions)
Assets
Federal
Reserve
and
Other
Central
Interest-Bearing
Due
from
and
Deposits
Purchased
Securities
Total Securities(3)
under
Agreements
to Resell
Loans
and Leases
Total
Earning Assets
Total Assets
Liabilities
and
Stockholders' Equity
Total
Interest-Bearing Deposits
Demand
and
Other
Noninterest-Bearing Deposits
Federal
Funds Purchased
Securities
Sold
under
Agreements
to Repurchase
Other Borrowings
Total
Stockholders’ Equity
DECEMBER
31, 2020
DECEMBER
31, 2019
CHANGE
Other(1)
$
55.4
$
33.8
$
6.6
1.6
61.1
33.8
158.5
170.0
100.8
43.1
0.3
—
4.0
11.7
7.0
0.7
52.3
31.4
125.2
136.8
82.8
26.3
0.6
0.5
6.7
11.1
21.6
(0.4)
0.9
8.8
2.4
33.3
33.2
18.0
16.8
(0.3)
(0.5)
(2.7)
0.6
64 %
(5)
126
17
7
27
24
22
64
(53)
(92)
(41)
5
(1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses for the purpose of presenting
earning assets; such deposits are presented in Other Assets on the consolidated balance sheets.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as
presented on the consolidated balance sheets.
(3) Total Securities includes certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the
consolidated balance sheets.
TABLE 32: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION
Bank
Deposits
and
with Banks(2)
($
In Billions)
Assets
Federal
Reserve
and
Other
Central
Interest-Bearing
Due
from
and
Deposits
Securities Purchased
Total Securities(3)
under
Agreements
to Resell
Loans
and Leases
Total
Earning Assets
Total Assets
Liabilities
and
Stockholders' Equity
Total
Interest-Bearing Deposits
Demand
and
Other
Noninterest-Bearing Deposits
Federal
Funds Purchased
Securities
Sold
under
Agreements
to Repurchase
Other Borrowings
Total
Stockholders’ Equity
TWELVE
MONTHS
ENDED
DECEMBER 31,
2020
2019
CHANGE
Other(1)
$
27.9
$
18.5
$
5.4
1.2
56.1
33.5
124.1
136.8
85.1
23.4
1.0
0.2
6.4
11.2
6.0
0.8
50.7
31.1
107.1
117.6
72.3
17.5
1.3
0.3
7.8
10.6
9.4
(0.6)
0.4
5.4
2.4
17.0
19.2
12.8
5.9
(0.3)
(0.1)
(1.4)
0.6
51 %
(10)
50
11
8
16
16
18
34
(23)
(36)
(17)
5
(1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses for the purpose of presenting
earning assets; such deposits are presented in Other Assets on the consolidated balance sheets.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as
presented on the consolidated balance sheets.
(3) Total Securities includes certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the
consolidated balance sheets.
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. The current growth in both the period-end and
average consolidated balance sheets was primarily driven by higher customer deposit balances.
Stockholders’ Equity. The increase in average Stockholders’ Equity was primarily attributable to earnings and
Accumulated Other Comprehensive Income since the prior year, partially offset by the repurchase of common stock
2020 Annual Report | Northern Trust Corporation 51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
pursuant to the Corporation’s share repurchase program, the net redemption of preferred stock during the first quarter of
2020, and dividend declarations. During the first quarter of 2020, proceeds from the Series E Non-Cumulative Perpetual
Preferred Stock issuance in the fourth quarter of 2019 were used to fund the redemption of all outstanding shares of the
Corporation’s Series C Non-Cumulative Perpetual Preferred Stock at a redemption price of $400 million, which was $11.5
million in excess of the net carrying value of the shares. The $11.5 million excess is included in preferred stock dividends
in the determination of net income available to common shareholders.
The Corporation suspended its open-market share repurchase program on March 16, 2020. During the year ended
December 31, 2020, the Corporation repurchased 3,276,589 shares of common stock, including 532,713 shares withheld
related to share-based compensation, at a total cost of $299.8 million ($91.49 average price per share).
Beginning in the second quarter of 2020, the Federal Reserve announced certain measures to ensure that large financial
institutions, including Northern Trust, remain resilient despite the economic uncertainty resulting from the ongoing
COVID-19 pandemic. Specifically, for the third and fourth quarters of 2020, no share repurchases were permitted by these
institutions and dividend payments were limited to the amount paid in the second quarter and could not exceed the payor’s
average net income for the four preceding quarters. On December 18, 2020, the Federal Reserve again extended its capital
distribution limits into the first quarter of 2021 with certain modifications, which include continuing to limit dividend
payments based on recent income and limiting share repurchases based on recent income. During the first quarter of 2021,
the Corporation restarted its share repurchase program in accordance with such limitations.
Asset Quality
Securities Portfolio
The following table presents the remaining maturity and average yield of Northern Trust's held to maturity and available
for sale debt securities by security type as of December 31, 2020.
TABLE 33: REMAINING MATURITY AND AVERAGE YIELD OF DEBT SECURITIES HELD TO MATURITY AND AVAILABLE FOR
SALE
TOTAL
ONE YEAR OR
LESS
ONE TO FIVE
YEARS
FIVE TO TEN
YEARS
BOOK
YIELD
BOOK
YIELD
BOOK
YIELD
BOOK
YIELD
OVER TEN
YEARS
AVERAGE
BOOK YIELD MATURITY
DECEMBER 31, 2020
($ in Millions)
Debt Securities Held to
Maturity
U.S. Government
$
90.0
0.06% $
90.0
0.06% $ — —%
$ —
— % $ — —%
2 mo.
Obligations of States
and Political
Subdivisions
Government
Sponsored Agency
Other – Fixed
– Floating
Total Debt Securities Held
to Maturity
Debt Securities Available
for Sale
2.1
5.47
1.4
5.37
0.7
5.64
—
—
— —
6 mos.
3.0
15,130.6
2,565.4
4.86
0.29
0.42
0.5
11,000.7
501.0
4.83
0.11
0.27
1.3
3,572.4
2,032.8
4.85
0.76
0.46
0.8
440.9
31.6
4.88
0.67
0.41
0.4
116.6
4.85
1.31
— —
60 mos.
13 mos.
40 mos.
$17,791.1 0.31% $11,593.6 0.12% $ 5,607.2
0.65% $ 473.3
0.66 % $ 117.0 1.32%
17 mos.
U.S. Government
$ 2,799.9
1.66% $ 303.2
1.86% $ 1,767.0
1.72% $ 729.7
1.43 % $ — —%
39 mos.
Obligations of States
and Political
Subdivisions
Government
Sponsored Agency
Asset-Backed – Fixed
Asset-Backed –
Floating
Other – Fixed
– Floating
Total Debt Securities
Available for Sale
3,083.6
2.10
8.0
1.66
266.8
2.30
2,718.4
2.09
90.4
1.64
90 mos.
24,956.7
3,274.1
1,755.2
5,150.8
1,001.7
1.40
2.18
1.41
1.88
0.62
5,613.6
537.4
0.7
821.7
314.1
1.48
2.39
1.31
1.29
0.64
9,063.0
2,094.3
1,284.6
3,912.8
687.6
1.48
1.94
1.47
0.54
0.62
7,793.6
642.4
372.9
416.3
—
1.26
2.80
1.55
0.56
—
2,486.5
1.39
— —
97.0
0.11
— —
— —
60 mos.
30 mos.
87 mos.
32 mos.
19 mos.
$42,022.0 1.57% $ 7,598.7
1.51% $19,076.1 1.67% $12,673.3
1.51 % $2,673.9 1.35%
55 mos.
Note: Yield is calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates.
52 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northern Trust maintains a high quality debt securities portfolio. Debt securities not explicitly rated were grouped
where possible under the credit rating of the issuer of the security. The following tables provide the fair value of debt
securities available for sale and amortized cost of debt securities held to maturity by credit rating.
TABLE 34: FAIR VALUE OF DEBT SECURITIES AVAILABLE FOR SALE BY CREDIT RATING
Obligations
of
States
and
Political Subdivisions
918.1
2,165.5
($
In Millions)
U.S. Government
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
Total
Percent
of Total
AS
OF
DECEMBER
31, 2020
AAA
AA
A
NOT RATED
TOTAL
$
2,799.9
$
—
$
24,956.7
669.8
426.3
453.3
1,622.0
3,947.5
1,031.8
—
38.8
790.0
—
566.0
—
—
$
—
—
—
5.4
1,123.5
24.9
157.8
—
—
—
—
—
—
199.8
74.9
—
50.0
—
$
2,799.9
3,083.6
24,956.7
714.0
2,539.6
553.1
2,345.8
3,997.5
1,031.8
$
36,825.4
$
3,560.3
$
1,311.6
$
324.7
$
42,022.0
88 %
8 %
3 %
1 %
100 %
The 1% of debt securities available for sale not rated by Moody’s Investors Service, Standard and Poor’s or Fitch Ratings
primarily consisted of corporate debt, covered bonds, and other asset-backed securities.
TABLE 35: AMORTIZED COST OF DEBT SECURITIES HELD TO MATURITY BY CREDIT RATING
($
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
Other Asset-Backed
Other
Total
Percent
of Total
AAA
AA
A
BBB
NOT RATED
TOTAL
AS OF DECEMBER 31, 2020
$
90.0
$
—
3.0
$
—
1.0
—
$
—
—
—
319.8
1,337.4
6,630.6
3.8
279.1
305.1
3,184.6
—
—
—
677.0
—
—
—
—
—
—
—
—
$
—
1.1
—
48.8
—
—
—
—
—
—
—
—
—
—
—
—
807.2
—
—
454.6
$
90.0
2.1
3.0
8,336.6
588.0
3,184.6
807.2
3,648.0
677.0
454.6
$
6,869.1
$
2,674.6
$
6,935.7
$
49.9
$
1,261.8
$
17,791.1
39 %
15 %
39 %
— %
7 %
100 %
Sub-Sovereign,
Supranational
and
Non-U.S.
Agency Bonds
2,590.9
1,057.1
The 7% of debt securities held to maturity not rated by Moody’s Investors Service, Standard and Poor’s or Fitch Ratings
consisted of certificates of deposit with a remaining life of less than six months as well as investments purchased by
Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its
obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that
benefit low-to-moderate income communities within Northern Trust’s market area.
Net unrealized gains within the investment securities portfolio totaled $872.6 million at December 31, 2020, compared
to net unrealized gains of $118.9 million as of December 31, 2019. Net unrealized gains as of December 31, 2020 were
comprised of $981.9 million and $109.3 million of gross unrealized gains and losses, respectively.
As of December 31, 2020, the $42.0 billion debt securities available for sale portfolio had unrealized losses of $26.9
million and $2.8 million related to government-sponsored agency and other asset-backed securities, respectively, which are
primarily attributable to changes in market interest rates and credit spreads since their purchase.
As of December 31, 2020, the $17.8 billion debt securities held to maturity portfolio had an unrealized loss of $76.5
million related to other residential mortgage-backed securities, which is primarily attributable to changes in overall market
interest rates and credit spreads since their purchase.
As of December 31, 2020, 16% of the corporate debt securities available for sale portfolio was backed by guarantees
provided by U.S. and non-U.S. government entities.
For additional information relating to the securities portfolio, refer to Note 4, “Securities,” provided in Item 8,
“Financial Statements and Supplementary Data.”
2020 Annual Report | Northern Trust Corporation 53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northern Trust participates in the repurchase agreement market as a relatively low cost alternative for short-term
funding. Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted
for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued
interest. To minimize 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.
For additional information relating to the securities sold under agreements to repurchase, 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.”
Loans and Leases
During 2020, 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 as of December 31,
2019 below have been adjusted to conform to the revised presentation. The 2020 adjustments generally reflect
reclassification of loans from the commercial real estate class to commercial and institutional, residential real estate, and
private client classes. There was no impact on total Loans and Leases previously reported.
For additional information relating to the loan and leases portfolio, refer to Note 6, “Loans and Leases,” and Note 8
“Concentrations of Credit Risk” provided in Item 8, “Financial Statements and Supplementary Data.”
The following table presents the remaining maturity of loans and leases by segment and class as of December 31, 2020.
TABLE 36: REMAINING MATURITY OF LOANS AND LEASES
DECEMBER 31, 2020
(In Millions)
U.S.:
Commercial
TOTAL
ONE
YEAR
OR
LESS
ONE
TO
FIVE
YEARS
FIVE
TO
FIFTEEN
YEARS
OVER
FIFTEEN
YEARS
Commercial
and Institutional
$
10,058.3
$
3,850.3
$
5,635.0
$
566.3
$
3,558.4
11.4
288.2
11,815.1
6,035.7
49.0
470.3
—
288.2
7,978.6
125.6
49.0
2,314.4
—
—
3,499.3
324.4
—
769.1
11.4
—
335.3
910.3
—
6.7
4.6
—
—
1.9
4,675.4
—
31,816.1
$
12,762.0
$
11,773.1
$
2,592.4
$
4,688.6
1,345.7
$
1,203.4
$
142.3
$
—
$
597.9
1,943.6
33,759.7
$
$
469.5
1,672.9
14,434.9
$
$
82.7
225.0
11,998.1
$
$
31.8
31.8
2,624.2
$
$
—
13.9
13.9
4,702.5
custodied client investments.
Commercial
Real Estate
Lease
Financing, net
Other
Personal
Private Client
Residential
Real Estate
Other
Total U.S.
Non-U.S.:
Non-U.S. - Commercial
Non-U.S. - Personal
Total Non-U.S.
Total
Loans
and Leases
$
$
$
$
Note:
Non-U.S.
loans
primarily
include
short
duration
exposures
related
to
54 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 37: INTEREST RATE SENSITIVITY OF LOANS AND LEASES
(In Millions)
Fixed Rate:
Commercial
Commercial
and Institutional
Commercial
Real Estate
Total Commercial
Personal
Private Client
Residential
Real Estate
Total Personal
Total
Fixed Rate
Variable Rate:
Commercial
Commercial
and Institutional
Commercial
Real Estate
Non-U.S.
Lease
Financing, net
Other
Total Commercial
Personal
Private Client
Residential
Real Estate
Non-U.S.
Other
Total Personal
Total
Variable Rate
Total
Loans
and Leases
DECEMBER 31, 2020
TOTAL
ONE YEAR
OR LESS
ONE
TO FIVE
YEARS
FIVE
TO
FIFTEEN
YEARS
OVER
FIFTEEN
YEARS
$
$
$
$
$
$
$
$
$
$
$
548.7
$
190.5
739.2
$
423.9
$
920.5
1,344.4
2,083.6
$
$
97.6
$
28.0
125.6
$
88.9
$
3.7
92.6
218.2
$
$
392.6
$
108.0
500.6
$
239.3
$
39.8
279.1
779.7
$
$
9,509.6
$
3,752.7
$
5,242.4
$
3,367.9
1,345.7
11.4
288.2
442.3
1,203.4
—
288.2
2,206.4
142.3
—
—
57.1
$
54.5
111.6
$
94.8
$
570.0
664.8
776.4
$
$
509.2
$
714.6
—
11.4
—
14,522.8
$
5,686.6
$
7,591.1
$
1,235.2
$
11,391.2
$
7,889.7
$
3,260.0
$
240.5
$
5,115.2
597.9
49.0
17,153.3
31,676.1
33,759.7
$
$
$
121.9
469.5
49.0
284.6
82.7
—
8,530.1
14,216.7
14,434.9
$
$
$
3,627.3
11,218.4
11,998.1
$
$
$
340.3
31.8
—
612.6
1,847.8
2,624.2
$
$
$
1.4
—
1.4
0.9
307.0
307.9
309.3
5.3
4.6
—
—
—
9.9
1.0
4,368.4
13.9
—
4,383.3
4,393.2
4,702.5
Nonaccrual Assets and 90 Days Past Due Loans
During 2020, the Corporation implemented changes 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 as of December 31,
2019 below have been adjusted to conform to the revised presentation. The 2020 adjustments generally reflect
reclassification of loans from the commercial real estate class to commercial and institutional, residential real estate, and
private client classes.
Nonaccrual assets consist of nonaccrual 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. For additional information relating to nonaccrual loans, refer to Note 6, “Loans and Leases,”
provided in Item 8, “Financial Statements and Supplementary Data.”
2020 Annual Report | Northern Trust Corporation 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents nonaccrual assets and loans that were delinquent 90 days or more and still accruing
interest at December 31, 2020 and 2019.
TABLE 38: NONACCRUAL ASSETS
($
In Millions)
Nonaccrual
Loans
and Leases
Commercial
Commercial
and Institutional
Commercial
Real Estate
Total Commercial
Personal
Residential
Real Estate
Private Client
Non-U.S.
Total Personal
Total
Nonaccrual
Loans
and Leases
Other
Real
Estate Owned
Total
Nonaccrual Assets
90
Day
Past
Due
Loans
Still Accruing
Nonaccrual
Loans
and
Leases
to
Total
Loans
and Leases
Allowance
for
Credit
Losses
Assigned
to
Loans
and
Leases
to
Nonaccrual
Loans
and Leases
DECEMBER 31,
2020
2019
$
$
$
$
$
$
26.4
40.2
66.6
$
$
62.2
$
2.9
—
65.1
$
131.7
0.7
132.4
8.9
$
$
0.39 %
1.4x
7.6
3.6
11.2
71.4
0.5
0.5
72.4
83.6
3.2
86.8
7.4
0.27 %
1.3x
Nonaccrual assets as of December 31, 2020 increased from December 31, 2019, primarily relating to net increases in
the commercial real estate portfolio due to three new nonaccrual loans and the commercial and institutional portfolio
primarily due to a new nonaccrual loan, partially offset by a net decrease in the residential real estate portfolio due to net
payoffs and charge-offs. In addition to the negative impact on net interest income and the risk of credit losses, nonaccrual
assets also increase operating costs due to the expense associated with collection efforts. Changes in the level of nonaccrual
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 allowance evaluated on an individual basis and the
quantitative and qualitative factors used in the determination of the allowance evaluated on a collective basis within the
allowance for credit losses.
Allowance for Credit Losses
During 2020, the Corporation implemented changes in the classification of certain loans and leases to specific segments to
enhance the consistency of its reporting across various regulatory regimes. The allowance for credit losses as of and prior
to December 31, 2019 remains unadjusted for these adjustments, as the impact of the reclassification on the allowance was
immaterial.
The Corporation adopted ASU No. 2016-13 on January 1, 2020, which significantly changed 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. For more information on the adoption of ASU 2016-13, please refer to Note 2,
“Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.”
The allowance for credit losses — which represents management’s best estimate of lifetime expected credit losses
related to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower relationships —
is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses
of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does
not share similar risk characteristics with other financial assets and the related allowance is determined through an
individual evaluation. Management’s estimates utilized in establishing an appropriate level of allowance for credit losses
are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates
numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into
consideration past events, current conditions and reasonable and supportable forecasts. The results of the credit reserve
estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input
from Credit Risk Management, Treasury, Corporate Finance, the Economic Research group, and each of Northern Trust’s
business units. The allowance for credit losses related to loans and leases, undrawn loan commitments and standby letters
of credit, debt securities held to maturity, and other financial assets, was $190.7 million, $61.1 million, $7.3 million, and
$0.8 million, respectively as of December 31, 2020. For additional information relating to the allowance for credit losses
and the changes in the allowance for credit losses during the years ended December 31, 2020 and 2019 due to charge-offs,
56 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
recoveries and provisions for credit losses, refer to Note 7, “Allowance for Credit Losses,” provided in Item 8, “Financial
Statements and Supplementary Data.”
The following table shows the net recoveries (charge-offs) to average loans and leases by segment and class at
December 31, 2020, 2019, and 2018.
TABLE 39: NET RECOVERIES (CHARGE-OFFS) TO AVERAGE LOANS AND LEASES
($ in Millions)
Net Recoveries (Charge-Offs) to Average Loans and Leases
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Private Client
Residential Real Estate
Total Personal
2020
2019
2018
0.02 %
(0.03)%
0.02 %
(0.18)
(0.03)
—
0.02
—
0.02
(0.02)
—
0.04
0.02
(0.02)
0.01
(0.01)
(0.01)
(0.01)
Total Net Recoveries (Charge-Offs) to Average Loans and Leases
(0.01)%
— %
— %
Net Recoveries (Charge-Offs)
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Private Client
Residential Real Estate
Total Personal
Total Net Recoveries (Charge-Offs)
Average Loans and Leases
Commercial
Commercial and Institutional
Commercial Real Estate
Total Select Commercial
Personal
Private Client
Residential Real Estate
Total Select Personal
$
1.8
$
(2.6)
$
(5.7)
(3.9)
(0.5)
1.2
0.7
$
(3.2)
$
0.5
(2.1)
0.3
2.5
2.8
0.7
$
1.4
(0.6)
0.8
(1.3)
(0.6)
(1.9)
(1.1)
$ 10,347.1
$
8,979.9
$
9,047.2
3,253.8
13,600.9
11,452.9
6,116.4
17,569.3
2,918.1
11,898.0
3,072.8
12,120.0
10,746.0
6,297.2
17,043.2
10,413.3
7,034.4
17,447.7
Total Select Average Loans and Leases
$ 31,170.2
$
28,941.2
$
29,567.7
Net recoveries (charge-offs) for the following segments were zero and therefore excluded from the above table as the
ratio of net recoveries (charge-offs) to average loans and leases is also zero: Lease Financing, net, Other, and Non-U.S. The
average loans and leases balances were also not provided in the table for Lease Financing, net, Other, and Non-U.S.
Total average loans and leases for all loan portfolio categories were $33.5 billion, $31.1 billion, and $32.0 billion for
the years ended December 31, 2020, 2019, and 2018, respectively.
The SEC requires the disclosure of the Allowance for Credit Losses that is applicable to international operations. The
disclosure has been prepared in compliance with this disclosure requirement and is used in determining non-U.S. operating
performance. The amounts disclosed should not be construed as being the only amounts that are available for non-U.S. loan
charge-offs, since the entire Allowance for Credit Losses assigned to Loans and Leases is available to absorb losses on both
U.S. and non-U.S. loans. In addition, these amounts are not intended to be indicative of future charge-off trends. Please
refer to the following table for the non-U.S. allowance balances.
2020 Annual Report | Northern Trust Corporation 57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table shows the allowance evaluated on an individual and collective basis for the loans and leases
portfolio by segment and class at December 31, 2020 and 2019.
TABLE 40: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
($
In Millions)
Evaluated
on
an
Individual Basis
Evaluated
on a
Collective Basis
Commercial
Commercial
and Institutional
Commercial
Real Estate
Lease
Financing, net
Non-U.S.
Other
Total Commercial
Personal
Residential
Real Estate
Private Client
Non-U.S.
Other
Total Personal
Total Allowance Evaluated on a Collective Basis
Total Allowance for Credit Losses
Allowance Assigned to:
Loans and Leases
Undrawn Commitments and Standby Letters of Credit
Total Allowance for Credit Losses
DECEMBER 31,
2020
2019
ALLOWANCE
AMOUNT
$
10.7
PERCENT
OF
TO
LOANS
TOTAL LOANS
ALLOWANCE
AMOUNT
PERCENT
OF
TO
LOANS
TOTAL LOANS
— %
$
6.9
— %
100.6
70.7
0.4
17.7
—
189.4
28.9
20.6
2.2
—
51.7
241.1
251.8
$
$
30
10
—
4
1
45
18
35
2
—
55
35.3
33.0
0.1
—
0.2
68.6
27.0
20.5
—
1.4
48.9
29
10
—
5
1
45
19
35
1
—
55
100 % $
117.5
100 % $
124.4
100 %
100 %
$
190.7
61.1
$
251.8
$
104.5
19.9
$
124.4
Allowance Assigned to Loans and Leases to Total Loans and Leases
0.56 %
0.33 %
Allowance Related to Credit Exposure Evaluated on an Individual Basis: The allowance is determined through an
individual evaluation of loans, leases, 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.
The allowance evaluated on an individual basis for Loans and Leases increased $3.8 million from $6.9 million at
December 31, 2019 to $10.7 million at December 31, 2020, primarily attributable to outstanding loans in the commercial
and institutional portfolio, partially offset by a decrease in outstanding loans in the residential real estate portfolio.
Allowance Related to Credit Exposure Evaluated on a Collective Basis: Expected credit losses are measured on a
collective basis as long as the financial assets included in the respective pool share similar risk characteristics. If financial
assets are deemed to not share similar risk characteristics, an individual assessment is warranted.
The allowance evaluated on a collective basis for Loans and Leases increased $123.6 million to $241.1 million at
December 31, 2020, compared with $117.5 million at December 31, 2019 under the previous “incurred loss” model,
primarily driven by current and projected economic conditions and downgrades in the portfolio, both resulting from the
ongoing COVID-19 pandemic and related market and economic impacts. The largest increases were in the commercial and
institutional and commercial real estate portfolios.
Overall Allowance: The evaluation of the reserve evaluated on an individual and collective basis resulted in a total
allowance for credit losses of $259.9 million at December 31, 2020, compared with $124.4 million at the end of 2019
under the previous “incurred loss” model. The allowance of $190.7 million assigned to Loans and Leases, as a percentage
of total Loans and Leases, was 0.56% at December 31, 2020, which increased from a $104.5 million allowance assigned to
Loans and Leases, representing 0.33% of total Loans and Leases at December 31, 2019. Allowances assigned to undrawn
loan commitments and standby letters of credit totaled $61.1 million and $19.9 million at December 31, 2020 and 2019,
respectively, and are included in Other Liabilities on the consolidated balance sheets.
58 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Expenditures
Capital expenditures in 2020 included continued investments to enhance Northern Trust’s software and hardware
capabilities, the opening of new offices, and the renovation of several existing offices. Capital expenditures for 2020
totaled $560.4 million, of which $424.6 million was for software, $66.6 million was for building and leasehold
improvements, $65.4 million was for computer hardware, and $3.8 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 2019 totaled $599.8 million, of which $441.8
million was for software, $77.7 million was for building and leasehold improvements, $73.7 million was for computer
hardware, and $6.6 million was for furnishings.
Deposits
The following table provides the scheduled maturity of total time deposits in denominations of $250,000 or greater at
December 31, 2020. For additional information, refer to Note 12, “Deposits,” provided in Item 8, “Financial Statements
and Supplementary Data.”
TABLE 41: REMAINING MATURITY OF TIME DEPOSITS $250,000 OR MORE
(In Millions)
3
Months
or Less
Over
3
Months
through
6 Months
Over
6
Months
through
12 Months
Over
12 Months
Total
U.S. OFFICE
CERTIFICATES
OF
DEPOSIT
DECEMBER 31, 2020
NON-U.S. OFFICES
OTHER TIME
TOTAL
$
$
266.1
$
205.4
$
83.6
310.5
41.2
—
—
—
701.4
$
205.4
$
471.5
83.6
310.5
41.2
906.8
Deposits not insured by the FDIC as of December 31, 2020 and 2019 totaled $135.5 billion and $100.9 billion,
respectively. These deposit amounts are derived by adding estimated domestic office uninsured deposits as allowed by
Federal Financial Institutions Examination Council instructions to all foreign office deposits. Estimated uninsured domestic
office deposits are determined by calculating and totaling the deposits in excess of the deposit insurance limit on an
individual account basis.
Short-Term Borrowings
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.”
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.
2020 Annual Report | Northern Trust Corporation 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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. For additional information refer
to Note 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary
Data.”
TABLE 42: 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
2020
2019
$
26,908.5
$
27,240.7
3,258.5
1,742.5
16,018.5
70,001.5
68,828.9
3,896.5
1,721.1
15,420.6
62,110.3
60,419.7
Non-U.S. Outstandings
As used in this discussion, 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 Markets Credit Committee oversees country-risk analyses
and imposes limits on country exposure. For additional information refer to Note 32, “Reporting Segments and Related
Information,” provided in Item 8, “Financial Statements and Supplementary Data.”
STATEMENTS OF CASH FLOWS
The following discusses the statement of cash flow activities for the years ended December 31, 2020, 2019, and 2018.
TABLE 43: CASH FLOW ACTIVITY SUMMARY
(In Millions)
Net
cash
provided
by
(used in):
Operating activities
Investing activities
Financing activities
Effect
of
Foreign
Currency
Exchange
Rates
on Cash
Change
in
Cash
and
Due
from Banks
FOR THE YEAR ENDED DECEMBER 31,
2020
2019
2018
$
$
1,896.8
$
(29,923.0)
27,871.9
84.6
(69.7)
$
2,592.0
$
(3,405.0)
615.9
74.7
(122.4)
$
1,767.5
4,327.1
(5,818.2)
(212.9)
63.5
Operating Activities
Net cash provided by operating activities of $1.9 billion for the year ended December 31, 2020 was primarily attributable
to period earnings and the impact of higher non-cash charges such as depreciation and amortization and provision for credit
losses.
For the year ended December 31, 2019, net cash provided by operating activities of $2.6 billion was primarily
reflecting period earnings and lower net collateral deposited with derivative counterparties.
60 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investing Activities
Net cash used in investing activities of $29.9 billion for the year ended December 31, 2020 was primarily attributable to
higher levels of deposits with the Federal Reserve and other central banks, net purchases of debt securities held to maturity,
higher levels of loans and leases, and net purchases of debt securities available for sale.
For the year ended December 31, 2019, net cash used in investing activities of $3.4 billion was 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, partially offset by the net proceeds from the maturity and
redemption of debt securities held to maturity and lower levels of loans and leases.
Financing Activities
Net cash provided by financing activities of $27.9 billion for the year ended December 31, 2020 was primarily attributable
to higher levels of total deposits and proceeds from the issuance by the Corporation of 1.95% senior notes, partially offset
by lower short-term other borrowings, dividends paid on common stock, repayment of the 3.45% senior notes previously
issued by the Corporation that matured in November 2020, lower securities sold under agreements to repurchase, and the
redemption of the Series C Non-Cumulative Perpetual Preferred Stock. The increase in total deposits was primarily
attributable to higher levels of non-U.S. office noninterest-bearing deposits, non-U.S. interest-bearing deposits, savings,
money market and other interest-bearing deposits, and demand and other noninterest-bearing deposits.
For the year ended December 31, 2019, net cash provided by financing activities of $0.6 billion was 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 savings, money market and
other interest-bearing deposits and non-U.S. office noninterest-bearing deposits, partially offset by lower levels of non-U.S.
office interest-bearing deposits.
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 strengthened in 2020 as average stockholders’ equity increased $544.2 million, or 5%, reaching $11.2
billion. Total stockholders’ equity was $11.7 billion at December 31, 2020, as compared to $11.1 billion at December 31,
2019. 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 at a redemption price of $400.0 million, which was $11.5 million in excess of the net carrying value of the shares.
The $11.5 million excess is included in preferred stock dividends in the determination of net income available to common
shareholders. Preferred dividends totaling $44.7 million were declared in 2020. During 2020, the Corporation maintained
its quarterly common stock dividend of $0.70 per common share. Common dividends totaling $592.0 million were declared
in 2020. During the year ended December 31, 2020, the Corporation repurchased 3.3 million shares of common stock,
including 0.5 million shares withheld related to share-based compensation, at an average price per share of $91.49.
2020 Annual Report | Northern Trust Corporation 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced
approaches. For each ratio, the lower of the result calculated under the standardized approach and the advanced approach
serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of
the Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios, under the
applicable U.S. regulatory rules as of December 31, 2020 and 2019.
TABLE 44: CAPITAL ADEQUACY
($
In Millions)
Common
Equity
Tier 1 Capital
Common
Stockholders’ Equity
Goodwill
and
Other
Intangible
Assets,
net
of
Deferred
Tax Liability
Other
Total
Common
Equity
Tier
1 Capital
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
Risk-Based Capital
Total
Risk-Weighted Assets(1)
Total
Assets
End
of
–
Period (EOP)
Adjusted
Average
Fourth
Quarter Assets(2)
Total
Loans
and
Leases
– EOP
Common
Stockholders’
Equity to:
Total
Loans
and
Leases
– EOP
Total
Assets
– EOP
Risk-Based
Capital Ratios
Common
Equity
Tier
1 Capital
Tier
1 Capital
Total
Capital
(Tier
Tier
1 Leverage
1
and
Tier 2)
Supplementary Leverage
(3)
DECEMBER
31, 2020
DECEMBER
31, 2019
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
$
10,803.4
$
10,803.4
$
9,817.5
$
9,817.5
(775.7)
(65.5)
9,962.2
884.9
(24.9)
860.0
(775.7)
(65.5)
9,962.2
884.9
(24.9)
860.0
10,822.2
10,822.2
259.9
949.7
53.9
1,263.5
12,085.7
77,662.5
170,003.9
142,457.6
33,759.7
—
949.7
53.9
1,003.6
11,825.8
74,460.4
170,003.9
142,457.6
33,759.7
$
$
$
$
$
$
(776.1)
(142.7)
8,898.7
1,273.4
(20.1)
1,253.3
10,152.0
124.4
1,099.5
80.8
1,304.7
11,456.7
70,088.3
136,828.4
117,165.7
31,409.6
$
$
(776.1)
(142.7)
8,898.7
1,273.4
(20.1)
1,253.3
10,152.0
—
1,099.5
80.8
1,180.3
11,332.3
67,526.9
136,828.4
117,165.7
31,409.6
32.00 %
32.00 %
6.35
6.35
31.26 %
7.18
31.26 %
7.18
12.8 %
13.4 %
12.7 %
13.2 %
13.9
15.6
7.6
N/A
14.5
15.9
7.6
8.6
14.5
16.3
8.7
N/A
15.0
16.8
8.7
7.6
(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) In November 2019, the Federal Reserve and other U.S. federal banking agencies adopted a final rule that established a deduction for central bank deposits from the total
leverage exposures of custodial banking organizations, including Northern Trust Corporation and The Northern Trust Company, equal to the lesser of (i) the total amount of
funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the
custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. The rule became effective on April 1, 2020.
Further, on April 1, 2020, the Federal Reserve issued an interim final rule that requires bank holding companies, including Northern Trust Corporation, to deduct, on a
temporary basis, deposits with the Federal Reserve and investments in U.S. Treasury securities from their total leverage exposure. The U.S. Treasury securities deduction is
applied in addition to the central bank deposits relief referred to above. This rule became effective on April 1, 2020 and will remain in effect through the first quarter of 2021.
On May 15, 2020, the U.S. federal banking agencies released an interim final rule that permits insured depository institutions of bank holding companies also to temporarily
exclude deposits with the Federal Reserve and investments in U.S. Treasury securities from their total leverage exposure. The Northern Trust Company did not elect to take this
deduction.
The supplementary leverage ratios at December 31, 2020 for the Northern Trust Corporation and The Northern Trust Company reflect the impact of these final rules.
62 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of December 31, 2020 and 2019, the Corporation’s capital ratios exceeded the requirements for classification as
“well-capitalized” under applicable U.S. regulatory requirements. As a result of the stress test results published by the
Federal Reserve on June 25, 2020, Northern Trust’s stress capital buffer requirement for the 2020 Capital Plan cycle was
set at 2.5%. The 2020 stress capital buffer became effective October 1, 2020, and results in a common equity tier 1 capital
ratio minimum requirement of 7.0%.
Further information regarding the Corporation’s and the Bank’s capital ratios and the minimum requirements for
classification as “well-capitalized” is provided in the “Supervision and Regulation” section of Item 1, “Business,” and
Note 33, “Regulatory Capital Requirements,” provided in Item 8, “Financial Statements and Supplementary Data.”
As of December 31, 2020, the Basel III regulatory capital items subject to phase-in and phase-out are not material to
regulatory capital ratios.
OFF-BALANCE SHEET ARRANGEMENTS
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.
At December 31, 2020, legally binding commitments to extend credit and standby letters of credit to commercial real
estate borrowers totaled $252.3 million and $4.5 million, respectively. 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.
Additional information about Northern Trust’s off-balance sheet financial instruments is included in Note 26,
“Commitments and Contingent Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data.”
Variable Interest Entities
Variable Interest Entities (VIEs) are defined within GAAP as entities which either (1) lack sufficient equity at risk to
permit the entity to finance its activities without additional subordinated financial support, (2) have equity investors that
lack attributes typical of an equity investor, such as the ability to make significant decisions through voting rights affecting
the entity’s operations, or the obligation to absorb expected losses or the right to receive residual returns of the entity, or (3)
are structured with voting rights that are disproportionate to the equity investor’s obligation to absorb losses or right to
receive returns, and substantially all of the activities are conducted on behalf of the holder of the equity investment at risk
with disproportionately few voting rights. Investors that finance a VIE through debt or equity interests 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’s economic performance and, through its variable interest, the obligation to absorb losses or
the right to receive returns that could potentially be significant to the entity is deemed to be the VIE’s primary beneficiary
and is required to consolidate the VIE.
Additional information about Northern Trust’s VIEs is included in Note 29, “Variable Interest Entities,” provided in
Item 8, “Financial Statements and Supplementary Data.”
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 1, “Summary of Significant Accounting Policies,” provided in
Item 8, “Financial Statements and Supplementary Data.” The use of estimates and assumptions is required in the
preparation of financial statements in conformity with GAAP and actual results could differ from those estimates. The SEC
has issued guidance relating to the disclosure of critical accounting estimates. Critical accounting estimates are those that
require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and
may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas
could have a material impact on Northern Trust’s future financial condition and results of operations.
For Northern Trust, accounting estimates that are viewed as critical are those relating to the allowance for credit losses
and pension plan accounting. Management has discussed the development and selection of each critical accounting
estimate with the Audit Committee of the Board of Directors (Audit Committee).
2020 Annual Report | Northern Trust Corporation 63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Credit Losses
The Corporation adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—Credit Losses:
Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) on January 1, 2020, which 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. Upon adoption of ASU 2016-13, the Corporation
recorded a $13.7 million increase in the allowance for credit losses with a corresponding cumulative effect adjustment to
decrease retained earnings $10.1 million, net of income taxes. For more information on the adoption of ASU 2016-13,
please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and
Supplementary Data.”
The allowance for credit losses — which represents management’s estimate of lifetime expected credit losses related
to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower relationships — is
determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of
financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does
not share similar risk characteristics with other financial assets and the related allowance is determined through an
individual evaluation.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent
on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many
of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current
conditions and reasonable and supportable forecasts. Due to the inherent imprecision in accounting estimates, other
estimates or assumptions could reasonably have been used in 2020 and changes in estimates are reasonably likely to occur
from period to period.
The allowance for credit losses consists of the following components:
Evaluated on a Collective Basis: Expected credit losses are measured on a collective basis as long as the financial
assets included in the respective pool share similar risk characteristics. If financial assets are deemed to not share similar
risk characteristics, an individual assessment is warranted.
The allowance estimation methodology for the collective assessment is primarily based on internal loss data specific to
the Northern Trust financial asset 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 and obligor-specific factors, including loan type, borrower type, collateral type,
loan size, and borrower credit quality. For each segment, the probability of default and loss given default are derived for
each quarter of the remaining life of each instrument. For the first two years (the reasonable and supportable period), these
factors are derived by applying quarterly macroeconomic projections using models developed from historical data on
macroeconomic factors and loans with similar factors. For periods beyond the reasonable and supportable period, Northern
Trust reverts to its long-run historical loss experiences on a straight-line basis over four quarters. The exposure at default
for every quarter is based on contractual balances as of each quarter-end, with adjustments made for potential draw-downs
of revolving lines.
For each of the different parameters, specific credit models for the individual loan segments were developed. For each
segment, the probability of default and the loss given default are applied to the exposure at default for each projected
quarter to determine the quantitative component of the allowance. The quantitative allowance is then reviewed within the
qualitative adjustment framework, through which management applies judgment by assessing internal risk factors, potential
limitations in the quantitative methodology, and environmental factors that are not fully contemplated in the forecast to
compute an adjustment to the quantitative allowance for each segment of the loan portfolio.
ASU 2016-13 requires the use of projected macroeconomic factors. Northern Trust’s current projection period is eight
quarters, with a four-quarter straight-line reversion period to historical average loss rates. The Corporation uses multiple
forecasts which are approved by Northern Trust’s Macroeconomic Scenario Development Committee (MSDC). The
baseline forecast aligns with the Corporation’s latest thinking on macroeconomic projections for the next eight quarters.
The forecasts are weighted at each evaluation period and are management’s best estimate of future economic projections at
that time.
The allowance estimate is sensitive to changes in portfolio composition and quality, and macroeconomic forecasts.
Increases in the amount of borrowing and material downgrades to the quality of the lending portfolio will increase the
reserve, all else equal. Similarly, deteriorating projections for macroeconomic conditions will increase the reserve.
Macroeconomic factors that are particularly correlated to Northern Trust’s loan and lease portfolio are equity market
values, market volatility, corporate profits, house and commercial real estate price indices, unemployment, and disposable
income. The investment security and other financial assets exposure portfolios are less sensitive to macroeconomic factors
in terms of overall reserve impact due to factors such as high credit quality, short duration, and low historical losses.
64 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss
Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic
Research group, and each of Northern Trust’s business units. The Credit Loss Reserve Committee determines the
probability weights applied to each forecast approved by MSDC, and also reviews and approves qualitative adjustments to
the collective allowance in line with Northern Trust’s qualitative adjustment framework.
Evaluated on an Individual Basis: The allowance is determined through an individual evaluation of financial assets
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 for which the amount of 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.
The quarterly analysis of the individual and collective 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.
Management believes that the allowance for credit losses adequately addresses these uncertainties and has been
established at an appropriate level. 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.
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 average remaining service period 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 2020, Northern Trust utilized a discount rate of
3.37% 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 4.97%. The expected long-term rate of return on U.S.
Qualified Plan assets was 5.25%.
In evaluating possible revisions to pension-related assumptions for the U.S. pension plans as of Northern Trust’s
December 31, 2020 measurement date, the following were considered:
• Discount Rate: Northern Trust estimates the discount rate for its U.S. pension plans by applying the plan specific
projected cash flows for future benefit payments for each plan 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 2.75% and 2.45% at December 31, 2020 for the U.S. Qualified and U.S. Non-
qualified Plans, respectively.
2020 Annual Report | Northern Trust Corporation 65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
•
•
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
remains at 5.25% for 2021.
Mortality Table: As of December 31, 2020, 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-2020, which was released by the Society of Actuaries in October
2020. This assumption was updated at December 31, 2020 from improvement scale MP-2019. The updated
improvement scale applies to annuity payments only and results in slightly lower projected mortality improvement
rates than estimated by the MP-2019 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 2021.
Net pension expense in 2021 is expected to increase slightly by approximately $1.2 million, primarily driven by the
decrease in discount rates in 2020.
In order to illustrate the sensitivity of these assumptions on the expected U.S pension plans’ periodic pension expense in
2021 and the projected benefit obligation as of December 31, 2020, the following table is presented to show the effect of
increasing or decreasing each of these assumptions by 25 basis points.
TABLE 45: SENSITIVITY OF U.S. PENSION PLANS ASSUMPTIONS
($
In Millions)
Increase
(Decrease)
in
2021
Pension Expense
Discount
Rate Change
Compensation
Level Change
Rate
of
Return
on
Plan
Assets Change
Increase
(Decrease)
in
2020
Projected Benefit Obligation
Discount
Rate Change
Compensation
Level Change
25 BASIS
POINT INCREASE
25 BASIS
POINT DECREASE
$
(4.4)
$
2.5
(3.8)
(58.0)
10.8
4.6
(2.5)
3.8
61.4
(10.4)
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 2020 plan year. The minimum required contribution to
the U.S. Qualified Plan is expected to be zero in 2021. The maximum deductible contribution is estimated at $255.0 million
for 2021.
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, 2020, approximately 25% 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,” 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 7% 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 93% of Northern Trust’s assets and 98% 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
66 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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,” provided in Item 8,
“Financial Statements and Supplementary Data.”
As of December 31, 2020, 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 95%, 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, 2020, 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 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, “Commitments and Contingent
Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data,” for further information.
While Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate
and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to
Level 3 assets, could have a material effect on the computation of their estimated fair values.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In January 2020, the Financial Accounting Standards Board (FASB) issued ASU No. 2020-01, “Investments—Equity
Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic
815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (ASU 2020-01). ASU 2020-01 addresses
two accounting issues: (1) application of the measurement alternative under Topic 321 in correlation with the transition
into and out of the equity method under Topic 323 and (2) the measurement of certain forward contracts and purchased
options to acquire equity securities. ASU 2020-01 clarifies that an entity applying the measurement alternative under Topic
321 that must transition to the equity method under Topic 323 because of an observable transaction will remeasure its
investment immediately before transition, whereas an entity applying the equity method under Topic 323 that must
transition to Topic 321 because of an observable transaction will remeasure its investment immediately after transition.
ASU 2020-01 also clarifies that certain forward contracts or purchased call options to acquire equity securities generally
will be measured using the fair value principles of Topic 321 before settlement or exercise. ASU 2020-01 is effective for
interim and annual periods beginning after December 15, 2020, although early adoption is permitted. ASU 2020-01 is not
expected to have a significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of
income.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06). ASU 2020-06 simplifies the convertible instrument
accounting framework through the elimination of the beneficial conversion and cash conversion accounting models used to
account for convertible debt and convertible preferred stock. ASU 2020-06 also amends the accounting for certain
contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions
in Accounting Standards Codification 815—Derivatives and Hedging. In addition, ASU 2020-06 modifies how particular
convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share
2020 Annual Report | Northern Trust Corporation 67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
computation. ASU 2020-06 is effective for interim and annual periods beginning after December 15, 2021, although early
adoption is permitted. ASU 2020-06 is not expected to have a significant impact on Northern Trust’s consolidated balance
sheets or consolidated statements of income.
In October 2020, the FASB issued ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables-
Nonrefundable Fees and Other Costs” (ASU 2020-08). ASU 2020-08 clarifies the Codification related to the standard
issued in ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities”. ASU 2020-08 clarifies that an entity should amortize premiums on
purchased callable debt securities to the first call date and related call amount and at that point reassess if there is a
remaining premium to amortize to a subsequent call date. ASU 2020-08 is effective for interim and annual periods
beginning after December 15, 2020, although early adoption is permitted. ASU 2020-08 is not expected to have a
significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.
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, manage and govern 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 across the organization, contains three roles, each with 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
following diagram 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 46: RISK GOVERNANCE STRUCTURE
Audit Committee
Business Risk Committee
Capital Governance Committee
Compensation and Benefits Committee
Northern Trust Corporation Board of Directors
-Cybersecurity Risk
Oversight Subcommittee
Global Enterprise Risk Committee (GERC)
Credit Risk Committee
Operational Risk
Committee
Fiduciary Risk
Committee
Compliance & Ethics
Oversight Committee
Market & Liquidity
Risk Committee
Model Risk Oversight
Committee
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, strategic risk, and associated risk themes. The
Cybersecurity Risk Oversight Subcommittee of the Business Risk Committee assists the Business Risk Committee in
discharging its duties with respect to risks related to cybersecurity inherent in Northern Trust’s businesses. 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.
The Operational Risk Committee (ORC) provides independent oversight and is responsible for setting the operational
risk-related policies and developing and implementing 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 establishes business and regional risk committees that also
report into GERC.
2020 Annual Report | Northern Trust Corporation 69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 risk committees, senior management, and the
Board of Directors or committees thereof, as appropriate.
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 framework 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, issuer, or counterparty to perform on an
obligation.
Credit Risk Overview
Credit risk is inherent in many of Northern Trust’s activities. A significant component of credit risk relates to loans, leases,
securities, and counterparty-related exposures. Northern Trust’s loan portfolio differs significantly from those of other
large U.S. financial institutions in that Northern Trust is generally:
•
•
not an originator of loan products to be sold into a secondary market or to be bundled into asset securitizations;
not an agent bank or syndicator of loans, where risk management is achieved post-close through the sale of
participations; and
not a participant in leveraged financial transactions, such as project finance, private-equity-originated acquisition
financing or hedge fund leveraging.
•
Credit Risk Framework and Governance
The Credit Risk Management function is the focal point of the credit risk framework and, while independent of the
businesses, it works closely with them to achieve the goal of assuring proactive management of credit risk. To monitor and
control credit risk, the Credit Risk Management function maintains a framework that consists of policies, standards, and
programs designed to promote a prudent relationship-based credit culture. This function also monitors adherence to
corporate policies, standards, programs, and external regulations.
The Credit Risk Management function provides a system of checks and balances for Northern Trust’s diverse credit-
related activities by monitoring these activities and practices and promoting their uniform application throughout Northern
Trust.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The credit risk framework provides authorities for approval of the extension of credit. Individual credit authority for
commercial and personal loans is limited to specified amounts and maturities. Credit requests exceeding individual
authority because of amount, rating, term or other conditions, are referred to the relevant Group Credit Approval
Committee. Credit decisions involving exposure in excess of these limits require the approval of the Senior Credit
Committee. The Capital Markets Credit Committee has sole credit authority for the approval, modification, or renewal of
credit exposure to all wholesale market counterparties.
The Credit Risk Committee 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 26, “Commitments and
Contingent Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data.”
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, 2020.
2020 Annual Report | Northern Trust Corporation 71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 47: UNDRAWN COMMITMENTS TO EXTEND CREDIT BY INDUSTRY SECTOR
AS OF DECEMBER 31, 2020
($
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
Non-U.S.
Other
Total Personal
Total
COMMITMENT EXPIRATION
TOTAL
COMMITMENTS
ONE YEAR
AND LESS
OVER ONE
YEAR
OUTSTANDING
LOANS
$
4,435.8
$
2,454.1 $
1,981.7
$
—
6,945.6
785.6
98.4
903.1
6,150.7
283.1
1,286.2
749.6
195.2
—
1,061.3
259.5
98.4
350.5
2,626.4
0.2
38.3
108.4
100.9
—
5,884.3
526.1
—
552.6
3,524.3
282.9
1,247.9
641.2
94.3
21,833.3
7,098.0
14,735.3
252.3
—
1,250.2
106.1
23,441.9
676.1
4,248.9
571.6
—
93.0
—
609.0
106.1
159.3
—
641.2
—
91.2
3,014.0
249.2
—
584.9
1,234.9
322.4
—
5,496.6
3,354.4
2,142.2
$
28,938.5
$
11,260.5
$
17,678.0
$
3,085.0
28.8
1,422.8
5.2
24.1
164.0
4,329.0
214.2
7.2
427.3
350.7
10,058.3
3,558.4
11.4
1,345.7
288.2
6,035.7
11,815.1
597.9
49.0
18,497.7
33,759.7
7,906.1
15,535.8
15,262.0
(1) Commercial and Institutional industry sector information is presented on the basis of the North American Industry Classification System (NAICS).
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 nonaccrual status or charged
off. Northern Trust maintains a loan portfolio watch list for adversely classified credit exposures that includes all
nonaccrual credits as well as other loans with elevated risk of default. Independent from the Credit Risk Management
function, Credit Review undertakes both on-site and off-site file reviews that evaluate effectiveness of management’s
implementation of the Credit Risk Management’s requirements.
Counterparty Credit Risk
Counterparty credit risk for Northern Trust primarily arises from a variety of funding, treasury, trading and custody-related
activities, including over-the-counter (OTC) currency and interest rate derivatives, and from indemnified securities lending
transactions. Credit exposure to counterparties is managed by use of a framework for setting limits by product type and
exposure tenor.
To calculate exposure, Northern Trust treats repurchase agreements, reverse repurchase agreements and indemnified
securities lending transactions as repo-style transactions. Foreign exchange exposures and interest rate derivatives are
treated as OTC derivatives. The exposure at default measurement methodology for each eligible type of counterparty credit
exposure, including the use of netting and collateral as risk mitigants, is determined based on operational requirements, the
characteristics of the contract type and the portfolio size and complexity.
Credit Risk Mitigation
Northern Trust considers cash flow to be the primary source of repayment for client-related credit exposures. However,
Northern Trust employs several different types of credit risk mitigants to manage its overall credit risk in the event cash
flow is not sufficient to repay a credit exposure. Northern Trust broadly groups its risk mitigation techniques into the
following three primary categories.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 comprehensive, structured risk management process used by Northern Trust’s
businesses to identify, measure, monitor and mitigate operational risk exposures throughout the enterprise.
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 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 risk
management processes and controls to address information security, including cyber threats, technology and
compliance risks to the organization.
•
•
•
•
•
2020 Annual Report | Northern Trust Corporation 73
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
•
•
Operational Resiliency and Recovery Management Program - a program designed to protect life safety, minimize
business impact and support the resumption of mission-critical and economic 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 and maintaining 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. This includes identification and assessment of evolving risk
trends across the operational risk framework and how these can be best managed.
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 Risk 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.
The 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
cyber-attacks. Northern Trust operates a global security operations center for threat identification and response. This center
aggregates security threat information from systems and platforms across the businesses, and alerts the organization in
accordance with its documented Cyber Incident Response Plan.
The Cyber Incident Response Plan is used to respond to cybersecurity incidents. A cybersecurity incident is defined as
an incident caused by damaging activity, which requires actions to prevent and respond to disruptions, denials,
compromises or exfiltration that impact the confidentiality, integrity and availability 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.
74 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northern Trust’s disclosure procedures and controls 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.
Operational Resiliency and Recovery Management
Northern Trust’s operational resiliency approach encompasses operational resiliency and 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 operational 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, 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. In 2020, Northern Trust utilized these business
continuity plans to respond to the COVID-19 pandemic.
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). In the context of operational risk, the main focus of these climate-related scenario analyses is on
operational resiliency and recovery. Conducting such scenario analyses and assessing the magnitude of climate-related
financial and non-financial risks and opportunities related to Northern Trust’s global assets is 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.
Fiduciary Risk Framework and Governance
The FRC is responsible for overseeing activities related to the exercise of fiduciary powers throughout the organization and
for establishing and reviewing the fiduciary risk policies and the fiduciary risk framework that supports the coordination of
activities to identify, monitor, manage and report on fiduciary risk. In addition, the FRC serves as an escalation point for
significant issues raised by its subcommittees or elsewhere in the organization.
Compliance Risk
Compliance risk is the risk of legal or regulatory sanctions, financial loss, or damage to reputation resulting from failure to
comply with laws, regulations, rules, other regulatory requirements, or codes of conduct and other standards of self-
regulatory organizations applicable to Northern Trust. Compliance risk includes the following two subcategories:
•
Regulatory Risk - risk arising from failure to comply with prudential and conduct of business or other regulatory
requirements.
Financial Crime Risk - risk arising from financial crime (e.g., money laundering, sanctions violations, fraud, insider
dealing, theft, etc.) in relation to the products, services, or accounts of the institution, its clients, or others associated
with the same.
•
2020 Annual Report | Northern Trust Corporation 75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Management
Liquidity Risk Overview
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.
Northern Trust maintains a strong liquidity position and 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 and can also be
influenced by market conditions. 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. Current elevated levels of client deposits driven by market
conditions are actively managed and monitored.
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.
The Market and Liquidity Risk Management Committee (MLRC), 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 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.
76 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Regulatory Environment
Northern Trust actively follows regulatory developments and regularly evaluates its liquidity risk management framework
against proposed rule-making and industry best practices in order to comply with applicable regulations and further
enhance its liquidity policies. Please refer to “Supervision and Regulation—Liquidity Standards” in Item 1, “Business,” for
a discussion of applicable liquidity standards.
Liquidity Coverage Ratio (LCR)
The LCR Final Rule requires covered banking organizations, which include the Corporation, to maintain an amount of
high-quality liquid assets (HQLAs) equal to or greater than 100% of the banking organization’s total net cash outflows
over a 30 calendar-day standardized supervisory liquid stress scenario. The requirements of the LCR Final Rule are
intended to promote the short-term resilience of the liquidity risk profile of covered banking organizations, improve the
banking industry’s ability to absorb shocks arising from financial and economic stress, and improve the measurement and
management of liquidity risk. The Corporation and the Bank each satisfied the U.S. liquidity coverage ratio requirements
during 2020.
Funding
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 73% of total assets
as of December 31, 2020. The market value of unencumbered securities at the Bank, which include those placed at the
Federal Reserve discount window, totaled $56.8 billion at December 31, 2020.
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, interest earned on investment securities and money market assets,
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, 2020,
the Bank had over $51.3 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.
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 and dividend payments from the Bank. On May 1, 2020, the Corporation
issued $1.0 billion of 1.95% senior notes, due May 1, 2030. The Corporation also received $900.0 million of dividends
from the Bank in 2020. Dividends from the Bank are subject to certain restrictions, as discussed in further detail in Note
31, “Restrictions on Subsidiary Dividends and Loans or Advances,” provided in Item 8, “Financial Statements and
Supplementary Data.”
The Corporation’s liquidity, defined as the amount of cash and highly marketable assets, was $2.5 billion and $2.6
billion at December 31, 2020 and 2019, respectively. During, and at year-end, 2020 and 2019, 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 2020 and 2019 was $2.7 billion and $2.0 billion, respectively. The cash flows of the Corporation
are shown in Note 34, “Northern Trust Corporation (Corporation only),” provided in Item 8, “Financial Statements and
Supplementary Data.”
Uses of Liquidity
Liquidity supports a variety of activities, including client withdrawals, purchases of securities, net loan growth, and draws
on commitments to extend credit.
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 2020 were $584.6 million of common stock dividends and $299.8
million of common stock repurchases.
Credit Ratings
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, 2020, provided in the following table,
allow Northern Trust to access capital markets on favorable terms.
2020 Annual Report | Northern Trust Corporation 77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 48: NORTHERN TRUST CREDIT RATINGS AS OF DECEMBER 31, 2020
Northern
Trust Corporation:
Senior Debt
Subordinated Debt
Preferred Stock
Trust
Preferred
Capital Securities
Outlook
The
Northern
Trust Company:
Short-Term Deposit
Long-Term Deposit/Debt
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
A+
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,” 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, 2020, the net maximum amount of these termination payments that Northern Trust could have
been required to pay was $604.2 million. Other than these credit-risk-related contingent derivative counterparty payments,
Northern Trust had no long-term debt covenants or other credit-risk-related payments at December 31, 2020, that would be
triggered by a significant downgrade in its debt ratings.
Contractual Obligations
The following table shows Northern Trust’s contractual obligations as of December 31, 2020.
TABLE 49: CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2020
($
In Millions)
Senior Notes(1)
Subordinated Debt(1)
Rate
Floating
Operating Leases
Purchase Obligations(3)
Total
(2)
Capital Debt(1)
Contractual Obligations
PAYMENT DUE BY PERIOD
TOTAL
3,122.4
1,189.3
277.8
801.5
710.3
6,101.3
$
$
ONE YEAR
AND LESS
499.8
—
—
99.1
213.9
812.8
$
$
1-3
YEARS
499.6
—
—
178.2
360.8
1,038.6
$
$
3-5 YEARS
—
839.8
—
151.7
128.8
1,120.3
$
$
OVER 5
YEARS
2,123.0
349.5
277.8
372.5
6.8
3,129.6
$
$
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,” provided in Item 8, “Financial Statements and Supplementary Data,”
for further details.
(2) Refer to Note 10, “Lease Commitments,” 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.
Market Risk Management
There are two types of market risk, interest rate risk associated with the assets and liabilities on the balance sheet, and
trading risk. Interest rate risk associated with the assets and liabilities on the balance sheet 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.
78 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The 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, overseeing the
execution of strategies, 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 associated with the assets and liabilities on the balance sheet 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
directly impact the MVE. To mitigate interest rate risk, 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 structural interest rate risk associated with the assets and liabilities on the
balance sheet:
•
•
•
repricing risk, which arises from differences in the maturity and repricing terms of assets and liabilities;
yield curve risk, which arises from changes in the shape of the yield curve;
basis risk, 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 risk, 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 investment securities;
sale of investment securities that are classified as available for sale;
issuance of senior notes and subordinated notes;
collateralized borrowings from the Federal Home Loan Bank; and
hedging with various types of derivative financial instruments.
2020 Annual Report | Northern Trust Corporation 79
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 ramps upward
and 100 basis point ramp downward movements in interest rates relative to forward rates. Each rate movement is assumed
to occur gradually over a one-year period.
TABLE 50: NET INTEREST INCOME SENSITIVITY AS OF DECEMBER 31, 2020
INCREASE/(DECREASE)
($
In Millions)
INCREASE
IN
INTEREST
100
Basis Points
200
Basis Points
RATES
ABOVE
MARKET
IMPLIED
FORWARD RATES
DECREASE
IN
INTEREST
RATES
BELOW
MARKET
IMPLIED
FORWARD RATES
100
Basis Points
ESTIMATED
NEXT
IMPACT ON
TWELVE MONTHS
INTEREST
OF
INCOME
NET
$
$
249
451
114
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:
80 2020 Annual Report | Northern Trust Corporation
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 51: MARKET VALUE OF EQUITY SENSITIVITY AS OF DECEMBER 31, 2020
INCREASE/(DECREASE)
($
In Millions)
INCREASE
IN
INTEREST
100
Basis Points
200
Basis Points
RATES
ABOVE
MARKET
IMPLIED
FORWARD RATES
DECREASE
IN
INTEREST
RATES
BELOW
MARKET
IMPLIED
FORWARD RATES
100
Basis Points
ESTIMATED
MARKET
IMPACT ON
VALUE OF
EQUITY
$
$
558
551
328
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 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 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 vendor 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 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.
2020 Annual Report | Northern Trust Corporation 81
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 following table 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 52: GLOBAL FOREIGN CURRENCY VALUE-AT-RISK
($
In Millions)
(FX
FOR
THE
YEAR
ENDED
DECEMBER 31,
High
Low
Average
of
As
December 31,
$
TOTAL VaR
AND
IR DRIVERS)
FX
VaR
(FX
DRIVERS ONLY)
IR
VaR
(IR
DRIVERS ONLY)
$
2020
1.8
—
0.3
0.3
$
2019
0.3
—
0.1
0.1
$
2020
1.9
—
0.1
0.3
$
2019
0.3
—
0.1
0.1
$
2020
1.0
—
0.2
0.2
2019
0.2
—
0.1
0.1
During 2020, Northern Trust did not incur an actual GFX trading loss in excess of the daily GFX VaR estimate. During
2019, Northern Trust experienced one day of 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 $1.1 million for the year ended December 31, 2020.
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 risk 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 encompasses two main areas:
•
•
Macroeconomic and geopolitical risk centers on external events or developments that would have a detrimental impact
on financial markets and/or financial services firms.
Business risk arises from internal, secular, competitive, or regulatory trends that impact Northern Trust’s stated
strategy or its achievability.
Strategic Risk Framework and Governance
The Corporate Strategic Risk Framework has been developed in conjunction with the Corporation’s risk appetite and risk
management policies, and defines the mission and expectations of the Strategic Risk Management function to identify and
analyze the sources and consequences of strategic risk.
This is achieved through participation in the establishment and review of business line strategy, coordination of risk
input to the evaluation of key strategic opportunities, and developing and maintaining a risk inventory and set of metrics
which attempt to gauge the level of strategic risk within the organization.
In addition, the Strategic Risk Management function maintains the Global Event Response Program, which aims to
anticipate and prepare for stress scenarios, and provide an outline for responding to them when they occur.
Both GERC and the Business Risk Committee are responsible for reviewing the general methods, guidelines and
frameworks by which Northern Trust monitors and evaluates strategic risk.
82 2020 Annual Report | Northern Trust Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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:
•
the impact of the ongoing COVID-19 pandemic—and governmental and societal responses thereto—on Northern
Trust’s business, financial condition, and results of operations;
financial market disruptions or economic recession in the United States or other countries across the globe resulting
from any of a number of factors;
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 cybersecurity, 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 availability of the London Interbank Offered Rate (LIBOR) or the calculation of alternative interest rate
benchmarks;
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;
geopolitical risks, risks related to global climate change and the risks of extraordinary events such as pandemics,
natural disasters, 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;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
2020 Annual Report | Northern Trust Corporation 83
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
•
•
•
•
•
•
•
•
•
•
•
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;
the effectiveness of Northern Trust’s management of its human capital, including its 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;
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.
84 2020 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. Net
interest margin is calculated by dividing annualized net interest income by average interest-earning assets. 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 53: RECONCILIATION TO FULLY TAXABLE EQUIVALENT
($
In Millions)
Net
Interest Income
Interest
Income - GAAP
Add:
FTE Adjustment
Interest
Income
(FTE) - Non-GAAP
Net
Interest
Income - GAAP
Add:
FTE Adjustment
Net
Interest
Income
(FTE) - Non-GAAP
Net
Interest
Margin - GAAP
Net
Interest
Margin
(FTE) - Non-GAAP
Total Revenue
Total
Revenue - GAAP
Add:
FTE Adjustment
Total
Revenue
(FTE) - Non-GAAP
FOR THE YEAR ENDED DECEMBER 31,
2020
2019
2018
1,643.5
$
2,499.9
$
34.4
32.8
1,677.9
$
2,532.7
$
1,443.2
$
1,677.9
$
34.4
32.8
1,477.6
$
1,710.7
$
2,321.4
41.2
2,362.6
1,622.7
41.2
1,663.9
1.16 %
1.19 %
1.57 %
1.60 %
1.43 %
1.46 %
6,100.8
$
6,073.1
$
34.4
32.8
6,135.2
$
6,105.9
$
5,960.2
41.2
6,001.4
$
$
$
$
$
$
2020 Annual Report | Northern Trust Corporation 85
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 2020 and 2019.
TABLE 54: QUARTERLY FINANCIAL DATA (UNAUDITED)
STATEMENTS
OF INCOME
2020
2019
($
In
Millions Except
Per
Share Information)
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
FOURTH
QUARTER
THIRD
QUARTER
SECOND
QUARTER
FIRST
QUARTER
Trust,
Investment
and
Other
Servicing Fees
$
1,026.1
$
1,003.8
$
961.5 $
1,003.6
$
992.2
$
975.5
$
955.5 $
Other Noninterest Income
Net
Interest Income
Interest Income
Interest Expense
Net
Interest Income
Revenue
Provision
for
Credit Losses
Noninterest Expense
Provision
for
Income Taxes
Net Income
Preferred
Stock Dividends
Net
Income
Applicable to
Common Stock
PER
Net
COMMON SHARE
Income – Basic
161.4
152.7
172.5
176.0
134.7
144.7
133.7
352.6
18.2
334.4
355.4
26.8
328.6
406.3
34.2
372.1
529.2
121.1
408.1
576.1
155.3
420.8
620.8
203.1
417.7
640.2
222.8
417.4
1,521.9
1,485.1
1,506.1
1,587.7
1,547.7
1,537.9
1,506.6
1,480.9
(2.5)
0.5
66.0
1,151.0
132.5
1,094.7
1,036.9
95.4
89.9
61.0
1,065.6
100.5
(1.0)
(7.0)
(6.5)
1,072.3
105.3
1,036.3
124.0
1,006.2
117.5
240.9 $
294.5
$
313.3
$
360.6
$
371.1 $
384.6
$
389.4
$
4.7
16.2
4.8
30.5
5.8
17.4
5.9
236.2
$
278.3
$
308.5
$
330.1 $
365.3 $
367.2
$
383.5 $
1.13
$
1.32
$
1.47 $
1.56
$
1.71
$
1.70
$
1.76 $
$
$
$
– Diluted
1.12
1.32
1.46
1.55
1.70
1.69
1.75
AVERAGE BALANCE SHEET ASSETS
$
2,434.5
$
2,293.3 $
2,966.7
$
2,723.0
$
2,292.6
$
2,551.5 $
2,784.3
$
1,940.7
Central
Bank
29,896.2
31,602.3
30,299.0
19,826.2
17,230.0
17,524.9
19,236.2
20,163.2
928.9
130.0
662.8
240.8
422.0
—
1,028.7
105.1
347.1
17.3
329.8
1.49
1.48
5,449.0
4,816.1
5,505.7
5,838.1
6,073.9
5,656.5
5,811.9
6,452.2
0.6
2.5
1,565.8
61,227.4
33,096.1
1,789.8
58,072.1
33,085.2
0.1
985.8
52,884.4
35,506.7
5.9
661.7
51,963.2
32,316.2
3.8
942.1
51,919.0
30,990.8
4.6
812.3
50,024.9
30,935.9
5.3
645.6
48,911.2
31,098.9
38.0
940.1
51,889.3
31,189.4
(222.7)
(218.4)
(160.2)
(109.9)
(105.5)
(111.2)
(115.1)
(114.0)
9,815.1
9,482.5
10,782.4
10,946.1
8,758.6
8,952.7
7,980.6
6,917.8
$
143,262.0
$
140,925.4
$
138,770.6
$
124,170.5
$
118,105.3
$
116,352.1
$
116,358.9
$
119,416.7
Cash and
Due
from Banks
and
(1)
Other
and Other
Reserve
Federal
Deposits
Interest-Bearing
Banks(2)
Due
from
and
Deposits
with
Federal
Funds Sold
Securities
Securities
Purchased
(3)
under
Agreements
to Resell
Loans
and Leases
Allowance
for
Credit Losses
Other Assets
Total Assets
LIABILITIES
EQUITY
Deposits
AND
STOCKHOLDERS’
Demand
and
Other Noninterest-Bearing
$
26,997.5
$
25,202.3
$
21,856.7
$
19,331.5
$
17,462.9
$
16,687.3
$
17,826.5
$
17,858.4
Savings,
Money
Market,
and Other
24,984.3
24,305.4
24,017.0
20,251.2
18,130.2
17,802.7
15,950.9
14,372.8
Savings
Certificates
and
Other Time
1,198.3
1,502.1
1,403.6
Non-U.S.
Offices – Interest-Bearing
61,943.6
61,834.9
63,592.7
Total Deposits
Federal
Funds Purchased
Securities
Sold
under
Agreements
to Repurchase
Other Borrowings
Senior Notes
Long-Term Debt
Floating
Rate
Capital Debt
Other Liabilities
Stockholders’ Equity
115,123.7
112,844.7
110,870.0
562.7
183.6
5,984.4
3,315.4
1,190.9
277.8
5,090.4
275.6
185.3
6,167.8
3,666.3
1,199.0
277.7
4,906.1
1,181.0
170.7
6,008.4
3,332.9
1,198.3
277.7
4,690.2
959.8
54,543.3
95,085.8
1,916.5
334.3
7,450.6
2,615.1
1,168.7
277.7
4,534.8
919.0
52,925.8
89,437.9
856.6
281.0
7,632.9
2,584.6
1,154.0
277.7
4,948.0
898.9
53,631.5
89,020.4
595.4
340.3
7,833.1
2,587.7
1,156.7
277.7
3,853.0
888.6
54,679.9
89,345.9
1,298.3
394.5
7,734.8
2,361.4
1,131.6
277.6
3,276.7
761.4
58,377.2
91,369.8
2,342.9
340.7
7,810.4
2,014.1
1,112.9
277.6
3,719.5
11,533.1
11,402.9
11,041.4
10,787.0
10,932.6
10,687.8
10,538.1
10,428.8
Total
Liabilities
and
Stockholders’ Equity
$
143,262.0
$
140,925.4
$
138,770.6
$
124,170.5
$
118,105.3
$
116,352.1
$
116,358.9
$
119,416.7
(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 on the
consolidated balance sheets as of December 31, 2020, and 2019.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated
balance sheets as of December 31, 2020, and 2019..
(3) Securities include Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in Other Assets on the consolidated balance sheets as of
December 31, 2020 and 2019.
86 2020 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” in this Form 10-K.
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, 2020 and 2019, 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, 2020,
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, 2020 and
2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2020, 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, 2020, 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 23, 2021 expressed an unqualified opinion on the effectiveness
of the Corporation’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Corporation has changed its method of accounting for
the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial
Instruments – Credit Losses.
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 judgments. 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.
2020 Annual Report | Northern Trust Corporation 87
Assessment of the allowance for credit losses for commercial loans and leases evaluated on a collective basis
As discussed in Notes 1 and 7 to the consolidated financial statements, the Corporation’s allowance for credit losses
for commercial loans and leases evaluated on a collective basis (the collective ACL) was $133.4 million of a total
allowance for credit losses assigned to loans and leases of $190.7 million as of December 31, 2020. Expected credit
losses are measured on a collective basis as long as the financial assets included in the respective pool share similar
risk characteristics. The allowance estimation methodology for the collective assessment is primarily based on internal
loss data specific to the Corporation’s financial asset 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 and obligor specific factors, including loan type,
borrower type, collateral type, loan size, and borrower credit quality. The estimation methodology applies probability
of default and loss given default assumptions to the exposure at default on a pool basis. For each segment, the
probability of default (PD) and loss given default (LGD) are derived for each quarter of the remaining life of each
instrument. For the first two years (the reasonable and supportable period), these factors are derived by applying
quarterly macroeconomic projections using models developed from historical data on macroeconomic factors and
loans with similar factors, including the borrower rating assigned to individual obligors, as applicable. For periods
beyond the reasonable and supportable period, the Corporation reverts to its own long-run historical loss experience on
a straight-line basis over four quarters. The exposure at default for every quarter is based on contractual balances as of
each quarter-end. Estimating expected lifetime credit losses requires the consideration of the effect of future economic
conditions. The Corporation employs multiple scenarios over a reasonable and supportable period to project future
conditions. The Corporation determines the probability weights assigned to each scenario at each quarter-end. The
quantitative allowance is then reviewed within the qualitative adjustment framework, through which the Corporation
applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology, and
environmental factors that are not fully contemplated in the forecast to compute an adjustment to the quantitative
allowance for each segment of the loan portfolio.
We identified the assessment of the quantitative component of the collective ACL as a critical audit matter. A high
degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was
involved in the assessment of the quantitative component of the collective ACL due to significant measurement
uncertainty. Specifically, the assessment encompassed the evaluation of the quantitative component of the collective
ACL methodology, including the methods and models used to estimate the PD and LGD and their significant
assumptions, including the multiple economic forecast scenarios and macroeconomic factors and their respective
weightings, the reasonable and supportable period, the historical observation period, and borrower ratings for certain
commercial loans and leases. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence
obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design
and operating effectiveness of certain internal controls related to the critical audit matter. This included controls related
to the Corporation’s measurement of the quantitative component of the collective ACL estimate, including controls
over:
•
•
•
•
•
•
development of the quantitative component of the collective ACL methodology
development of the PD and LGD models
ongoing monitoring of the PD and LGD models
development and approval of the multiple economic forecast scenarios, macroeconomic factors and their
respective weightings
determination and measurement of the significant assumptions used in the PD and LGD models
analysis of the allowance for credit losses for loans and leases results.
We evaluated the Corporation’s process to develop the quantitative component of the collective ACL estimate by
testing certain sources of 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
skills and knowledge, who assisted in:
•
evaluating the quantitative component of the Corporation’s collective ACL methodology for compliance with U.S.
generally accepted accounting principles
88
2020 Annual Report | Northern Trust Corporation
•
•
•
•
•
evaluating judgments made by the Corporation relative to the development and performance monitoring of the PD
and LGD models
assessing the conceptual soundness and performance testing of the PD and LGD models by inspecting model
documentation to determine whether the models were suitable for their intended use
assessing the economic forecast scenarios, the economic input variables and their respective weightings through
comparison to publicly available forecasts and the Corporation’s business environment
evaluating the length of the historical observation period and reasonable and supportable period by comparing
them to specific portfolio risk characteristics and trends
testing individual borrower ratings for a selection of commercial loan and lease relationships by evaluating the
financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral,
where applicable.
We also assessed the sufficiency of the audit evidence obtained related to the quantitative component of the collective
ACL by evaluating the:
•
•
•
cumulative results of the procedures
qualitative aspects of the Corporation’s accounting practices
potential bias in the accounting estimate
We have served as the Corporation’s auditor since 2002.
CHICAGO, ILLINOIS
FEBRUARY 23, 2021
2020 Annual Report | Northern Trust Corporation 89
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
Securities Purchased under Agreements to Resell
Debt Securities
Available for Sale (Amortized cost of $41,155.7 and $38,722.2)
Held to Maturity (Fair value of $17,797.4 and $12,249.3)
Trading Account
Total Debt Securities
Loans and Leases
Commercial
Personal
Total Loans and Leases (Net of unearned income of $9.8 and $14.1)
Allowance for Credit Losses
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 0 and 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 208,289,178 and 209,709,046
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury Stock (36,882,346 and 35,462,478 shares, at cost)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements on pages 94-168.
90 2020 Annual Report | Northern Trust Corporation
DECEMBER 31,
2020
2019
$
4,389.5 $
4,459.2
55,503.6
33,886.0
4,372.6
4,877.1
—
1,596.5
5.0
707.8
42,022.0
38,876.3
17,791.1
12,284.5
0.5
0.3
59,813.6
51,161.1
15,262.0
14,001.3
18,497.7
17,408.3
33,759.7
31,409.6
(198.8)
514.9
1,160.2
707.2
(104.5)
483.3
845.7
696.8
8,384.9
8,401.3
$ 170,003.9 $ 136,828.4
$ 17,728.5 $ 14,114.7
28,631.8
21,441.5
937.1
986.7
25,382.2
12,177.4
71,198.4
60,400.3
143,878.0
109,120.6
260.2
39.8
4,011.5
3,122.4
1,189.3
277.8
552.9
489.7
6,744.8
2,573.0
1,148.1
277.7
5,536.6
4,830.6
158,315.6
125,737.4
—
493.5
391.4
408.6
963.6
388.5
493.5
391.4
408.6
1,013.1
12,207.7
11,656.7
428.0
(194.7)
(3,204.5)
(3,066.1)
11,688.3
11,091.0
$ 170,003.9 $ 136,828.4
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(In Millions Except Share Information)
Noninterest Income
FOR THE YEAR ENDED DECEMBER 31,
2020
2019
2018
Trust, Investment and Other Servicing Fees
$
3,995.0 $
3,852.1 $
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
prior to the adoption of ASU 2016-13
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 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
Comprehensive Income
See accompanying notes to consolidated financial statements on pages 94-168.
290.4
45.4
133.2
194.0
(0.4)
4,657.6
1,643.5
200.3
1,443.2
125.0
1,318.2
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
3,753.7
307.2
51.8
98.3
127.5
(1.0)
4,337.5
2,321.4
698.7
1,622.7
(14.5)
1,637.2
1,947.1
1,859.0
1,806.9
387.7
763.1
673.5
230.1
346.7
4,348.2
1,627.6
418.3
355.2
774.5
612.1
212.9
329.8
4,143.5
1,944.1
451.9
1,209.3 $
1,492.2 $
56.2
46.4
356.7
739.4
582.2
201.1
330.6
4,016.9
1,957.8
401.4
1,556.4
46.4
1,153.1 $
1,445.8 $
1,510.0
5.48 $
5.46
6.66 $
6.63
6.68
6.64
208,319,412
214,525,547
223,148,335
209,007,986
215,601,149
224,488,326
— $
(0.4)
(0.4) $
(0.3) $
(1.1)
(1.4) $
(0.5)
(0.5)
(1.0)
$
$
$
$
$
FOR THE YEAR ENDED DECEMBER 31,
2020
2019
2018
$
1,209.3 $
1,492.2 $
1,556.4
527.8
0.5
26.9
67.5
622.7
228.9
(7.7)
49.9
(12.1)
259.0
(22.3)
(1.4)
22.2
(12.6)
(14.1)
$
1,832.0 $
1,751.2 $
1,542.3
2020 Annual Report | Northern Trust Corporation 91
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, 2018
$
882.0
$
408.6
$
1,047.2 $
9,685.1
$
(414.3)
$
(1,392.4)
$
10,216.2
Reclassification
Accumulated
of
Other
Certain
from
Comprehensive Income
Effects
Tax
Change in
Accounting Principle
Net income
Other
Comprehensive
and Reclassifications)
Income
(Loss)
(Net
of
Tax
Dividends Declared:
Common Stock,
$1.94
per share
Preferred Stock
Stock
Awards
and Options Exercised
Stock Purchased
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21.3
—
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)
164.1
(924.3)
(924.3)
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
Comprehensive Income (Loss)
Other
and Reclassifications)
(Net of
Tax
Dividends Declared:
Common Stock, $2.60 per share
Preferred Stock
Issuance of Preferred Stock, Series E
Stock Awards and Options Exercised
Stock Purchased
—
—
—
—
391.4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(55.4)
—
1,492.2
—
(565.9)
(46.4)
—
—
—
—
259.0
—
—
—
—
—
—
—
—
—
—
208.0
1,492.2
259.0
(565.9)
(46.4)
391.4
152.6
(1,100.2)
(1,100.2)
Balance at December 31, 2019
$
1,273.4 $
408.6 $
1,013.1 $ 11,656.7 $
(194.7) $
(3,066.1) $ 11,091.0
Cumulative Effect Adjustment related to the
adoption of Accounting Standards Update 2016-13
Balance at January 1, 2020
Net income
Other Comprehensive Income (Loss) (Net of Tax
and Reclassifications)
Dividends Declared:
Common Stock, $2.80 per share
Preferred Stock
—
—
—
—
Redemption of Preferred Stock, Series C
(388.5)
Stock Awards and Options Exercised
Stock Purchased
—
—
—
—
—
(10.1)
—
—
(10.1)
1,273.4
408.6
1,013.1
11,646.6
(194.7)
(3,066.1) 11,080.9
—
—
—
—
—
—
—
—
—
—
—
—
1,209.3
—
(592.0)
(44.7)
(11.5)
(49.5)
—
—
—
—
—
1,209.3
622.7
—
622.7
—
—
—
—
—
—
—
—
161.4
(592.0)
(44.7)
(400.0)
111.9
(299.8)
(299.8)
Balance at December 31, 2020
$
884.9 $
408.6 $
963.6 $ 12,207.7 $
428.0 $
(3,204.5) $ 11,688.3
See accompanying notes to consolidated financial statements on pages 94-168.
92 2020 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) Gains, net
Amortization and Accretion of Securities and Unearned Income, net
Provision for Credit Losses
Depreciation and Amortization
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
Change in Federal Funds Sold
Change in 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
Redemption of Preferred Stock - Series C
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 from Available for Sale to Held to Maturity
Transfers to Leases Held For Sale from Leases
See accompanying notes to consolidated financial statements on pages 94-168.
FOR THE YEAR ENDED DECEMBER 31,
2020
2019
2018
$
1,209.3 $
1,492.2 $
1,556.4
0.4
88.9
125.0
500.3
25.4
(15.6)
16.4
4.5
(23.6)
(17.8)
(16.4)
1,896.8
5.0
(700.9)
712.6
(19,845.2)
(40,187.9)
35,658.6
(10,886.8)
8,748.2
(2,316.7)
(135.8)
(424.6)
(226.8)
—
—
(322.7)
(29,923.0)
32,137.9
(292.7)
(450.0)
(2,698.3)
(400.0)
993.2
(508.6)
—
(299.8)
19.5
(584.6)
(45.9)
1.2
27,871.9
84.6
(69.7)
4,459.2
4,389.5 $
226.8 $
327.7
0.2
301.5
—
1.4
64.6
(14.5)
458.9
(70.7)
(6.1)
34.3
(50.3)
(23.6)
1,154.0
(448.2)
2,592.0
129.0
357.3
(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
160.8
53.6
1.0
95.9
(14.5)
460.9
(130.0)
(74.5)
10.5
(197.0)
28.5
(699.6)
729.9
1,767.5
(113.0)
218.7
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
—
—
2020 Annual Report | Northern Trust Corporation 93
$
$
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, on the consolidated statements of income. Income and expense accounts
are remeasured at period-average rates of exchange.
Asset and liability accounts of entities with functional currencies that are not the U.S. dollar are translated at period-
end rates of exchange. Income and expense accounts are translated at period-average rates of exchange. Translation
adjustments, net of applicable taxes, are reported directly to accumulated other comprehensive income (AOCI), a
component of stockholders’ equity.
E. Securities. Securities Available for Sale are reported at fair value, with unrealized gains and losses credited or charged,
net of the tax effect, to AOCI. Realized gains and losses on securities available for sale are determined on a specific
identification basis and are reported within Investment Security Gains (Losses), net, on the consolidated statements of
income. Interest income is recorded on the accrual basis, adjusted for the amortization of premium and accretion of
discount.
94 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 reported at fair value. Realized and unrealized gains and losses on securities held for
trading are reported within Security Commissions and Trading Income on the consolidated statements of 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 29, “Variable Interest Entities,” are amortized over the lives of the related tax credits
and other tax benefits.
F. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase. Northern
Trust participates in the repurchase agreement market as a relatively low cost alternative for short-term funding. Securities
purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized
financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize 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 at fair value within Other Assets and Other Liabilities on the consolidated balance sheets.
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 on 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 within the line item, Other Operating Activities, net, on the consolidated statement of cash flows,
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
on the consolidated statements of 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 on the
consolidated statements of 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 on the consolidated statements of income. 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 in assessing whether these hedging
relationships are highly effective at inception and quarterly thereafter.
Derivatives designated as cash flow hedges are used to minimize the variability in cash flows of earning assets or
forecasted transactions caused by movements in interest or foreign exchange rates. Changes in the fair value of such
derivatives are recognized in AOCI, a component of stockholders’ equity, and there is no change to the accounting for the
hedged item. Balances in AOCI are reclassified to earnings when the hedged forecasted transaction impacts earnings, and
are reflected in the same 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on the consolidated statements of 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 expected losses.
Nonaccrual Loans and Recognition of Income. Interest income on loans and leases 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 nonaccrual 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 nonaccrual, interest accrued but not collected is reversed against interest income in the current period. Interest collected
on nonaccrual 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. Nonaccrual loans are returned to performing status when factors indicating doubtful
collectability no longer exist. Factors considered in returning a loan to performing status are consistent across all classes of
loans and leases and, in accordance with regulatory guidance, relate primarily to expected payment performance. A loan is
eligible to be returned to performing status when: (i) no principal or interest that is due is unpaid and repayment of the
remaining contractual principal and interest is expected or (ii) the loan has otherwise become well-secured (possessing
realizable value sufficient to discharge the debt, including accrued interest, in full) and is in the process of collection
(through action reasonably expected to result in debt repayment or restoration to a current status in the near future). A loan
that has not been brought fully current may be restored to performing status provided there has been a sustained period of
repayment performance (generally a minimum of six payment periods) by the borrower in accordance with the contractual
terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time. Additionally, a loan that
has been formally restructured so as to be reasonably assured of repayment and performance according to its modified
terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Troubled Debt Restructurings (TDRs). A loan that has been modified as a concession by Northern Trust or a
bankruptcy court resulting from the debtor’s financial difficulties is referred to as a troubled debt restructuring (TDR). All
TDRs are reported as TDRs starting in the calendar year of their restructuring. In subsequent years, a TDR may cease being
reported as a TDR 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 accrual status if it satisfies the six-
payment-period performance requirement.
The expected credit loss is measured based upon the present value of expected future cash flows, discounted at the
effective interest rate based on the original contractual rate. If a loan’s contractual interest rate varies based on subsequent
changes in an independent factor, such as an index or rate, the loan’s effective interest rate is calculated based on the factor
as it changes over the life of the loan. Northern Trust elected not to project changes in the factor for purposes of estimating
expected future cash flows. Further, Northern Trust elected not to adjust the effective interest rate for prepayments. If the
loan is collateral dependent, the expected loss is measured based on the fair value of the collateral at the reporting date.
If the loan valuation is less than the recorded value of the loan, either an allowance is established, or a charge-off is
recorded, for the difference. Smaller balance (individually less than $1 million) homogeneous loans are collectively
evaluated. Northern Trust’s accounting policies for material nonaccrual loans is consistent across all classes of loans and
leases.
All loans and leases with TDR modifications are evaluated for additional expected credit losses. The nature and extent
of further deterioration in credit quality, including a subsequent default, is considered in the determination of an
appropriate level of allowance for credit losses.
Collateral Dependent Financial Assets. A financial asset is collateral-dependent when the borrower is experiencing
financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral.
Most of Northern Trust’s collateral dependent credit exposure relates to its residential real estate portfolio for which the
collateral is usually the underlying real estate property. For collateral dependent financial assets, it is Northern Trust’s
policy to reserve or charge-off the difference between the amortized cost basis of the loan and the value of the collateral.
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.
I. Allowance for Credit Losses.
2020 Allowance for Credit Losses after the Adoption of Accounting Standards Update No. 2016-13
As of December 31, 2020, the allowance for credit losses represents management’s best estimate of lifetime expected credit
losses related to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower
relationships.
Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis.
A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the
related allowance is determined through an individual evaluation.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent
on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many
of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current
conditions and reasonable and supportable forecasts.
Forecasting and Reversion. Estimating expected lifetime credit losses requires the consideration of the effect of future
economic conditions. Northern Trust employs multiple scenarios over a reasonable and supportable period to project future
conditions. Management determines the probability weights assigned to each scenario at each quarter-end. Key variables
determined to be relevant for projecting credit losses on the portfolios in scope include macroeconomic factors, such as
corporate profits, unemployment, and real estate price indices, as well as financial market factors such as equity prices,
volatility, and credit spreads. For periods beyond the reasonable and supportable period, Northern Trust reverts to its own
historical loss experiences.
Allowance for Loans and Leases. The allowance estimation methodology for the collective assessment is primarily
based on internally developed loss data specific to the Northern Trust financial asset portfolio from a historical observation
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
period that includes both expansionary and recessionary periods. The estimation methodology and the related qualitative
adjustment framework segregate the loan and lease portfolio into homogeneous segments based on similar risk
characteristics or risk monitoring methods.
Northern Trust utilizes a quantitative probability of default/loss given default approach for the calculation of its credit
allowance on a collective basis. For each of the different parameters, specific credit models for the individual loan
segments were developed. For each segment, the probability of default and the loss given default are applied to the
exposure at default for each projected quarter to determine the quantitative component of the allowance. The quantitative
allowance is then reviewed within a qualitative adjustment framework, through which management applies judgment by
assessing internal risk factors, potential limitations in the quantitative methodology, and environmental factors that are not
fully contemplated in the forecast to compute an adjustment to the quantitative allowance for each segment of the loan
portfolio.
The allowance related to credit exposure evaluated on an individual basis is determined through an individual
evaluation of loans, leases, 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 for which
the amount of 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.
Northern Trust analyzes its exposure to credit losses from both on-balance sheet and off-balance sheet activity using a
consistent methodology for the quantitative framework as well as the qualitative framework.
As of December 31, 2020, 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 credit
utilization factors, resulting in a proportionate amount of expected credit losses.
Allowance for HTM Securities. Debt securities held to maturity classified as U.S. government, government sponsored
agency, and certain securities classified as obligations of states and political subdivisions are considered to be guarantees of
the U.S. government or an agency of the U.S. government and therefore an allowance for credit losses is not estimated for
such investments as the expected probability of non-payment of the amortized cost basis is zero.
Debt securities held to maturity classified as other asset-backed represent pools of underlying receivables from which
the cash flows are used to pay the bonds that vary in seniority. Utilizing a qualitative estimation approach, the allowance
for other asset-backed securities is assessed by evaluating underlying pool performance based on delinquency rates and
available credit support.
Debt securities held to maturity classified as other relates to investments purchased by Northern Trust to fulfill its
obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by
making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income
communities within Northern Trust’s market area. The allowance for CRA investments is assessed using a qualitative
estimation approach primarily based on internal historical performance experience and default history of the underlying
CRA portfolios to determine a quantitative component of the allowance.
The allowance estimation methodology for all other debt securities held to maturity is developed using a combination
of external and internal data. The estimation methodology groups securities with shared characteristics for which the
probability of default and the loss given default are applied to the total exposure at default to determine a quantitative
component of the allowance.
Allowance for Available for Sale Securities. Securities available for sale impairment reviews are conducted quarterly
to identify and evaluate securities that have indications of possible credit losses. A determination as to whether a security’s
decline in market value is related to credit impairment 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 credit related include, but are not limited to, the severity of the impairment; the cause of the impairment and the financial
condition and near-term prospects of the issuer; activity in the market of the issuer, which may indicate adverse credit
conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that
Northern Trust 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 a credit loss has occurred that is then based on the best estimate of cash
flows to be collected from the security, discounted using the security’s effective interest rate. If the present value of the
expected cash flows is found to be less than the current amortized cost of the security, an allowance for credit losses is
generally recorded equal to the difference between the two amounts, limited to the amount the amortized cost basis exceeds
the fair value of the security.
Allowance for Other Financial Assets. The allowance for other financial assets consists of the allowance for those
other financial assets presented in Cash and Due from Banks, Other Central Bank Deposits, Interest-Bearing Deposits with
Banks, Federal Funds Sold, and Other Assets. The Other Assets category includes other miscellaneous credit exposures
reported in Other Assets on the consolidated balance sheets. The allowance estimation methodology for other financial
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets primarily utilizes a similar approach as used for the debt securities held to maturity portfolio. It consists of a
combination of externally and internally developed loss data, adjusted for the appropriate contractual term. Northern
Trust’s portfolio is composed mostly of institutions within the “1 to 3” internal borrower rating category and expected to
exhibit minimal to modest likelihood of loss.
The portion of the allowance assigned to loans and leases, debt securities held to maturity, and other financial assets is
presented as a contra asset in Allowance for Credit Losses on the consolidated balance sheets. The portion of the allowance
assigned to undrawn loan commitments and standby letters of credit is reported in Other Liabilities on the consolidated
balance sheets. The allowance for AFS securities is presented parenthetically with the amortized cost basis of AFS
securities on the consolidated balance sheets.
The Provision for Credit Losses on the consolidated statements of income represents the change in the Allowance for
Credit Losses on the consolidated balance sheets and is the charge to current period earnings. It represents the amount
needed to maintain the Allowance for Credit Losses on the consolidated balance sheets at an appropriate level to absorb
lifetime expected credit losses related to financial assets in scope. 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.
Contractual Term. Northern Trust estimates expected credit losses over the contractual term of the financial assets
adjusted for prepayments, unless prepayments are not relevant to specific portfolios or sub-portfolios. Extension and
renewal options are typically not considered since it is not Northern Trust’s practice to enter into arrangements where the
borrower has the unconditional option to renew, or a conditional extension option whereby the conditions are beyond
Northern Trust’s control.
Accrued Interest. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables
related to its loan and securities portfolios as its policy is to write-off uncollectible accrued interest receivable balances in a
timely manner. Accrued interest is written off by reversing interest income during the quarter the financial asset is moved
from an accrual to a nonaccrual status.
2019 Allowance for Credit Losses prior to the Adoption of Accounting Standards Update No. 2016-13
Allowance for Loans and Leases under the Previous “Incurred Loss” Model. As of December 31, 2019, the
Allowance for Credit Losses represented management’s estimate of probable losses which occurred as of the date of the
consolidated financial statements. The loan and lease portfolio and other lending-related credit exposures were regularly
reviewed to evaluate the level of the Allowance for Credit Losses. In determining an appropriate allowance level, Northern
Trust evaluated the allowance necessary for impaired loans and lending-related commitments and also estimated losses
inherent in other lending-related credit exposures. The allowance for credit losses consisted of the following components:
Specific Allowance. A loan was considered to be impaired when, based on existing information and events,
management determined that it was probable that Northern Trust would be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loans were 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 were 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 related 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. The specific allowance was determined through
an individual evaluation of loans and lending-related commitments considered impaired that was 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, was determined based on the value of the underlying real estate collateral,
third-party appraisals were typically obtained and utilized by management. These appraisals were generally less than
twelve months old and were subject to adjustments to reflect management’s judgment as to the realizable value of the
collateral.
Inherent Allowance. The inherent allowance estimation methodology was based on internally developed loss data
specific to the Northern Trust loan and lease portfolio. The estimation methodology and the related qualitative adjustment
framework segregated the loan and lease portfolio into homogeneous segments. For each segment, the probability of
default and the loss given default were applied to the total exposure at default to determine a quantitative inherent
allowance. The quantitative inherent allowance was then reviewed within the qualitative adjustment framework, where
management applied judgment by assessing internal risk factors, potential limitations in the quantitative methodology and
environmental factors that were 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 were reviewed quarterly by Northern Trust’s Loan Loss
Reserve Committee, which included representatives from Credit Risk Management, reporting segment management, and
Corporate Finance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans, leases, and other extensions of credit deemed uncollectible were charged to the Allowance for Credit Losses.
Subsequent recoveries, if any, were credited to the allowance. Northern Trust’s policies relative to the charging-off of
uncollectible loans and leases were consistent across both loan and lease segments. Determinations as to whether loan
balances for which the collectability was in question were charged-off or a specific reserve was established were based on
management’s assessment as to the level of certainty regarding the amount of loss. The Provision for Credit Losses, which
was charged to income, was the amount necessary to adjust the allowance for credit losses to the level determined to be
appropriate through the above processes.
As of December 31, 2019, for purposes of estimating the allowance for credit losses for undrawn loan commitments
and standby letters of credit, the exposure at default included 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 resulted 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 was 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 was reported in Other Liabilities on the consolidated balance sheets.
Other-Than-Temporary Impairment (OTTI) related to Securities. As of December 31, 2019, a security was
considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected was less than
the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security was
less than the security’s amortized cost basis and the investor intended, or more-likely-than-not would have been required,
to sell the security before recovery of the security’s amortized cost basis. If OTTI existed, the charge to earnings was
limited to the amount of credit loss if the investor did not intend to sell the security, and it was more-likely-than-not that it
would not have been required to sell the security, before recovery of the security’s amortized cost basis. Any remaining
difference between fair value and amortized cost was recognized in AOCI, net of applicable taxes. Otherwise, the entire
difference between fair value and amortized cost was charged to earnings.
J. Standby Letters of Credit. Fees on standby letters of credit are recognized in Other Operating Income on the
consolidated statements of 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.
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 on the consolidated statements of income.
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 services that do not convey a software
license are expensed as incurred.
Goodwill and other intangible assets are reviewed for impairment on an annual basis or more frequently if events or
changes in circumstances indicate the carrying amounts may not be recoverable.
N. Trust, Investment and Other Servicing Fees. Trust, investment and other servicing fees are recorded on an accrual
basis, over the period in which the service is provided. Fees are primarily a function of the market value of assets
custodied, managed and serviced, transaction volumes, and securities lending volume and spreads, as set forth in the
underlying client agreement. This revenue recognition involves the use of estimates and assumptions, including
components that are calculated based on estimated asset valuations and transaction volumes.
O. Client Security Settlement Receivables. These receivables result from custody client withdrawals from short-term
investment funds that settle on the following business day as well as custody client security sales executed under
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on 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 on the consolidated statements of income.
Q. Cash Flow Statements. Cash and cash equivalents have been defined as “Cash and Due from Banks” on the
consolidated balance sheets.
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 on the consolidated
balance sheets. 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 expense the grant-date fair value of stock and stock
unit awards and other share-based compensation granted to employees as Compensation on 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 on the consolidated statements of cash flows.
T. Net Income Per Common Share. Basic net income per common share is computed by dividing net income/loss
applicable to common stock by the weighted average number of common shares outstanding during each period. Diluted
net income per common share is computed by dividing net income applicable to common stock and potential common
shares by the aggregate of the weighted average number of common shares outstanding during the period and common
share equivalents calculated for stock options outstanding using the treasury stock method. In a period of a net loss, diluted
net income per common share is calculated in the same manner as basic net income per common share.
Northern Trust has issued certain restricted stock unit awards, which are unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents. These units are considered participating securities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, Northern Trust calculates net income applicable to common stock using the two-class method, whereby net
income is allocated between common stock and participating securities.
Note 2 – Recent Accounting Pronouncements
On January 1, 2020, Northern Trust adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13
significantly changed 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 legacy GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans.
Upon adoption of ASU 2016-13, Northern Trust recorded a $13.7 million increase in the allowance for credit losses with a
corresponding cumulative effect adjustment to decrease retained earnings by $10.1 million, net of income taxes, on January
1, 2020. Northern Trust did not restate comparative periods for the effects of applying ASU 2016-13. There was no
significant impact to Northern Trust’s consolidated statements of income. Please refer to Note 7 — Allowance for Credit
Losses for further information.
On January 1, 2020, Northern Trust adopted ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment” (ASU 2017-04). ASU 2017-04 amends the subsequent measurement of
goodwill whereby Step 2 from the goodwill impairment test is eliminated. As a result, the goodwill impairment test is
performed by comparing the fair value of a reporting unit to its carrying value and an impairment charge should be
recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total
amount of goodwill allocated to that reporting unit. Upon adoption of ASU 2017-04, there was no significant impact to
Northern Trust’s consolidated balance sheets or consolidated statements of income.
On January 1, 2020, Northern Trust adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure
Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). The primary
objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to financial statements. Upon adoption
of ASU 2018-13, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated
statements of income.
On January 1, 2020, Northern Trust adopted 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). Upon adoption of ASU 2018-15, there was no significant
impact to Northern Trust’s consolidated balance sheets or consolidated statements of income.
On January 1, 2020, Northern Trust adopted ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to
Related Party Guidance for Variable Interest Entities” (ASU 2018-17). ASU 2018-17 requires that indirect interests held
through related parties in common control arrangements be considered on a proportional basis (rather than as the equivalent
of a direct interest in its entirety) for determining whether fees paid to decision makers and service providers are variable
interests. Upon adoption of ASU 2018-17, there was no significant impact to Northern Trust’s consolidated balance sheets
or consolidated statements of income.
On April 1, 2020, Northern Trust adopted ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04). The global transition toward alternative
reference rates and away from referencing the London Interbank Offered Rate (LIBOR) and other interbank offered rates
(Reference Rate Reform) is expected to have a significant impact on the volume of contract modifications, hedge
accounting, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of
Reference Rate Reform. ASU 2020-04 provides temporary optional expedients and exceptions for applying GAAP to
contract modifications, hedging relationships, and other transactions affected by Reference Rate Reform if certain criteria
are met. The main provisions of ASU 2020-04 provide the following optional expedients: (1) simplification of the
accounting evaluations under current GAAP for contract modifications, including loan, debt, lease and other contracts with
potential embedded derivatives, if qualifying criteria are met (2) preservation of hedging relationships without
dedesignation upon certain changes to the critical terms of an existing hedging relationship due to Reference Rate Reform
and other optional hedge accounting relief provisions and (3) a one-time election to sell or transfer, or both sell and
102 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transfer, debt securities classified as held to maturity that reference a rate affected by Reference Rate Reform and are
classified as held to maturity before January 1, 2020.
The optional expedients in ASU 2020-04 for contract modifications and hedging relationships are applied prospectively,
while the one-time election to sell or transfer, or both sell and transfer debt securities classified as held to maturity may be
made at any time after March 12, 2020. The optional expedients and exceptions provided by ASU 2020-04 do not apply to
contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for
hedging relationships existing as of December 31, 2022 for which an entity has elected certain optional expedients and
which are retained through the end of the hedging relationship. Upon adoption of ASU 2020-04, there was no significant
impact on Northern Trust’s consolidated balance sheets or consolidated statements of income. Northern Trust expects to
elect the optional expedients provided in ASU 2020-04 and does not expect a significant impact on Northern Trust’s
consolidated balance sheets or consolidated statements of income as a result of electing such expedients.
On January 7, 2021, Northern Trust retrospectively adopted ASU No. 2021-01, “Reference Rate Reform (Topic 848):
Scope” (ASU 2021-01). ASU 2021-01 clarifies the scope of Topic 848 to explicitly include those derivative instruments
affected by changes in interest rates used for margining, discounting, or contract price alignment as eligible for certain
optional expedients and exceptions in Topic 848. Upon adoption of ASU 2021-01, Northern Trust elected the expedients
provided in Topic 848 with no significant impact on Northern Trust’s consolidated balance sheets or consolidated
statements of income.
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 into or out of Level 3 occurred during the years ended December 31, 2020, or 2019.
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, 2020, Northern Trust’s available for sale debt securities
portfolio included 2,260 Level 2 securities with an aggregate market value of $39.2 billion. All 2,260 debt securities were
valued by external pricing vendors. As of December 31, 2019, Northern Trust’s available for sale debt securities portfolio
included 1,704 Level 2 debt securities with an aggregate market value of $34.3 billion. All 1,704 debt securities were
valued by external pricing vendors. Trading account debt securities, which totaled $0.5 million and $0.3 million as of
December 31, 2020 and 2019, respectively were all valued using external pricing vendors.
Northern Trust has established processes and procedures to assess the suitability of valuation methodologies used by
external pricing vendors, including reviews of valuation techniques and assumptions used for selected securities. On a daily
basis, periodic quality control reviews of prices received from vendors are conducted which include comparisons to prices
on similar security types received from multiple pricing vendors and to the previous day’s reported prices for each security.
Predetermined tolerance level exceptions are researched and may result in additional validation through available market
information or the use of an alternate pricing vendor. Quarterly, Northern Trust reviews documentation from third-party
pricing vendors regarding the valuation processes and assumptions used in their valuations and assesses whether the fair
value levels assigned by Northern Trust to each security classification are appropriate. Annually, valuation inputs used
within third-party pricing vendor valuations are reviewed for propriety on a sample basis through a comparison of inputs
used to comparable market data, including security classifications that are less actively traded and security classifications
comprising significant portions of the portfolio.
2020 Annual Report | Northern Trust Corporation 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern
Trust and sold in June 2016 and 2015, respectively. Pursuant to the swaps, Northern Trust retains the risks associated with
the ultimate conversion of the Visa Class B common shares into shares of Visa Inc. Class A common stock (Visa Class A
common shares), such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and
Northern Trust will be compensated for any anti-dilutive adjustments to the ratio. The 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 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, “Commitments and 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, 2020 and 2019,
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.
104 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 55: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
DECEMBER 31, 2020
WEIGHTED-
FINANCIAL INSTRUMENT
Swaps
Visa
Related
B
Class
Sale
to
Certain
of
Common Shares
FAIR VALUE
$35.3 million
VALUATION
TECHNIQUE
Discounted
Flow
Cash
UNOBSERVABLE
INPUTS
Conversion Rate
Class
Visa
A
Appreciation
INPUT VALUES
1.62x
8.73%
AVERAGE
INPUT
VALUES(1)
1.62x
8.73%
(1) Weighted average of expected duration based on scenario probability.
Expected Duration
12 -
33 months
20 months
DECEMBER 31, 2019
WEIGHTED-
FINANCIAL INSTRUMENT
Swaps
Visa
Related
B
Class
Sale
to
of
Common Shares
Certain
FAIR VALUE
$33.4 million
VALUATION
TECHNIQUE
Discounted
Flow
Cash
UNOBSERVABLE
INPUTS
Conversion Rate
Class
A
Visa
Appreciation
INPUT VALUES
1.62x
8.54%
AVERAGE
INPUT
VALUES(1)
1.62x
8.54%
(1) Weighted average of expected duration based on scenario probability.
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019,
segregated by fair value hierarchy level.
Expected Duration
12 -
36 months
22 months
TABLE 56: RECURRING BASIS HIERARCHY LEVELING
(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,
Bonds
Supranational
and
Non-U.S.
Agency
Other Asset-Backed
Commercial Mortgage-Backed
Total
Available
for Sale
Trading Account
Total
Available
for
Sale
and
Trading
Debt Securities
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)
DECEMBER
31, 2020
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
ASSETS/
LIABILITIES
AT FAIR
VALUE
$
2,799.9
$
—
$
—
$
—
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,083.6
24,956.7
714.0
2,539.6
553.1
2,345.8
3,997.5
1,031.8
2,799.9
39,222.1
—
0.5
2,799.9
39,222.6
—
—
—
—
—
—
4,260.7
297.5
4,558.2
4,722.5
125.0
—
2,799.9
3,083.6
24,956.7
714.0
2,539.6
553.1
2,345.8
3,997.5
1,031.8
42,022.0
0.5
42,022.5
—
—
—
—
—
—
—
—
—
—
—
(3,505.3)
(2.5)
755.4
295.0
(3,507.8)
1,050.4
—
—
35.3
(2,718.6)
2,003.9
(98.5)
—
26.5
35.3
Total
Derivative Liabilities
$
—
$
4,847.5
$
35.3
$
(2,817.1)
$
2,065.7
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, 2020, derivative assets and liabilities shown above also include reductions of $1,867.8 million and $1,177.2 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.
2020 Annual Report | Northern Trust Corporation 105
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
Supranational
Sub-Sovereign,
Bonds
Other Asset-Backed
and
Non-U.S.
Agency
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
Total
Derivatives Assets
Other Liabilities
Derivative Liabilities
Foreign
Exchange Contracts
Interest
Rate Contracts
Other
Financial Derivative(1)
DECEMBER
31, 2019
LEVEL 1
LEVEL 2
LEVEL 3
NETTING
$
4,549.1
$
—
$
—
$
—
$
ASSETS/
LIABILITIES
AT 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
38,876.3
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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
4,549.1
34,327.5
—
—
—
—
—
—
3,234.8
152.9
3,387.7
3,182.2
97.4
—
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.
The following table presents the changes in Level 3 liabilities for the years ended December 31, 2020 and 2019.
TABLE 57: CHANGES IN LEVEL 3 LIABILITIES
LEVEL 3 LIABILITIES
(In Millions)
Fair
Value
at
January 1
Total
(Gains) Losses:
Included
in Earnings(1)
Sales,
Purchases,
Issues,
and Settlements
Settlements
Fair
Value
at
December 31
Unrealized
Losses
(Gains)
Included
in
Earnings
Related
to
Financial
Instruments
Held
at
December 31(1)
(1) Gains (losses) are recorded in Other Operating Income on the consolidated statements of income.
SWAPS
RELATED
CERTAIN
TO
VISA
OF
B
COMMON SHARES
SALE
CLASS
$
$
$
2020
33.4
$
18.3
(16.4)
35.3
18.6
$
$
2019
32.8
17.1
(16.5)
33.4
12.3
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.
106 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets measured at fair value on a nonrecurring basis at December 31, 2020 and 2019, all of which were categorized
as Level 3 under the fair value hierarchy, were comprised of nonaccrual 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. The fair values of real estate loan collateral were subject to adjustments to
reflect management’s judgment as to realizable value and consisted of discount factors ranging from 15.0% to 20.0% with
a weighted average based on fair values of 16.8% and 15.3% as of December 31, 2020 and December 31, 2019,
respectively. 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.
OREO assets are carried at the lower of cost or fair value less estimated costs to sell, with fair value typically based on
third-party appraisals.
Collateral-based nonaccrual loans that have been adjusted to fair value totaled $24.6 million and $8.0 million at
December 31, 2020 and 2019, respectively.
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, 2020 and 2019, 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 58: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS
DECEMBER 31, 2020
FINANCIAL INSTRUMENT
FAIR
VALUE(1)
VALUATION
TECHNIQUE
UNOBSERVABLE INPUTS
INPUT VALUES
WEIGHTED-AVERAGE
INPUT VALUES
Loans
$24.6 million
Market Approach
Discount
estate
to
factor
applied
collateral-based
real
to
loans
reflect
realizable value
15.0%
– 20.0%
16.8%
(1) Includes real estate collateral-based loans and other collateral-based loans.
DECEMBER 31, 2019
FINANCIAL INSTRUMENT
FAIR
VALUE(1)
Loans
$8.0 million
VALUATION
TECHNIQUE
UNOBSERVABLE INPUTS
INPUT VALUES
WEIGHTED-AVERAGE
INPUT VALUES
Market Approach Discount
collateral-based
factor
applied
loans
to
to
realizable value
estate
real
reflect
15.0% – 20.0%
15.3%
(1)
Includes
real
estate
collateral-based
loans
and
other
collateral-based loans.
2020 Annual Report | Northern Trust Corporation 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the fair values of all financial instruments.
TABLE 59: FAIR VALUE OF FINANCIAL INSTRUMENTS
(In Millions)
ASSETS
Cash and Due from Banks
Federal Reserve and Other Central Bank Deposits
Interest-Bearing Deposits with Banks
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
Demand, Noninterest-Bearing, Savings, Money Market and Other
Interest-Bearing
$
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
DECEMBER 31, 2020
FAIR VALUE
BOOK VALUE
TOTAL
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
$
$
4,389.5
55,503.6
4,372.6
1,596.5
$
4,389.5
55,503.6
4,372.6
1,596.5
4,389.5 $
—
—
—
$
—
55,503.6
4,372.6
1,596.5
42,022.0
17,791.1
0.5
42,022.0
17,797.4
0.5
2,799.9
90.0
—
39,222.1
17,707.4
0.5
—
—
—
—
—
—
—
33,558.0
1,160.2
34,017.5
1,160.2
—
—
—
1,160.2
34,017.5
—
275.0
919.6
215.8
275.0
919.6
228.9
—
—
138.6
275.0
919.6
90.3
$
71,742.5
937.1
71,198.4
260.2
39.8
4,011.5
3,122.4
71,742.5
943.0
71,198.4
260.2
39.8
4,012.7
3,222.6
1,189.3
277.8
1,250.1
264.6
22.4
77.0
22.4
77.0
$
71,742.5 $
—
—
—
—
—
—
—
—
—
—
$
—
943.0
71,198.4
260.2
39.8
4,012.7
3,222.6
1,250.1
264.6
—
—
22.4
77.0
$
$
15.6
311.8
$
15.6
311.8
— $
—
$
15.6
311.8
8.3
10.2
35.3
8.3
10.2
35.3
4,245.1
4,410.7
4,245.1
4,410.7
289.2
114.8
289.2
114.8
—
—
—
—
—
—
—
8.3
10.2
—
35.3
4,245.1
4,410.7
289.2
114.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) Refer to the table located on page 105 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.
108 2020 Annual Report | Northern Trust Corporation
DECEMBER 31, 2019
FAIR VALUE
BOOK VALUE
TOTAL
FAIR VALUE
LEVEL 1
LEVEL 2
LEVEL 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
ASSETS
Cash and Due from Banks
Federal Reserve and Other Central Bank Deposits
Interest-Bearing Deposits with Banks
Federal Funds Sold
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
Demand, Noninterest-Bearing, Savings, Money Market and Other
Interest-Bearing
$
Savings Certificates and Other Time
Non U.S. Offices Interest-Bearing
Federal Funds Purchased
Securities Sold Under Agreements to Repurchase
Other Borrowings
Senior Notes
Long-Term Debt
$
$
4,459.2
33,886.0
4,877.1
5.0
707.8
38,876.3
12,284.5
0.3
$
4,459.2
33,886.0
4,877.1
5.0
707.8
38,876.3
12,249.3
0.3
31,239.5
845.7
31,517.8
845.7
301.2
749.3
199.5
301.2
749.3
207.6
4,459.2
—
—
—
—
4,549.1
138.8
—
—
—
—
—
131.0
$
47,733.6
986.7
60,400.3
552.9
489.7
6,744.8
2,573.0
$
47,733.6
994.2
60,400.3
552.9
489.7
6,745.9
2,593.0
$
47,733.6
—
—
—
—
—
—
1,148.1
277.7
1,169.5
262.1
25.5
32.3
25.5
32.3
—
—
—
—
$
$
—
33,886.0
4,877.1
5.0
707.8
34,327.2
12,110.5
0.3
—
845.7
301.2
749.3
76.6
$
—
994.2
60,400.3
552.9
489.7
6,745.9
2,593.0
1,169.5
262.1
—
—
—
—
—
—
—
—
31,517.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25.5
32.3
—
—
—
—
20.5
21.1
—
33.4
3,151.7
3,158.1
132.4
76.3
—
—
—
—
$
$
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
—
—
—
—
—
—
—
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
(1) Refer to the table located on page 106 for the disaggregation of available for sale debt securities.
(3) This line consists of swaps related to the sale of certain Visa Class B common shares.
2020 Annual Report | Northern Trust Corporation 109
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 60: 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
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, 2020
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
2,728.8
$
71.1
$
—
$
2,927.8
24,595.1
713.6
2,459.9
543.1
2,281.7
3,953.5
952.2
155.9
388.5
1.1
79.8
10.0
64.7
46.8
79.7
0.1
26.9
0.7
0.1
—
0.6
2.8
0.1
FAIR
VALUE
2,799.9
3,083.6
24,956.7
714.0
2,539.6
553.1
2,345.8
3,997.5
1,031.8
$
41,155.7
$
897.6
$
31.3
$
42,022.0
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
TABLE 61: REMAINING MATURITY OF DEBT SECURITIES AVAILABLE FOR SALE
DECEMBER
31, 2020
ONE
YEAR
OR
LESS
ONE
TO
FIVE YEARS
FIVE
TO
TEN YEARS
OVER
TEN YEARS
TOTAL
(In Millions)
U.S. Government
Amortized
Cost
Fair
Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
300.9
$
303.2
$
1,732.8
$
1,767.0
$
695.1
$
729.7
$
—
$
—
$
2,728.8
$
2,799.9
Obligations
Political Subdivisions
States and
of
7.9
8.0
252.1
266.8
2,578.4
2,718.4
89.4
90.4
2,927.8
3,083.6
Government
Sponsored Agency
5,540.0
5,613.6
8,942.2
9,063.0
7,682.1
7,793.6
2,430.8
2,486.5
24,595.1
24,956.7
Non-U.S. Government
Corporate Debt
Covered Bonds
Sub-Sovereign,
Supranational
and Non-U.S. Agency Bonds
Other Asset-Backed
Commercial Mortgage-Backed
414.3
443.5
108.2
163.9
517.4
12.0
414.6
448.6
108.6
164.1
525.9
12.1
40.6
40.8
258.7
258.6
2,016.4
2,091.0
434.9
444.5
1,960.8
2,024.0
2,903.1
2,937.8
413.5
441.2
—
—
157.0
436.0
526.7
—
—
157.7
436.8
578.5
—
—
—
—
97.0
—
—
713.6
714.0
—
2,459.9
2,539.6
—
543.1
553.1
—
2,281.7
2,345.8
97.0
3,953.5
3,997.5
—
952.2
1,031.8
Total
$
7,508.1 $ 7,598.7 $
18,696.4
$ 19,076.1
$ 12,334.0
$12,673.3 $ 2,617.2 $ 2,673.9
$41,155.7
$42,022.0
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
110 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities Available for Sale with Unrealized Losses. The following table provides information regarding debt
securities available for sale with no credit losses reported that had been in a continuous unrealized loss position for less
than twelve months and for twelve months or longer as of December 31, 2020 and 2019.
TABLE 62: DEBT SECURITIES AVAILABLE FOR SALE IN UNREALIZED LOSS POSITION WITH NO CREDIT LOSSES REPORTED
AS
OF
DECEMBER
31, 2020
LESS
THAN
12 MONTHS
12
MONTHS
OR LONGER
TOTAL
(In Millions)
FAIR UNREALIZED
LOSSES
VALUE
FAIR UNREALIZED
LOSSES
VALUE
FAIR UNREALIZED
LOSSES
VALUE
Obligations
of
States
and
Political Subdivisions
$
52.3
$
0.1
$
— $
— $
52.3
$
Government
Sponsored Agency
2,402.3
13.6
2,528.7
13.3
4,931.0
Non-U.S.
Government
Corporate Debt
Sub-Sovereign,
Supranational
and
Non-U.S.
Agency Bonds
Other Asset-Backed
Commercial Mortgage-Backed
Total
90.5
66.6
162.8
176.8
44.4
0.7
0.1
0.5
0.2
0.1
—
—
49.9
792.3
—
—
—
0.1
2.6
—
90.5
66.6
212.7
969.1
44.4
$
2,995.7
$
15.3
$
3,370.9
$
16.0 $
6,366.6 $
31.3
0.1
26.9
0.7
0.1
0.6
2.8
0.1
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
Corporate Debt
Covered Bonds
Sub-Sovereign,
Supranational
and
Non-U.S.
Agency Bonds
Other Asset-Backed
Commercial Mortgage-Backed
Total
FAIR UNREALIZED
LOSSES
VALUE
FAIR UNREALIZED
LOSSES
VALUE
FAIR UNREALIZED
LOSSES
VALUE
$
252.2
$
2.8
$
899.7
$
2.3
$
1,151.9
$
902.4
5,405.0
279.3
138.7
217.5
592.4
62.8
13.3
35.6
1.1
0.7
1.0
1.8
0.7
—
7,818.4
492.7
25.0
155.2
1,164.9
59.3
—
902.4
42.5
13,223.4
2.9
0.1
0.1
3.5
0.2
772.0
163.7
372.7
1,757.3
122.1
5.1
13.3
78.1
4.0
0.8
1.1
5.3
0.9
$
7,850.3
$
57.0
$
10,615.2
$
51.6
$
18,465.5
$
108.6
As of December 31, 2020, 412 debt securities available for sale with a combined fair value of $6.4 billion were in an
unrealized loss position, with their unrealized losses totaling $31.3 million. Unrealized losses related to debt securities
available for sale of $26.9 million and $2.8 million related to government sponsored agency and other asset-backed
securities, respectively, are primarily attributable to changes in market interest rates and credit spreads since their purchase.
As of December 31, 2020, 16% of the corporate debt securities available for sale portfolio were backed by guarantees
provided by U.S. and non-U.S. governmental entities. The remaining unrealized losses on Northern Trust’s debt securities
available for sale portfolio as of December 31, 2020 are attributable to changes in overall market interest rates or credit
spreads.
As of December 31, 2020, Northern Trust did not intend to sell any debt securities available for sale 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.
There was no provision for corporate debt securities available for sale for the year ended December 31, 2020 and no
allowance for credit losses for corporate debt securities available for sale as of December 31, 2020.
2020 Annual Report | Northern Trust Corporation 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities Held to Maturity. The following tables provide the amortized cost, fair values and remaining
maturities of debt securities held to maturity.
TABLE 63: 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, 2020
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
$
90.0
$
—
$
—
$
2.1
3.0
8,336.6
588.0
3,184.6
807.2
3,648.0
677.0
454.6
0.1
0.3
7.3
6.5
24.6
—
43.5
0.9
1.1
—
—
0.2
0.1
0.3
—
0.9
—
76.5
FAIR
VALUE
90.0
2.2
3.3
8,343.7
594.4
3,208.9
807.2
3,690.6
677.9
379.2
$
17,791.1
$
84.3
$
78.0
$
17,797.4
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
As of December 31, 2020, the $17.8 billion debt securities held to maturity portfolio had an unrealized loss of $76.5
million related to other residential mortgage-backed securities, which are primarily attributable to changes in overall
market interest rates and credit spreads since their purchase.
TABLE 64: REMAINING MATURITY OF DEBT SECURITIES HELD TO MATURITY
DECEMBER
31, 2020
ONE
YEAR
OR
LESS
ONE
TO
FIVE YEARS
FIVE
TO
TEN YEARS
OVER
TEN YEARS
TOTAL
(In Millions)
U.S. Government
Amortized
Cost
Fair
Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
90.0
$
90.0
$
—
$
—
$
—
$
—
$
—
$
—
$
90.0
$
90.0
of
States
Obligations
Political Subdivisions
Government
and
Sponsored Agency
Non-U.S. Government
Corporate Debt
Covered Bonds
1.4
0.5
1.4
0.5
8,065.4
8,065.5
126.2
126.3
0.7
1.3
271.2
461.8
0.8
1.4
278.2
468.1
1,283.7
1,289.5
1,836.3
1,854.7
Certificates
of Deposit
807.2
807.2
—
—
—
0.8
—
—
64.6
—
—
0.9
—
—
64.7
—
Sub-Sovereign,
Supranational
and Non-U.S. Agency Bonds
Other Asset-Backed
Other
Total
943.2
239.4
36.6
947.2
239.7
36.0
2,354.8
2,393.4
350.0
350.0
433.4
247.7
433.9
230.3
4.2
53.7
4.3
48.2
—
0.4
—
—
—
—
—
—
—
0.5
—
—
—
—
—
—
116.6
64.7
2.1
3.0
2.2
3.3
8,336.6
8,343.7
588.0
594.4
3,184.6
3,208.9
807.2
807.2
3,648.0
3,690.6
677.0
454.6
677.9
379.2
$
11,593.6
$11,603.3 $
5,607.2 $
5,660.8 $
473.3 $
468.1 $
117.0 $
65.2
$17,791.1
$17,797.4
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
112 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt securities held to maturity consist of securities that management intends to, and Northern Trust has the ability to, hold
until maturity. During the year ended December 31, 2020, $301.5 million securities reflected in U.S. government were
transferred from available for sale to held to maturity, all of which were transferred in the second quarter of 2020. During
the year ended December 31, 2019, $160.8 million securities reflected in covered bonds were transferred from available for
sale to held to maturity.
Credit Quality Indicators. The following table provides the amortized cost of debt securities held to maturity by credit
rating.
TABLE 65: AMORTIZED COST OF DEBT SECURITIES HELD TO MATURITY BY CREDIT RATING
(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
Other Asset-Backed
Other
Total
Percent
of Total
AAA
AA
A
BBB
NOT RATED
TOTAL
AS OF DECEMBER 31, 2020
$
—
1.0
—
$
—
—
—
$
90.0
$
—
3.0
319.8
3.8
3,184.6
—
1,337.4
279.1
—
—
677.0
—
—
—
6,630.6
305.1
—
—
—
—
—
$
—
1.1
—
48.8
—
—
—
—
—
—
—
—
—
—
—
—
807.2
—
—
454.6
$
90.0
2.1
3.0
8,336.6
588.0
3,184.6
807.2
3,648.0
677.0
454.6
$
6,869.1
$
2,674.6
$
6,935.7
$
49.9
$
1,261.8
$
17,791.1
39 %
15 %
39 %
— %
7 %
100 %
Sub-Sovereign,
Supranational
and
Non-U.S.
Agency Bonds
2,590.9
1,057.1
Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. Northern
Trust maintains a high quality debt securities portfolio, with 93% of the held to maturity portfolio at December 31, 2020
comprised of securities rated A or higher. The remaining held to maturity debt securities portfolio was comprised of 7%
not rated by Moody’s Investors Service, Standard and Poor’s, or Fitch Ratings. Securities not explicitly rated were grouped
where possible under the credit rating of the issuer of the security.
Investment Security Gains and Losses. Proceeds of $879.9 million, $1.2 billion, and $307.3 million in 2020, 2019, and
2018, respectively, from the sale of debt securities resulted in the following gains and losses shown in the following table.
TABLE 66: 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,
2020
3.4
$
(3.8)
—
(0.4)
$
2019
2.4
$
(3.5)
(0.3)
(1.4)
$
$
$
2018
1.5
(2.0)
(0.5)
(1.0)
(1)
Other-than-temporary
impairment
losses
relate
to
certain
Community
Reinvestment
Act
(CRA)
eligible
held
to
maturity
debt securities.
2020 Annual Report | Northern Trust Corporation 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Northern Trust participates in the repurchase agreement market as a relatively low cost alternative for short-term funding.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as
collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To
minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is
monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly
assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities
purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the
repurchase.
The following tables summarize information related to Securities Purchased under Agreements to Resell and Securities
Sold under Agreements to Repurchase.
TABLE 67: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
($
In Millions)
Balance
Average
Average
Maximum
at
Balance
Interest
December 31
During
Rate
Month-End
Earned
Balance
the Year
During
the Year
During
the Year
TABLE 68: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
($
In Millions)
Balance
Average
Average
Maximum
at
Balance
Interest
December 31
During
Rate
Month-End
the Year
During
Paid
Balance
the Year
During
the Year
2020
2019
$
1,596.5
1,253.1
$
707.8
835.0
0.31 %
2.10 %
$
2,055.6
$
1,290.0
2020
39.8
218.3
0.47 %
269.8
$
$
$
2019
489.7
339.0
1.89 %
$
489.7
TABLE 69: REPURCHASE AGREEMENTS ACCOUNTED FOR AS SECURED BORROWINGS
REMAINING
CONTRACTUAL
MATURITY
OF
AGREEMENTS
THE
($
In Millions)
U.S.
and
Treasury
Total Borrowings
Gross
of
related
Amounts
Amount
Agency Securities
$
Recognized
to
agreements
Liabilities
for
included
Repurchase
Note 28
in
not
Agreements
in
Note 28
OVERNIGHT
AND CONTINUOUS
December
31, 2020
December
31, 2019
$
39.8
39.8
39.8
—
489.7
489.7
489.7
—
114 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Loans and Leases
Amounts outstanding for Loans and Leases, by segment and class, are shown in the following table. During the first quarter
of 2020, the Corporation implemented a change in the classification of certain loans and leases to specific segments to
enhance the consistency of its reporting across various regulatory regimes. As a result, the loan and lease balances as of
December 31, 2019 below have been adjusted to conform to the presentation for periods ended after such date. The
adjustments generally reflect reclassification of loans from the commercial real estate class to commercial and institutional,
residential real estate, and private client classes. There was no impact on total Loans and Leases previously reported.
TABLE 70: 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
Non-U.S.
Other
Total Personal
Total
Loans
and Leases
DECEMBER 31,
2020
2019
$
10,058.3
$
3,558.4
1,345.7
11.4
288.2
9,091.1
3,104.3
1,576.3
65.6
164.0
15,262.0
14,001.3
11,815.1
6,035.7
597.9
49.0
18,497.7
$
33,759.7
$
11,071.4
6,095.0
174.8
67.1
17,408.3
31,409.6
Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan-
to-collateral value ratio of no more than 65% to 80% at inception. Northern Trust’s equity credit line products generally
have draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are
interest-only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert
the outstanding balance to an amortizing payment loan. As of December 31, 2020 and 2019, equity credit lines totaled
$304.4 million and $448.5 million, respectively, and equity credit lines for which first liens were held by Northern Trust
represented 97% and 97%, 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 at each of December 31, 2020 and 2019.
Demand deposit overdrafts reclassified as loan balances totaled $26.4 million and $90.4 million at December 31, 2020 and
2019, respectively.
As of December 31, 2020, there were no loans or leases classified as held for sale. As of December 31, 2019, there
were no loans and $53.6 million of leases, respectively, classified as held for sale related to the decision to sell substantially
all of the lease portfolio.
2020 Annual Report | Northern Trust Corporation 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net investment in direct finance and leveraged leases are as follows:
TABLE 71: 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,
2020
2019
$
—
$
—
—
—
—
11.8
—
(0.4)
11.4
11.4
$
$
1.5
21.3
0.2
—
23.0
19.1
33.1
(9.6)
42.6
65.6
Paycheck Protection Program. In response to the COVID-19 pandemic, Northern Trust became a lender under the
Paycheck Protection Program, as amended (PPP), which was created by the Coronavirus Aid, Relief, and Economic
Security (CARES) Act and is administered by the U.S. Small Business Administration (SBA). Loans issued under the PPP
are funded by Northern Trust directly to participating borrowers. The PPP loans are guaranteed by the SBA and borrowers
are eligible to apply for PPP loan forgiveness for up to the full principal amount and accrued interest of the PPP loan.
To the extent a borrower uses PPP loan proceeds to cover eligible costs and has met all other SBA loan forgiveness
requirements, the SBA will determine loan forgiveness under the CARES Act and will pay to Northern Trust the eligible
PPP loan forgiven amount, which will be credited to the borrower’s loan to repay or pay down the PPP loan. The SBA
forgiveness portal opened on August 10, 2020 and Northern Trust’s vendor portal opened on September 11, 2020 to begin
processing the PPP loan forgiveness applications. When Northern Trust submits forgiveness applications to the SBA, the
SBA will have at least 90 days to respond as to the approval or denial of such application. 41 PPP loan forgiveness
applications went through the forgiveness process as of December 31, 2020, and 36 of those loans, totaling $6.7 million,
were fully forgiven by the SBA as of such date.
As of December 31, 2020, Northern Trust had 1,087 outstanding loans totaling $207.1 million under the PPP in its
commercial and institutional portfolio with an average loan balance of $0.2 million. For its origination efforts, Northern
Trust received approximately $2.6 million in SBA fees, net of service charges, as of December 31, 2020.
Northern Trust accounts for loans originated under the PPP as loan receivables in accordance with Accounting
Standards Codification (ASC) 310 and recognizes such loans at the principal amount less the net amount of loan
origination fees. PPP loans are reported in Total Loans and Leases on the consolidated balance sheets.
The SBA provides a 100% guarantee on PPP loans covering principal and interest. Northern Trust considers the risk
mitigating effects of these guarantees, and accounts for them as a credit enhancement embedded in the contract. As a result,
no allowance for credit losses is measured for Northern Trust’s exposure under the PPP.
Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information
regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess
the credit risk of loans and leases at the segment, class, and individual credit exposure levels.
As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification,
approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting and management reporting.
Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated
using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary
among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of
credit exposure. Provided below are the more significant performance indicator attributes considered within Northern
Trust’s borrower rating models, by loan and lease class.
116 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• 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 as of December 31, 2020 are provided in the following table, segregated by
borrower ratings into “1 to 3,” “4 to 5” and “6 to 9” (watch list and nonaccrual status) categories by year of origination at
amortized cost basis. Loans that are held for investment are reported at the principal amount outstanding, net of unearned
income.
2020 Annual Report | Northern Trust Corporation 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 72: CREDIT QUALITY INDICATOR AT AMORTIZED COST BASIS BY ORIGINATION YEAR
DECEMBER 31, 2020
(In Millions)
Commercial
Commercial
and Institutional
Risk Rating:
TERM
LOANS
AND LEASES
2020
2019
2018
2017
2016
PRIOR
REVOLVING
LOANS
REVOLVING LOANS
CONVERTED
TO
TERM LOANS
TOTAL
$
663.8 $
793.4
34.3
1,491.5
546.0 $
505.1
119.8
1,170.9
$
204.6
354.1
37.3
596.0
$
96.0
405.4
42.8
544.2
$
396.0
134.6
23.0
553.6
$
448.8
167.3
6.0
622.1
$
3,742.4
1,238.7
61.1
5,042.2
406.3
703.1
15.3
1,124.7
109.2
811.8
55.2
976.2
27.6
332.7
32.0
392.3
36.5
107.4
25.8
169.7
11.8
184.5
—
196.3
555.2
313.1
—
868.3
16.8
0.7
23.1
40.6
—
—
—
—
—
2.0
—
2.0
—
—
11.1
—
—
11.1
—
—
—
—
—
—
—
—
99.4
382.8
12.2
494.4
—
157.9
—
157.9
11.4
11.4
124.3
60.4
—
184.7
78.5
39.2
146.3
264.0
—
—
81.7
206.5
288.2
3,772.7
—
—
—
2,187.7
—
—
—
990.3
—
—
—
725.0
—
—
—
749.9
—
—
—
1,285.8
—
—
—
5,490.9
5.5
32.3
—
37.8
$
6,103.1
3,630.9
324.3
10,058.3
8.7
11.4
—
20.1
823.8
2,594.1
140.5
3,558.4
—
1.8
—
1.8
—
—
661.6
514.7
169.4
1,345.7
11.4
11.4
—
—
—
59.7
81.7
206.5
288.2
15,262.0
668.6
492.1
6.0
1,166.7
1,554.3
854.6
15.3
2,424.2
23.3
12.7
—
36.0
273.7
479.9
0.5
754.1
317.4
359.5
8.3
685.2
14.9
26.0
—
40.9
51.7
117.3
22.1
191.1
42.9
115.8
0.7
159.4
—
11.8
—
11.8
60.4
60.4
3.2
124.0
109.9
163.2
0.5
273.6
—
0.5
—
0.5
10.2
77.5
—
87.7
136.1
77.5
—
213.6
5,392.8
3,564.7
63.7
9,021.2
47.9
207.3
1.5
256.7
6,641.4
5,076.7
97.0
11,815.1
205.1
209.7
1.9
416.7
627.8
896.5
94.8
1,619.1
—
0.5
—
0.5
1.8
7.9
0.3
10.0
152.8
273.1
22.5
448.4
275.6
217.5
—
493.1
1.7
7.4
—
9.1
3,011.9
2,879.8
144.0
6,035.7
—
5.1
—
5.1
315.6
282.0
0.3
597.9
1
4
6
to
to
to
3 Category
5 Category
9 Category
Total Commercial
and Institutional
Commercial
Real Estate
Risk Rating:
1
4
6
to
to
to
3 Category
5 Category
Category
9
Total Commercial Real Estate
Non-U.S.
Risk Rating:
1
4
6
to
to
to
3 Category
5 Category
9 Category
Total Non-U.S.
Lease
Financing, net
Risk Rating:
4
to
5 Category
Total Lease Financing, net
Other
Risk Rating:
3 Category
5 Category
1
4
to
to
Total Other
Total Commercial
Personal
Private Client
Risk Rating:
1
4
6
to
to
to
3 Category
5 Category
9 Category
Total Private Client
Residential Real Estate
Risk Rating:
1 to 3 Category
4 to 5 Category
6 to 9 Category
Total Residential Real Estate
Non-U.S.
Risk Rating:
1 to 3 Category
4 to 5 Category
6 to 9 Category
Total Non-U.S.
Other
Risk Rating:
1 to 3 Category
4 to 5 Category
Total Other
34.6
14.4
49.0
3,675.9
$ 7,448.6 $ 3,667.9 $ 1,352.6 $ 1,123.1 $ 1,254.8 $ 3,128.5 $ 15,453.6 $
—
—
—
1,480.2
—
—
—
1,842.7
—
—
—
9,962.7
—
—
—
504.9
—
—
—
398.1
—
—
—
362.3
—
—
—
270.9
330.6
34.6
14.4
49.0
18,497.7
$33,759.7
Total Personal
Total Loans and Leases
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
118 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 nonaccrual credits, are
expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default.
Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows
and capital levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse
down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable
likelihood of loss.
For credit quality indicator information that was required under the former provisions of ASC Topic 310, please refer
to Note 6, “Loans and Leases” included under Item 8, “Financial Statements and Supplementary Data” in the Annual
Report on Form 10-K for the year ended December 31, 2019.
Past Due Status. Past due status is based on the length of time from the contractual due date a principal or interest
payment has been past due. For disclosure purposes, loans and leases that are 29 days past due or less are reported as
current.
The following table provides balances and delinquency status of accrual and nonaccrual loans and leases by segment
and class, as well as the other real estate owned and nonaccrual asset balances, as of December 31, 2020 and 2019.
TABLE 73: DELINQUENCY STATUS
ACCRUAL
CURRENT
30 –
59 DAYS
PAST DUE
60 –
89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
ACCRUAL NONACCRUAL
TOTAL LOANS
AND LEASES
NONACCRUAL
NO
WITH
ALLOWANCE
(In Millions)
December
31, 2020
Commercial
Commercial
Institutional
and
Commercial
Real Estate
Non-U.S.
Lease
Financing, net
Other
$
9,877.0
$
153.7
$
1.2
$
—
$
10,031.9
$
26.4
$
10,058.3
$
3,516.2
1,345.7
11.4
288.2
2.0
—
—
—
—
—
—
—
3,518.2
1,345.7
11.4
288.2
40.2
—
—
—
3,558.4
1,345.7
11.4
288.2
—
15,195.4
66.6
15,262.0
Total Commercial
15,038.5
155.7
Personal
Private Client
Residential
Real Estate
Non-U.S.
Other
Total Personal
11,765.4
5,946.0
596.7
49.0
18,357.1
29.1
23.5
1.2
—
53.8
7.8
11,812.2
1.1
—
—
5,973.5
597.9
49.0
12.8
8.9
18,432.6
Total
Loans
and Leases
$
33,395.6 $
209.5 $
14.0
$
8.9 $ 33,628.0
Other
Real
Estate Owned
$
$
Total
Nonaccrual Assets
$
2.9
62.2
—
—
65.1
11,815.1
6,035.7
597.9
49.0
18,497.7
131.7 $
33,759.7 $
0.7
132.4
—
—
—
—
1.2
9.9
2.9
—
—
9.1
32.3
—
—
—
41.4
2.9
53.8
—
—
56.7
98.1
2020 Annual Report | Northern Trust Corporation 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions)
December
31, 2019
Commercial
Commercial
Institutional
and
Commercial
Real Estate
Non-U.S.
Lease
Financing, net
Other
Total Commercial
Personal
Private Client
Residential
Real Estate
Non-U.S
Other
Total Personal
ACCRUAL
CURRENT
30 –
59 DAYS
PAST DUE
60 –
89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
ACCRUAL NONACCRUAL
TOTAL LOANS
AND LEASES
NONACCRUAL
NO
WITH
ALLOWANCE
$
9,068.3
$
4.1 $
9.9
$
1.2
$
9,083.5
$
7.6
$
9,091.1
$
3,089.6
1,576.3
65.6
164.0
13,963.8
11,027.9
5,997.7
174.1
67.1
17,266.8
2.3
—
—
—
6.4
33.2
19.8
0.2
—
53.2
4.1
—
—
—
4.7
—
—
—
3,100.7
1,576.3
65.6
164.0
3.6
—
—
—
3,104.3
1,576.3
65.6
164.0
14.0
5.9
13,990.1
11.2
14,001.3
9.5
4.9
—
—
0.3
1.2
—
—
11,070.9
6,023.6
174.3
67.1
14.4
1.5
17,335.9
0.5
71.4
0.5
—
72.4
11,071.4
6,095.0
174.8
67.1
17,408.3
0.8
2.4
—
—
—
3.2
0.5
66.4
0.5
—
67.4
70.6
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
Nonaccrual Assets
$
3.2
86.8
Interest income that would have been recorded for nonaccrual loans and leases in accordance with their original terms was
$4.6 million in 2020, $7.3 million in 2019, and $8.0 million in 2018.
Collateral Dependent Financial Assets. A financial asset is collateral-dependent when the borrower is experiencing
financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral.
Most of Northern Trust’s collateral dependent credit exposure relates to its residential real estate portfolio for which the
collateral is usually the underlying real estate property. For collateral dependent financial assets, it is Northern Trust’s
policy to reserve or charge-off the difference between the amortized cost basis of the loan and the value of the collateral.
The collateral dependent financial asset balance as of December 31, 2020 was immaterial to Northern Trust’s financial
statements.
Nonaccrual Loans and Troubled Debt Restructurings (TDRs). A loan that has been modified as a concession by
Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties is referred to as a troubled debt
restructuring (TDR). Included within nonaccrual loans were $38.9 million and $54.9 million of nonaccrual TDRs and
$29.3 million and $27.7 million of accrual TDRs as of December 31, 2020 and 2019, respectively. There were $10.4
million and $8.2 million of aggregate undrawn loan commitments and standby letters of credit at December 31, 2020 and
2019, respectively, issued to borrowers with TDR modifications of loans.
120 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides, by segment and class, the number of TDR modifications of loans and leases during the years
ended December 31, 2020, and 2019, and the recorded investments and unpaid principal balances as of December 31, 2020
and 2019.
TABLE 74: TROUBLED DEBT RESTRUCTURINGS
($
In Millions)
December
31, 2020
Commercial
Commercial
and Institutional
Total Commercial
Personal
Residential
Real Estate
Total Personal
Total
Loans
and Leases
Note:
Period-end
balances
reflect
all
paydowns
and
charge-offs
during
the year.
($
In Millions)
December
31, 2019
Commercial
Commercial
and Institutional
Commercial
Real Estate
Total Commercial
Personal
Residential
Real Estate
Total Personal
Total
Loans
and Leases
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
$
3
3
22
22
24.3
$
24.3
16.2
16.2
25
$
40.5
$
24.5
24.5
16.7
16.7
41.2
NUMBER OF
LOANS AND
LEASES
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
$
1
2
3
45
45
7.5
$
—
7.5
37.4
37.4
48
$
44.9
$
8.8
—
8.8
38.8
38.8
47.6
Note: Period-end balances reflect all paydowns and charge-offs during the year.
TDR modifications 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, 2020, the TDR modifications of loans within residential real estate were
primarily extensions of term, other modifications, deferrals of principal, and interest rate concessions. During the year
ended December 31, 2020, TDR modifications of loans within commercial and institutional were other modifications and
extensions of term.
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 and commercial real estate
were other modifications, extensions of term, and deferrals of principal.
There were zero loans or leases TDR modifications during the previous twelve-month period which subsequently had
a payment default during the year ended December 31, 2020.
There were five loans or leases TDR modifications during the previous twelve-month period which subsequently had a
payment default 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.
Northern Trust may obtain physical possession of real estate via foreclosure on an in-substance repossession. As of
December 31, 2020 and 2019, Northern Trust held foreclosed real estate properties with a carrying value of $0.7 million
and $3.2 million, respectively, as a result of obtaining physical possession. In addition, as of December 31, 2020 and 2019,
Northern Trust had loans with a carrying value of $7.9 million and $18.1 million, respectively, for which formal
foreclosure proceedings were in process.
TDR Relief — COVID-19. Due to the economic environment arising from the COVID-19 pandemic, there have been two
forms of relief provided for classifying loans as TDRs: the Interagency Guidance (as defined below) and the CARES Act.
Various banking regulators, including the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the
2020 Annual Report | Northern Trust Corporation 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consumer Financial Protection Bureau, have issued guidance in the April 7, 2020 Interagency Statement on Loan
Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (revised) on
loan modification treatment (Interagency Guidance) pursuant to which financial institutions can apply ASC 310-40
Receivables – Troubled Debt Restructurings by Creditors. In accordance with the Interagency Guidance, a loan
modification is not considered a TDR if the modification is related to COVID-19; the borrower had been current (not more
than 29 days past due) when the modification program was implemented; and the modification includes payment deferrals
for not more than 6 months.
Under section 4013 of the CARES Act, relief provided to lenders exempting certain loan modifications which would
otherwise be classified as TDRs from such classification applies for loans that were not more than 30 days past due as of
December 31, 2019. The TDR relief under the CARES Act applies to COVID-19-related modifications that were made
from March 1, 2020 until the earlier of (a) January 1, 2022 (this date was updated from December 31, 2020, after the
Consolidated Appropriations Act, 2021 was enacted on December 27, 2020) or (b) 60 days from the date the COVID-19
national emergency officially ends.
Financial institutions may account for eligible loan modifications under the Interagency Guidance and/or the CARES
Act. Northern Trust has elected to apply both the CARES Act and the Interagency Guidance, as applicable, in providing
borrowers with loan modification relief in response to the COVID-19 pandemic. All other types of modifications which do
not meet the CARES Act or Interagency Guidance requirements continue to be governed by existing regulations and
accounting policies.
The following tables provide, by segment and class, the number of total COVID-19-related loan modifications
including the loan volume and deferred principal and interest balances as of December 31, 2020, for which Northern Trust
applied an exemption from TDR classification that are in active deferral (loans currently in the deferral period) or
completed deferral (loans that returned to their regular payment schedule).
TABLE 75: COVID-19 LOAN MODIFICATIONS NOT CONSIDERED TDRS IN ACTIVE DEFERRAL STATUS
($ In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Private Client
Residential Real Estate
Total Personal
Total Loans
NUMBER OF COVID-19
RELATED MODIFICATIONS
LOAN VOLUME
DEFERRED PRINCIPAL
AMOUNT
DEFERRED INTEREST
AMOUNT
DECEMBER 31, 2020
1 $
1
2 $
8 $
21
29 $
31 $
6.0 $
0.7
6.7 $
8.9 $
5.1
14.0 $
20.7 $
— $
—
— $
0.1 $
0.1
0.2 $
0.2 $
—
—
—
0.1
0.1
0.2
0.2
TABLE 76: COVID-19 LOAN MODIFICATIONS NOT CONSIDERED TDRS THAT HAVE COMPLETED DEFERRAL
($ In Millions)
Commercial
Commercial and Institutional
Commercial Real Estate
Total Commercial
Personal
Private Client
Residential Real Estate
Total Personal
Total Loans
NUMBER OF COVID-19
RELATED MODIFICATIONS
LOAN VOLUME
DEFERRED PRINCIPAL
AMOUNT
DEFERRED INTEREST
AMOUNT
DECEMBER 31, 2020
99 $
97
196 $
27 $
412
439 $
635 $
249.3 $
467.8
717.1 $
171.9 $
182.7
354.6 $
1,071.7 $
0.1 $
—
0.1 $
— $
1.6
1.6 $
1.7 $
2.2
3.2
5.4
1.1
2.2
3.3
8.7
Not included in the table above are 57 loans with a previous $63.0 million loan balance that had been granted payment
deferrals but have since paid off.
122 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Northern Trust continues to accrue and recognize interest income during the loan deferral period, and hence has not moved
these loans to nonaccrual or reported them as past due. Further, these loan balances continue to be assessed on a collective
basis for purposes of measuring an allowance for expected credit losses.
Note 7 – Allowance for Credit Losses
During the first quarter of 2020, the Corporation implemented a change in the classification of certain loans and leases to
specific segments to enhance the consistency of its reporting across various regulatory regimes. The allowance for credit
losses as of and prior to December 31, 2019 remains unadjusted, as the impact of the reclassification on the allowance was
immaterial.
The Corporation adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—Credit Losses:
Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) on January 1, 2020, which significantly changed
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. An opening balance sheet adjustment related to the
adoption of ASU 2016-13 resulted in an increase to the allowance for credit losses of $13.7 million, with a corresponding
adjustment to decrease retained earnings by $10.1 million, net of tax.
Allowance and Provision for Credit Losses. The allowance for credit losses — which represents management’s best
estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit
exposures, and specific borrower relationships — is determined by management through a disciplined credit review
process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective
basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets
and the related allowance is determined through an individual evaluation.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent
on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many
of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current
conditions and reasonable and supportable forecasts. Northern Trust employs multiple scenarios over a reasonable and
supportable period of currently two years to project future conditions. For periods beyond the reasonable and supportable
period, Northern Trust reverts to its own historical loss experiences on a straight-line basis over four quarters. The primary
forecast, consistent with Northern Trust’s economic outlook publications, assumes continued economic recovery from the
challenges of COVID-19, with steady growth and a falling unemployment rate over the forecast horizon. An alternative
scenario is also considered, which contemplates a resurgence of the virus, causing a double-dip recession.
The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss
Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic
Research group, and each of Northern Trust’s business units. The Credit Loss Reserve Committee determines the
probability weights applied to each forecast approved by Northern Trust’s Macroeconomic Scenario Development
Committee, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s
qualitative adjustment framework.
The following table provides information regarding changes in the total allowance for credit losses.
TABLE 77: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
LOANS
AND
LEASES
UNDRAWN
LOAN
COMMITMENTS
STANDBY
OF CREDIT
AND
LETTERS
2020
DEBT
SECURITIES
TO
HELD
MATURITY
OTHER
FINANCIAL
ASSETS
(In Millions)
Balance
at
End
of
Prior Period
$
Cumulative
Effect Adjustment
Balance
at
Beginning
of Period
Charge-Offs
Recoveries
Net
Recoveries (Charge-Offs)
Provision
for
Credit Losses
Balance
at
End
of Period
104.5 $
(2.2)
102.3
(9.7)
6.5
(3.2)
91.6
$
190.7
$
19.9
$
— $
— $
8.9
28.8
—
—
—
32.3
61.1
$
6.6
6.6
—
—
—
0.7
7.3
$
0.4
0.4
—
—
—
0.4
0.8 $
TOTAL
124.4
13.7
138.1
(9.7)
6.5
(3.2)
125.0
259.9
2020 Annual Report | Northern Trust Corporation 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2019
(In Millions)
Balance
at
Beginning
of Period
Charge-Offs
Recoveries
Net
Recoveries (Charge-Offs)
Provision
for
Credit Losses
Balance
at
End
of Period
$
$
LOANS
AND LEASES
AND
STANDBY
UNDRAWN
LOAN
COMMITMENTS
OF CREDIT
LETTERS
112.6
$
(6.5)
7.2
0.7
(8.8)
104.5
$
25.6 $
—
—
—
(5.7)
19.9 $
2018
(In Millions)
LOANS
AND
LEASES
AND
STANDBY
UNDRAWN
LOAN
COMMITMENTS
OF CREDIT
LETTERS
Balance
at
Beginning
of Period
$
Charge-Offs
Recoveries
Net
Recoveries (Charge-Offs)
Provision
for
Credit Losses
Balance
at
End
of Period
$
131.2
$
(10.1)
9.0
(1.1)
(17.5)
112.6
$
22.6 $
—
—
—
3.0
25.6 $
TOTAL
138.2
(6.5)
7.2
0.7
(14.5)
124.4
TOTAL
153.8
(10.1)
9.0
(1.1)
(14.5)
138.2
The current-year provision primarily reflected an increase in the reserve evaluated on a collective basis. The increase in the
collective basis reserve was primarily driven by current and projected economic conditions and downgrades in the
portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with increases
primarily in the commercial and institutional and commercial real estate portfolios.
For credit exposure and the associated allowance related to fee receivables, please refer to Note 18, “Revenue from
Contracts with Clients.” For information related to the allowance for debt securities available for sale, please refer to
Note 4, “Securities.” For all other financial assets recognized at amortized cost, which include Cash and Due from Banks,
Other Central Bank Deposits, Interest Bearing Deposits with Banks, Federal Funds Sold, and Other Assets, please refer to
the Allowance for Other Financial Assets section within this footnote.
Allowance for the Loan and Lease Portfolio. The following table provides information regarding changes in the total
allowance for credit losses, including undrawn loan commitments and standby letters of credit, by segment.
TABLE 78: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO LOANS AND LEASES
LOANS
AND LEASES
2020
UNDRAWN
LOAN
COMMITMENTS
AND
STANDBY
LETTERS
OF CREDIT
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
TOTAL
Balance
at
End
of
Prior Period
$
58.1
$
Cumulative
Effect Adjustment
Balance
at
Beginning
of Period
Charge-Offs
Recoveries
Net
Recoveries
(Charge-Offs)
Provision
for
Credit Losses
(5.9)
52.2
(6.3)
2.4
(3.9)
93.9
Balance at End
of Period
$
142.2
$
46.4
$
3.7
50.1
(3.4)
4.1
0.7
(2.3)
48.5
$
104.5
$
(2.2)
102.3
(9.7)
6.5
(3.2)
91.6
190.7
$
15.8
$
11.9
27.7
—
—
—
29.9
57.6
$
4.1
$
(3.0)
1.1
—
—
—
2.4
3.5
$
19.9
8.9
28.8
—
—
—
32.3
61.1
124 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS AND LEASES
2019
UNDRAWN
LOAN
COMMITMENTS
AND
LETTERS
OF CREDIT
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
Balance
at
Beginning
of Period
$
Charge-Offs
Recoveries
Net
Recoveries (Charge-Offs)
Provision
for
Credit Losses
57.6
$
(3.0)
0.9
(2.1)
2.6
Balance
at
End of Period
$
58.1
$
55.0
$
(3.5)
6.3
2.8
(11.4)
46.4
$
112.6
$
(6.5)
7.2
0.7
(8.8)
104.5 $
2018
21.1
$
4.5
$
—
—
—
(5.3)
15.8
$
—
—
—
(0.4)
4.1
$
STANDBY
TOTAL
25.6
—
—
—
(5.7)
19.9
(In Millions)
COMMERCIAL
PERSONAL
TOTAL
COMMERCIAL
PERSONAL
LOANS
AND LEASES
UNDRAWN
LOAN
COMMITMENTS
AND
LETTERS
OF CREDIT
Balance
at
Beginning
of Period
$
Charge-Offs
Recoveries
Net
Recoveries (Charge-Offs)
Provision
for
Credit Losses
Balance
at
End
of Period
$
63.5
$
(0.9)
1.7
0.8
(6.7)
57.6
$
67.7
$
(9.2)
7.3
(1.9)
(10.8)
131.2
$
(10.1)
9.0
(1.1)
(17.5)
—
—
—
3.8
55.0
$
112.6 $
21.1
$
17.3
$
5.3
$
STANDBY
TOTAL
22.6
—
—
—
3.0
25.6
—
—
—
(0.8)
4.5
$
The increase to the allowance for both loans and leases and undrawn loan commitments and standby letters of credit for
2020 was primarily due to an increase in the reserve evaluated on a collective basis driven by current and projected
economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related
market and economic impacts. The largest increases were in the commercial and institutional and commercial real estate
portfolios for the allowance for loans and leases and the commercial and institutional portfolio for the allowance for
undrawn loan commitments and standby letters of credit.
The following table provides information regarding the recorded investments in loans and leases and the allowance for
credit losses for loans and leases and undrawn loan commitments and standby letters of credit by segment as of
December 31, 2020 and 2019.
TABLE 79: RECORDED INVESTMENTS IN LOANS AND LEASES
(In Millions)
Loans
and Leases
Evaluated
on
an
Individual Basis
Evaluated
on a
Collective Basis
Total
Loans
and Leases
Allowance
for
Credit
Losses
on Credit Exposures
Evaluated
on
an
Individual Basis
Evaluated
on a
Collective Basis
Allowance Assigned
to
Loans and Leases
Allowance
Letters
for
of Credit
Undrawn Loan
Commitments
and
Standby
Evaluated
on
an
Individual Basis
Evaluated on a Collective Basis
Allowance
Standby
Letters
of Credit
Assigned
to Undrawn
Loan Commitments and
Total
Loan
Allowance Assigned
Commitments
and
to Loans and
Letters
Standby
Leases and
of Credit
Undrawn
DECEMBER
31, 2020
DECEMBER
31, 2019
COMMERCIAL PERSONAL
TOTAL COMMERCIAL PERSONAL
TOTAL
$
66.6
$
65.1
$
131.7
$
10.4
$
81.8
$
92.2
15,195.4
18,432.6
33,628.0
13,990.9
17,326.5
31,317.4
15,262.0
18,497.7
33,759.7
14,001.3
17,408.3
31,409.6
8.8
133.4
142.2
1.6
56.0
57.6
0.3
48.2
48.5
—
3.5
3.5
9.1
181.6
190.7
1.6
59.5
61.1
3.4
54.7
58.1
1.9
13.9
15.8
1.6
44.8
46.4
—
4.1
4.1
5.0
99.5
104.5
1.9
18.0
19.9
$
199.8
$
52.0 $
251.8
$
73.9
$
50.5 $
124.4
2020 Annual Report | Northern Trust Corporation 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Debt Securities Held to Maturity Securities Portfolio. The following table provides information
regarding changes in the total allowance for credit losses for debt securities held to maturity during 2020.
TABLE 80: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO DEBT SECURITIES HELD TO MATURITY
(In Millions)
CORPORATE
DEBT
NON-U.S.
GOVERNMENT
2020
SUB-SOVEREIGN,
SUPERNATIONAL,
NON-U.S.
AGENCY BONDS
AND
COVERED
BONDS
OTHER
TOTAL
Balance
at
End
of
Prior Period
$
— $
— $
— $
— $
—
$
Cumulative
Effect Adjustment
Balance
at
Beginning of Period
Provision
for Credit Losses
Balance
at
End
of Period
0.8
0.8
—
$
0.8
$
0.3
0.3
(0.1)
0.2
$
0.9
0.9
0.3
—
—
0.1
4.6
4.6
0.4
1.2
$
0.1
$
5.0
$
—
6.6
6.6
0.7
7.3
Prior to the adoption of ASU 2016-13, Northern Trust recognized $4.4 million of cumulative Other-Than-Temporary-
Impairment (OTTI) losses on the debt securities classified as other as of December 31, 2019. For debt securities with
previous OTTI losses recorded, Northern Trust applied ASU 2016-13 on a prospective basis whereby the amortized cost
basis of the impaired security remains unchanged immediately before and after adopting ASU 2016-13. The allowance
recorded at January 1, 2020 for debt securities held to maturity equals the difference between the calculated expected loss
and the amount of OTTI loss previously recorded and represents the cumulative effect adjustment required upon the
adoption of ASU 2016-13.
The allowance attributable to debt securities held to maturity for the twelve months ended December 31, 2020 was
primarily due to the reserve evaluated on a collective basis driven by current and projected economic conditions resulting
from the ongoing COVID-19 pandemic and related market and economic impacts.
Allowance for Other Financial Assets. The allowance for Other Financial Assets consists of the allowance for Cash and
Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, Federal Funds Sold, and Other
Assets. Northern Trust’s portfolio is composed mostly of institutions within the “1 to 3” internal borrower rating category
and expected to exhibit minimal to modest likelihood of loss. The allowance for credit losses related to Other Financial
Assets was $0.8 million as of December 31, 2020.
Accrued Interest. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables
related to its loan and securities portfolios as its policy is to write-off uncollectible accrued interest receivable balances in a
timely manner. The following table provides the amount of accrued interest excluded from the amortized cost basis of the
following portfolios.
TABLE 81: ACCRUED INTEREST
(In Millions)
Loans
and Leases
Debt Securities
Held
to Maturity
Available
for Sale
Other
Financial Assets
DECEMBER
31, 2020
DECEMBER
31, 2019
55.3
$
73.8
$
106.3
1.4
$
84.5
82.3
119.0
14.7
$
$
$
The amount of accrued interest reversed through interest income for loans and leases was immaterial and there was no
accrued interest reversed through interest income related to any other financial assets during 2020.
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.
126 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Banks and Bank Holding Companies. At December 31, 2020, 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 $4.4 billion, demand
balances maintained at correspondent banks of $4.3 billion, and Securities Purchased under Agreements to Resell of $1.6
billion. 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, demand balances maintained at correspondent
banks of $4.3 billion, Securities Purchased under Agreements to Resell of $707.8 million, and Federal Funds Sold of $5.0
million. Credit risk associated with U.S. and non-U.S. banks and bank holding companies deemed to be counterparties by
Credit Risk Management is managed by the Capital Markets Credit Committee. Credit limits are established through a
review process that includes an internally-prepared financial analysis, use of an internal risk rating system and
consideration of external ratings from rating agencies. Northern Trust places deposits with banks that have strong internal
and external credit ratings and the average life to maturity of deposits with banks is maintained on a short-term basis in
order to respond quickly to changing credit conditions.
Residential Real Estate. Residential real estate loans totaled $6.0 billion at December 31, 2020 and 2019, representing
19% and 20%, respectively, of total U.S. loans and leases. 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, 2020, $1.6 billion were in Florida, $1.3 billion were in California, and $894.9 million
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 $676.1 million and $714.2 million at December 31, 2020 and 2019, 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 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 New York 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. During the first quarter of 2020, the
Corporation implemented a change in the classification of certain loans and leases to specific segments to enhance the
consistency of its reporting across various regulatory regimes. As a result, commercial real estate balances as of December
31, 2019 below have been adjusted to conform to the presentation for periods ended after such date. The adjustments
generally reflect reclassification of loans from the commercial real estate class to commercial and institutional, residential
real estate, and private client classes. There was no impact on total Loans and Leases previously reported.
TABLE 82: COMMERCIAL REAL ESTATE LOANS
(In Millions)
Commercial Mortgages
Office
Apartment/ Multi-family
Retail
Industrial/ Warehouse
Other
Total
Commercial Mortgages
Construction,
Acquisition
and
Development Loans
Total
Commercial
Real
Estate Loans
DECEMBER 31,
2020
2019
$
831.3
$
906.8
561.3
344.2
409.9
3,053.5
504.9
$
3,558.4
$
754.3
646.5
573.3
278.0
420.1
2,672.2
432.1
3,104.3
2020 Annual Report | Northern Trust Corporation 127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Buildings and Equipment
A summary of Buildings and Equipment is presented in the following table.
TABLE 83: 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
ORIGINAL
COST
DECEMBER
31, 2020
ACCUMULATED
DEPRECIATION
NET BOOK
VALUE
$
14.5
$
0.5
$
257.8
816.4
523.9
163.0
596.8
337.4
$
1,612.6
$
1,097.7
$
14.0
94.8
219.6
186.5
514.9
ORIGINAL
COST
DECEMBER
31, 2019
ACCUMULATED
DEPRECIATION
NET BOOK
VALUE
$
14.5
$
0.5
$
305.8
731.0
416.1
156.0
521.5
306.1
$
1,467.4
$
984.1
$
14.0
149.8
209.5
110.0
483.3
The charge for depreciation amounted to $116.5 million in 2020, $103.2 million in 2019, and $108.6 million in 2018 on the
consolidated statements of income.
Note 10 – Lease Commitments
At December 31, 2020, 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 years ended December 31, 2020 and 2019 were as follows.
TABLE 84: LEASE COST COMPONENTS
(In Millions)
Operating
Lease Cost
Variable
Lease Cost
Sublease Income
Total
Lease Cost
DECEMBER
31, 2020
DECEMBER
31, 2019
$
$
119.4
$
32.7
(4.8)
147.3
$
102.2
38.7
(6.6)
134.3
128 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a maturity analysis of lease liabilities as of December 31, 2020.
TABLE 85: MATURITY OF LEASE LIABILITIES
(In Millions)
2021
2022
2023
2024
2025
Later Years
Total
Lease Payments
Less:
Imputed Interest
Present
Value
of
Lease Liabilities
MATURITY
OF
LEASE
LIABILITIES
$
$
99.1
92.6
85.6
74.7
77.0
372.5
801.5
(100.9)
700.6
As of December 31, 2020, Northern Trust had commitments for operating leases in addition to the above that have not yet
commenced for approximately $32.3 million. These operating leases are for the use of office space with lease terms
between 10 and 15 years and are expected to commence during the first half of 2021.
Northern Trust uses its incremental borrowing rate to determine the present value of lease payments for operating leases.
Operating lease right-of-use (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 on the consolidated balance sheets as of December 31, 2020 and 2019 are presented in the following table.
TABLE 86: LOCATION AND AMOUNT OF LEASE ASSETS AND LIABILITIES
(In Millions)
Assets
Operating
Lease
Right-of-Use Asset
Liabilities
Operating
Lease Liability
LOCATION
AND
LEASE
OF
LEASE
LIABILITIES
BALANCE SHEET
ASSETS
ON
THE
DECEMBER
31, 2020
DECEMBER
31, 2019
Other Assets
Other Liabilities
$
$
560.5
$
491.6
700.6
$
603.1
The weighted-average remaining lease term and weighted-average discount rate applied to leases as of December 31, 2020
and 2019 were as follows:
TABLE 87: WEIGHTED-AVERAGE REMAINING LEASE TERM AND DISCOUNT RATE
Operating Leases
Weighted-Average
Remaining
Lease Term
Weighted-Average
Discount Rate
DECEMBER
31, 2020
DECEMBER
31, 2019
10.0 years
2.5 %
9.2 years
3.0 %
The following table provides supplemental cash flow information related to leases for the years ended December 31, 2020
and 2019.
TABLE 88: 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, 2020 DECEMBER 31, 2019
$
$
107.9 $
164.8 $
101.2
108.3
2020 Annual Report | Northern Trust Corporation 129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Goodwill and Other Intangibles
Goodwill. Changes by reporting segment in the carrying amount of Goodwill for the years ended December 31, 2020 and
2019, including the effect of foreign exchange rates on non-U.S. dollar denominated balances, were as follows.
TABLE 89: GOODWILL
(In Millions)
Balance
at
December
31, 2018
Goodwill Acquired
Foreign
Exchange Rates
Balance
at
December
31, 2019
Foreign
Exchange Rates
Balance
at
December
31, 2020
CORPORATE
&
INSTITUTIONAL
SERVICES
WEALTH
MANAGEMENT
598.2
$
71.1
$
23.5
4.0
625.7
$
10.3
636.0
$
—
—
71.1
$
0.1
71.2
$
$
$
$
TOTAL
669.3
23.5
4.0
696.8
10.4
707.2
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 2020 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 2020.
Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other
intangible assets subject to amortization as of December 31, 2020 and 2019 were as follows.
TABLE 90: OTHER INTANGIBLE ASSETS
(In Millions)
Gross
Carrying Amount
Less:
Accumulated Amortization
Net
Book Value
DECEMBER 31,
2020
221.3
$
108.7
112.6
$
2019
207.2
86.6
120.6
$
$
Other intangible assets consist primarily of the value of acquired client relationships and are included in Other Assets on
the consolidated balance sheets. Amortization expense related to other intangible assets was $16.9 million, $16.6 million,
and $17.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. Amortization for the years 2021,
2022, 2023, 2024, and 2025 is estimated to be $15.1 million, $10.5 million, $10.2 million, $10.1 million, and $9.5 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.
Capitalized Software. The gross carrying amount and accumulated amortization of capitalized software as of
December 31, 2020 and 2019 were as follows.
TABLE 91: CAPITALIZED SOFTWARE
(In Millions)
Gross
Carrying Amount
Less:
Accumulated Amortization
Net
Book Value
130 2020 Annual Report | Northern Trust Corporation
DECEMBER 31,
2020
4,337.4
$
2,744.5
1,592.9
$
2019
3,885.2
2,377.9
1,507.3
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized software, which is included in Other Assets on the consolidated balance sheet, consists primarily of purchased
software, software licenses, and allowable internal costs, including compensation relating to software developed for
internal use. Fees paid for the use of software licenses that are not hosted by Northern Trust are expensed as incurred.
Amortization expense, which is included in Equipment and Software on the consolidated statements of income, amounted
to $366.9 million in 2020, $339.1 million in 2019, and $334.9 million in 2018.
Note 12 – Deposits
The following table provides the scheduled maturity of total time deposits in denominations of $250,000 or greater at
December 31, 2020.
TABLE 92: REMAINING MATURITY OF TIME DEPOSITS $250,000 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, 2020
CERTIFICATES
OF DEPOSIT
OTHER TIME
TOTAL
$
$
660.2
$
36.1
3.1
1.2
0.3
0.5
205.4
$
—
—
—
—
—
701.4
$
205.4
$
865.6
36.1
3.1
1.2
0.3
0.5
906.8
As of December 31, 2019, there were $1.7 billion of time deposits in denominations of $250,000 or greater, of which
$711.4 million were Certificates of Deposit and $1.0 billion were non-U.S.
Note 13 – Senior Notes and Long-Term Debt
Senior Notes. A summary of Senior Notes outstanding at December 31, 2020 and 2019 is presented in the following table.
TABLE 93: SENIOR NOTES
($
In Millions)
Corporation-Senior Notes
(1)
Fixed
Rate
Due
Nov. 2020
(2)
Fixed
Rate
Due
Aug. 2021
(2)
Fixed
Rate
Due
Aug. 2022
(2)
Fixed
Rate
Due
Aug.
2028
(3)(4)
Fixed
Rate
Due
May
2029
(3)(4)
Fixed
Rate
Due
May
2030
(3)(4)
DECEMBER 31,
RATE
2020
2019
3.45 %
$
—
$
3.375
2.375
3.65
3.15
1.95
499.8
499.6
584.4
567.9
970.7
499.9
499.4
499.4
547.2
527.1
—
Total
Senior Notes
$
3,122.4 $
2,573.0
(1) As of December 31, 2020, debt issuance costs of $3.4 million are included as a direct deduction from the carrying amount and amortized on a straight-line basis over the life
of the Note.
(2) Not redeemable prior to maturity.
(3) Redeemable within three months of maturity.
(4) Interest rate swap contracts were entered into to modify the interest expense from fixed rates to floating rates. The swaps are recorded as fair value hedges and increases in
the carrying values of senior notes outstanding of $130.7 million and $77.1 million were recorded as of December 31, 2020 and 2019, respectively. See further detail in Note
27, “Derivative Financial Instruments.”
2020 Annual Report | Northern Trust Corporation 131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Debt. A summary of Long-Term Debt outstanding at December 31, 2020 and 2019 is presented in the
following table.
TABLE 94: LONG-TERM DEBT
($
In Millions)
Corporation-Subordinated Debt
(1)
Fixed
Rate
Notes
due
Oct.
(2)(3)
2025
Fixed-to-Floating
Rate
Notes
due
Total
Long-Term Debt
May
2032
(4)
Long-Term
Debt
Qualifying
as
Risk-Based Capital
DECEMBER 31,
RATE
2020
2019
3.95
%
$
3.375
$
$
839.8
$
349.5
1,189.3
949.7
$
$
798.7
349.4
1,148.1
1,099.5
(1) As of December 31, 2020, debt issuance costs of $1.1 million are included as a direct deduction from the carrying amount and amortized on a straight-line basis over the life
of the Note.
(2) Not redeemable prior to maturity.
(3) Interest rate swap contracts were entered into to modify the interest expense from fixed rates to floating rates. The swaps are recorded as fair value hedges and increases in
the carrying values of the subordinated notes outstanding of $90.8 million and $49.8 million were recorded as of December 31, 2020 and 2019, respectively. See further detail
in Note 27, “Derivative Financial Instruments.”
(4) 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.
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 2020, 20% of
these securities was eligible for Tier 2 capital treatment, declining at an incremental 10% a year until they are fully phased
out in 2022.
The Corporation has fully, irrevocably and unconditionally guaranteed all payments due on the Series A and B
securities. The holders of the Series A and B securities are entitled to receive preferential cumulative cash distributions
quarterly in arrears (based on the liquidation amount of $1,000 per security) at an interest rate equal to the rate on the
corresponding subordinated debentures. The interest rate on the Series A and Series B securities is equal to three-month
LIBOR plus 0.52% and 0.59%, respectively. Subject to certain exceptions, the Corporation has the right to defer payment
of interest on the subordinated debentures at any time or from time to time for a period not exceeding 20 consecutive
quarterly periods provided that no extension period may extend beyond the stated maturity date. If interest is deferred on
the subordinated debentures, distributions on the Series A and B securities will also be deferred and the Corporation will
not be permitted, subject to certain exceptions, to pay or declare any cash distributions with respect to the Corporation’s
capital stock or debt securities that rank the same as or junior to the subordinated debentures, until all past due distributions
are paid. The subordinated debentures are unsecured and subordinated to substantially all of the Corporation’s existing
indebtedness.
The Corporation has the right to redeem the Series A and Series B subordinated debentures, in whole or in part, at a
price equal to the principal amount plus accrued and unpaid interest. The following table summarizes the book values of
the outstanding subordinated debentures as of December 31, 2020 and 2019.
TABLE 95: 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
132 2020 Annual Report | Northern Trust Corporation
DECEMBER 31,
2020
154.3
$
123.5
277.8
$
2019
154.3
123.4
277.7
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Stockholders’ Equity
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, 2020, 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”) were outstanding.
Series D Preferred Stock. As of December 31, 2020, 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, 2020 and 2019 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.
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. As of December 31, 2020, the Corporation had issued and outstanding 16 million depositary
shares, each representing 1/1,000th ownership interest in a share of Series E Preferred Stock, issued in November 2019. On
January 2, 2020, the proceeds from the Series E Preferred Stock were used to fund the redemption of all outstanding shares
of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock. Equity related to Series E Preferred Stock as of
December 31, 2020 and 2019 was $391.4 million, which represents the net aggregate proceeds from the public offering of
the depositary shares. Shares of the Series E Preferred Stock have no par value and a liquidation preference of $25,000
(equivalent to $25 per depositary share).
Dividends on the Series E Preferred Stock, which are not mandatory, accrue and are payable on the liquidation
preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January, April, July and October of
each year, at a rate per annum equal to 4.70%. On October 20, 2020, the Corporation declared a cash dividend of $293.75
per share of Series E Preferred Stock payable on January 1, 2021, to stockholders of record as of December 15, 2020.
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. In July 2018, the Board of Directors approved a stock repurchase authorization to repurchase up to
25.0 million shares of the Corporation’s common stock. 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. The Corporation suspended this program on March 16, 2020. Subsequent to the Corporation suspending its
open-market share repurchase program, the only shares repurchased were shares of common stock withheld upon the
vesting of share-based compensation to satisfy tax withholding obligations. During the year ended December 31, 2020, the
Corporation repurchased 3,276,589 shares of common stock, including 532,713 shares withheld related to share-based
compensation, at a total cost of $299.8 million.
The average price paid per share for common stock repurchased in 2020, 2019, and 2018 was $91.49, $93.40, and
$102.69, respectively.
2020 Annual Report | Northern Trust Corporation 133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beginning in the second quarter of 2020, the Federal Reserve announced certain measures to ensure that large financial
institutions, including Northern Trust, remain resilient despite the economic uncertainty resulting from the ongoing
COVID-19 pandemic. Specifically, for the third and fourth quarters of 2020, no share repurchases were permitted by these
institutions and dividend payments were limited to the amount paid in the second quarter and could not exceed the payor’s
average net income for the four preceding quarters. On December 18, 2020, the Federal Reserve again extended its capital
distribution limits into the first quarter of 2021 with certain modifications, which include continuing to limit dividend
payments based on recent income and limiting share repurchases based on recent income. During the first quarter of 2021,
the Corporation restarted its share repurchase program in accordance with such limitations.
An analysis of changes in the number of shares of common stock outstanding follows:
TABLE 96: SHARES OF COMMON STOCK
Balance
at
January 1
Incentive
Plan
and Awards
Stock
Options Exercised
Treasury
Stock Purchased
Balance
at
December 31
2020
2019
2018
209,709,046
219,012,050
226,126,674
1,512,035
344,686
1,688,931
786,931
(3,276,589)
(11,778,866)
208,289,178
209,709,046
1,310,778
575,662
(9,001,064)
219,012,050
134 2020 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, 2020, 2019, and 2018, and changes during the years then ended.
TABLE 97: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(In Millions)
NET
GAINS
DEBT
AVAILABLE
UNREALIZED
(LOSSES) ON
SECURITIES
FOR SALE(1)
NET
(LOSSES)
CASH
ON
UNREALIZED
GAINS
FLOW
HEDGES
NET
FOREIGN
CURRENCY
ADJUSTMENT
NET
PENSION
AND
OTHER
POSTRETIREMENT
BENEFIT
ADJUSTMENTS
TOTAL
(1.8)
$
(342.2) $
(414.3)
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 Change
Balance
at
December
31, 2020
$
$
$
(74.8)
$
(17.8)
(22.3)
(114.9)
$
228.9
114.0
$
527.8
641.8
$
4.5
$
0.9
(1.4)
4.0
$
(7.7)
(3.7)
$
0.5
47.5
22.2
67.9
$
49.9
117.8
$
26.9
(55.9)
(12.6)
(25.3)
(14.1)
(410.7) $
(453.7)
(12.1)
259.0
(422.8)
$
(194.7)
67.5
622.7
428.0
(3.2)
$
144.7
$
(355.3) $
(1) Includes net unrealized gains (losses) on debt securities transferred from available for sale to held to maturity during the years ended December 31, 2020, 2019, and 2018.
TABLE 98: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(In Millions)
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
BEFORE
TAX
TAX
EFFECT
AFTER
TAX
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
Unrealized
Available
Gains
for Sale
(Losses)
on
Debt
Securities
Unrealized
Available
Gains
for Sale
(Losses)
on
Debt
Securities
$
706.8 $
(179.3)
$
527.5
$
306.1
$
(78.0) $ 228.1
$
(31.9)
$
9.2
$
(22.7)
Reclassification
Included
in
Net Income(1)
Adjustment
for
Losses
(Gains)
0.4
(0.1)
0.3
1.1
(0.3)
0.8
0.5
(0.1)
0.4
Net Change
$
707.2 $
(179.4)
$
527.8
$
307.2
$
(78.3) $ 228.9
$
(31.4)
$
9.1 $
(22.3)
Unrealized
(Losses) Gains
on
Cash Flow Hedges
Foreign
Exchange Contracts
Interest
Rate Contracts
$
28.9 $
(7.3)
$
21.6
$
14.9 $
(3.7) $
11.2
$
70.5
$
(17.6) $
52.9
—
—
—
1.5
(0.3)
1.2
(1.2)
0.3
(0.9)
Reclassification
Included
in
Net Income(2)
Adjustment
for
(Gains)
Losses
Net Change
Foreign
Currency Adjustments
(28.1)
7.0
(21.1)
(26.7)
6.6
(20.1)
(71.1)
17.7
(53.4)
$
0.8 $
(0.3)
$
0.5
$
(10.3)
$
2.6 $
(7.7)
$
(1.8)
$
0.4 $
(1.4)
Foreign Currency
Translation Adjustments
$
169.1 $
(8.3)
$
160.8
$
6.4 $
(1.6) $
4.8
$ (107.8)
$
1.5 $
(106.3)
Long-Term Intra-Entity Foreign
Transaction (Losses) Gains
Currency
2.1
(0.5)
1.6
(0.5)
0.1
(0.4)
(1.8)
0.5
(1.3)
Net Investment Hedge Gains (Losses)
(178.7)
43.2
(135.5)
59.7
(14.2)
45.5
173.0
(43.2)
129.8
Net Change
$
(7.5) $
34.4
$
26.9 $
65.6 $
(15.7) $
49.9 $
63.4 $
(41.2) $
22.2
Pension
Adjustments
and Other
Postretirement Benefit
Net Actuarial (Losses) Gains
$
47.4 $
(12.3) $
35.1 $
(36.8) $
7.9 $
(28.9) $
(54.9) $
9.6 $
(45.3)
Reclassification Adjustment for Losses
Included
(Gains)
in Net Income(3)
of
Net
Amortization
Actuarial Loss
43.0
(10.5)
32.5
22.4
(5.4)
17.0
36.6
(3.6)
33.0
Amortization
of
Prior
Net Change
Total
Net
Change
Service Cost
(0.1)
—
(0.1)
(0.2)
—
(0.2)
(0.3)
—
(0.3)
$
90.3 $
(22.8)
$
67.5
$ 790.8 $ (168.1)
$
622.7
$
$
(14.6) $
2.5 $
(12.1)
$
(18.6)
$
6.0 $
(12.6)
347.9 $
(88.9) $ 259.0
$
11.6 $
(25.7) $
(14.1)
(1) The before-tax reclassification adjustment out of AOCI related to the realized gains (losses) on debt securities available for sale is recorded in Investment Security Gains
(Losses), net on 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 on the
consolidated statements of income.
2020 Annual Report | Northern Trust Corporation 135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Net Income per Common Share
The computations of net income per common share are presented in the following table.
TABLE 99: 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
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
208,319,412
214,525,547
223,148,335
$
1,209.3
$
1,492.2
$
1,556.4
56.2
1,153.1
12.1
46.4
1,445.8
16.9
46.4
1,510.0
20.1
$
1,141.0
$
1,428.9
$
1,489.9
5.48
6.66
6.68
208,319,412
214,525,547
223,148,335
688,574
1,075,602
1,339,991
209,007,986
215,601,149
224,488,326
Earnings
Allocated
to
Common
and
Potential
Common Shares
$
1,141.1
$
1,428.9
$
1,490.0
Diluted
Net
Income
Per
Common Share
5.46
6.63
6.64
Note: For the years ended December 31, 2020, 2019, and 2018, there were no common stock equivalents excluded in the computation of diluted net income per share.
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 Security Commissions and Trading Income
that relates to revenue from contracts with clients is primarily comprised of commissions earned from providing securities
brokerage services to Wealth Management and C&IS clients. The portion of Other Operating Income that relates to
revenue from contracts with clients is mainly comprised of service fees for banking-related services provided to Wealth
Management and C&IS clients.
Performance Obligations. Clients are typically charged monthly or quarterly in arrears based on the fee arrangement
agreed to with each client; payment terms will vary depending on the client and services offered.
Substantially all revenues generated from contracts with clients for asset servicing, asset management, securities
lending, treasury management and banking-related services are recognized on an accrual basis, over the period in which
services are provided. The nature of Northern Trust’s performance obligations is to provide a series of distinct services in
which the customer simultaneously receives and consumes the benefits of the promised services as they are performed. Fee
arrangements are mainly comprised of variable amounts based on market value of client assets managed and serviced,
transaction volumes, number of accounts, and securities lending volume and spreads. Revenue is recognized using the
output method in an amount that reflects the consideration to which Northern Trust expects to be entitled in exchange for
providing each month or quarter of service. For contracts with multiple performance obligations, revenue is allocated to
each performance obligation based on the price agreed to with the client, representing its relative standalone selling price.
Security brokerage revenue is primarily represented by securities commissions received in exchange of providing trade
execution related services. Control is transferred at a point in time, on the trade date of the transaction, and fees are
typically variable based on transaction volumes and security types.
136 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 100: 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,
2020
2019
2018
$
1,674.3
$
1,636.4
$
2,029.3
88.3
203.1
1,930.6
87.7
197.4
1,589.1
1,862.6
102.8
199.2
$
$
$
$
3,995.0
$
3,852.1
$
3,753.7
290.4
$
250.9
$
45.4
133.2
194.0
(0.4)
44.5
103.6
145.5
(1.4)
662.6
4,657.6
$
$
543.1
4,395.2
$
$
307.2
51.8
98.3
127.5
(1.0)
583.8
4,337.5
On the consolidated statements of income, Trust, Investment and Other Servicing Fees and Treasury Management Fees
represent revenue from contracts with clients. For the year ended December 31, 2020, revenue from contracts with clients
also includes $102.4 million of the $133.2 million total Security Commissions and Trading Income and $42.8 million of
the $194.0 million total Other Operating Income. For the year ended December 31, 2019, revenue from contracts with
clients also includes $87.1 million of the $103.6 million total Security 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 Security Commissions and Trading Income and $44.0 million
of the $127.5 million total Other Operating Income.
Receivables Balances. The following table represents receivables balances from contracts with clients, which are included
in Other Assets on the consolidated balance sheets, at December 31, 2020 and 2019.
TABLE 101: CLIENT RECEIVABLES
(In Millions)
Trust
Fees
Receivable, net(1)
Other
Total
Client Receivables
(1)
Trust
Fees
Receivable
is
net
of
a
$7.2
million
and
$5.6
million
fee
receivable
allowance
as
of
December
DECEMBER 31,
2020
819.3
$
116.5
935.8
$
2019
801.9
101.1
903.0
$
$
31,
2020
and
2019, respectively.
2020 Annual Report | Northern Trust Corporation 137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 – Net Interest Income
The components of Net Interest Income were as follows:
TABLE 102: NET INTEREST INCOME
(In Millions)
Interest Income
Loans
and Leases
Securities
– Taxable
– Non-Taxable(1)
Interest-Bearing
Due
from
and
Deposits
Federal
Reserve
and
Other
Central
Total
Interest Income
Interest Expense
Deposits
with Banks(2)
Deposits
Bank
and Other
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,
2020
2019
2018
$
774.6
$
1,153.4
$
812.4
1.4
22.4
32.7
1,070.7
3.8
72.4
199.6
1,643.5
$
2,499.9
$
48.4
$
488.9
$
2.2
1.0
45.3
72.7
26.5
4.2
25.9
6.4
181.7
72.6
38.3
8.2
1,098.8
905.2
7.0
70.0
240.4
2,321.4
384.6
50.3
7.8
150.1
53.4
45.0
7.5
200.3
1,443.2
$
$
822.0
1,677.9
$
$
698.7
1,622.7
$
$
$
$
(1) Non-Taxable Securities represent securities that are exempt from U.S. federal income taxes.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as
presented on the consolidated balance sheets.
Note 20 – Other Operating Income
The components of Other Operating Income were as follows:
TABLE 103: OTHER OPERATING INCOME
(In Millions)
Loan
Service Fees
Banking
Service Fees
Other Income
Total
Other
Operating Income
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
52.5
$
46.1
95.4
2019
48.0
$
45.6
51.9
2018
48.9
46.4
32.2
194.0
$
145.5
$
127.5
$
$
Other Operating Income in 2020 increased from 2019, primarily due to higher income related to a bank-owned life
insurance program implemented during 2019, a charge in the prior year related to the decision made to sell substantially all
of the lease portfolio, and higher miscellaneous income.
138 2020 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 104: OTHER OPERATING EXPENSE
(In Millions)
Business Promotion
Staff Related
FDIC
Insurance Premiums
Other
Intangibles Amortization
Other Expenses
Total
Other
Operating Expense
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
59.2
$
29.4
11.8
16.9
229.4
346.7
$
2019
104.2
$
42.8
9.9
16.6
156.3
329.8
$
2018
98.3
33.6
27.4
17.4
153.9
330.6
$
$
Other Operating Expense in 2020 increased from 2019 primarily due to a $43.4 million charge related to a corporate action
processing error as well as increases in mutual fund co-administration fees, partially offset by lower business promotion
expense due to reduced business travel and lower staff-related expense.
Note 22 – Income Taxes
The following table reconciles the statutory federal tax rate with the effective tax rate for the periods presented below.
TABLE 105: INCOME TAXES
Statutory
Federal
Tax Rate
Tax
Exempt Income
Foreign
Tax
Rate Differential
Excess
Tax
Benefit
Related
to
Share-Based Compensation
Tax Credits
Reversal
of
Tax
Benefits
Previously
Recognized through Earnings
State
Taxes, net
Impact
of
Tax
Cuts
and
Jobs Act
Change
in
Accounting Method
Valuation Allowance
Other
Effective
Tax Rate
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
21.0 %
2019
21.0 %
2018
21.0 %
(0.9)
0.7
(0.6)
(1.7)
1.6
3.2
—
—
1.6
0.8
(0.6)
0.2
(0.9)
(1.0)
—
2.8
—
—
1.5
0.2
(0.4)
(0.4)
(0.9)
(1.1)
—
3.4
(0.2)
(1.2)
—
0.3
25.7 %
23.2 %
20.5 %
Income tax expense for the year ended December 31, 2020 and 2019 was $418.3 million and $451.9 million,
representing an effective tax rate of 25.7% and 23.2%, respectively. For the year ended December 31, 2020, the increase in
the effective tax rate was primarily driven by $26.8 million of tax expense related to the reversal of tax benefits previously
recognized through earnings and higher taxes payable on the income of the Corporation’s non-U.S. branches.
For the year 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 year 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.
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 2013.
2020 Annual Report | Northern Trust Corporation 139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in Other Liabilities on the consolidated balance sheets at December 31, 2020 and 2019 were $22.4 million
and $25.3 million of unrecognized tax benefits, respectively. If recognized, the amounts would reduce 2020 and 2019
income tax expense by $20.7 million and $22.7 million, respectively. A reconciliation of the beginning and ending amount
of unrecognized tax benefits is as follows.
TABLE 106: 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
$
2020
25.3
$
0.9
0.4
(4.2)
—
2019
21.9
$
0.9
4.0
(1.5)
—
$
22.4
$
25.3
$
2018
27.7
0.5
1.7
(7.8)
(0.2)
21.9
It is possible that changes in the amount of unrecognized tax benefits could occur in the next 12 months due to changes
in judgment related to recognition or measurement, settlements with taxing authorities, or expiration of statute of
limitations. Management does not believe that future changes, if any, would have a material effect on the consolidated
financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a
particular period.
A provision for interest and penalties of $1.2 million, net of tax, was included in the Provision for Income Taxes for
the year ended December 31, 2020. This compares to a benefit for interest and penalties of $1.3 million, net of tax, and a
provision of $0.3 million, net of tax, for the year ended December 31, 2019 and 2018, respectively. As of December 31,
2020 and 2019, the liability for the potential payment of interest and penalties totaled $9.6 million and $8.4 million, net of
tax, respectively.
The components of the consolidated Provision for Income Taxes for each of the three years ended December 31 are
as follows.
TABLE 107: PROVISION FOR INCOME TAXES
(In Millions)
Current
Tax Provision:
Federal
State
Non-U.S.
Total
Deferred
Tax Provision:
Federal
State
Non-U.S.
Total
Provision
for
Income Taxes
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
$
$
$
$
$
203.0
$
216.4
$
57.2
141.7
50.7
150.5
401.9
$
417.6
$
8.8
$
16.5
$
5.4
2.2
16.4
418.3
$
$
16.5
1.3
34.3
451.9
$
$
132.8
95.4
162.7
390.9
33.8
(13.8)
(9.5)
10.5
401.4
In addition to the amounts shown above, tax charges and benefits have been recorded directly to Stockholders’ Equity for
the following.
TABLE 108: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY
(In Millions)
Tax
Effect
of
Other
Comprehensive Income
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
$
168.1
$
2019
88.9
$
2018
25.7
Deferred taxes result from temporary differences between the amounts reported on the consolidated financial statements
and the tax bases of assets and liabilities. Deferred tax assets and liabilities have been computed as follows.
140 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 109: 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,
2020
2019
$
9.0
$
268.1
99.7
31.0
67.4
372.6
847.8
54.5
139.8
194.3
(55.2)
139.1
$
708.7
$
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
Northern Trust had various state net operating loss carryforwards as of December 31, 2020 and 2019. The income tax
benefits associated with these loss carryforwards were approximately $0.5 million as of December 31, 2020 and $1.0
million as of December 31, 2019. A valuation allowance related to the loss carryforwards of $0.5 million and $0.3 million
was recorded at December 31, 2020 and 2019, respectively, as management believes the net operating losses will not be
fully realized.
The Corporation generated a foreign tax credit carryforward during the years ended December 31, 2020 and 2019,
expiring in 2030 and 2029, respectively. A valuation allowance related to the credit carryforward of $25.3 million and
$29.5 million was recorded at December 31, 2020 and 2019, respectively, as management believes the foreign tax credit
carryforwards 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. A description of each major plan and related disclosures are
provided below.
Pension. A noncontributory qualified defined benefit pension plan covers substantially all U.S. employees of Northern
Trust. Employees of certain European subsidiaries retain benefits in local defined benefit plans, although those plans are
closed to new participants and to future benefit accruals. Employees continue to accrue benefits under the Swiss pension
plan, which is accounted for as a defined benefit plan under U.S. GAAP.
Northern Trust also maintains a noncontributory supplemental pension plan for participants whose retirement 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 on the consolidated balance sheets. Total assets in the “Rabbi” Trust related to the nonqualified
pension plan at December 31, 2020 and 2019 amounted to $137.5 million and $128.8 million, respectively. Contributions
of $10.6 million and $3.0 million were made to the “Rabbi” Trust in 2020 and 2019, respectively.
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S.
Qualified Plan, Non-U.S. Pension Plans, and U.S. Non-Qualified Plan for 2020, 2019, and 2018. Prior service costs are
being amortized on a straight-line basis over 11 years for the U.S. Qualified Plan and 10 years for the U.S. Non-Qualified
Plan of which approximately one year was remaining as of December 31, 2020 for both the U.S. Qualified Plan and the
U.S. Non-Qualified Plan.
2020 Annual Report | Northern Trust Corporation 141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 110: EMPLOYEE BENEFIT PLAN STATUS
($
In Millions)
Accumulated
Benefit Obligation
Projected
Benefit Obligation
Plan
Assets
at
Fair Value
Funded
Status
at
December 31
Weighted-Average Assumptions:
Discount Rates
U.S.
QUALIFIED PLAN
NON-U.S.
PENSION PLANS
U.S.
NON-QUALIFIED PLAN
2020
2019
2020
2019
2020
2019
$
1,312.9
$
1,470.6
1,793.7
$
$
1,181.9
1,323.4
1,601.2
$
$
228.5
236.1
211.5
$
$
$
$
204.7
211.1
190.1
139.8
162.3
—
$
$
131.5
149.2
—
$
323.1
$
277.8
$
(24.6)
$
(21.0)
$
(162.3)
$
(149.2)
2.75 %
3.37 %
0.93 %
1.40 %
2.45 %
3.37 %
Rate
of
Increase
in
Compensation Level
Expected
Long-Term
Rate
of
Return
on Assets
4.97
5.25
4.97
5.25
1.50
1.28
1.50
1.72
4.97
N/A
4.97
N/A
TABLE 111: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
(In Millions)
Net
Actuarial Loss
Prior
Service
(Benefit) Cost
Amount
in
Gross
Income
Accumulated
Other
Comprehensive
Income
Tax Effect
Amount
Net
Income
in
Accumulated
Other
Comprehensive
TABLE 112: NET PERIODIC PENSION EXPENSE
U.S.
QUALIFIED PLAN
NON-U.S.
PENSION PLANS
U.S.
NON-QUALIFIED PLAN
2020
2019
2020
2019
2020
$
332.4
$
426.7
$
49.0
$
46.5
$
96.3
$
(0.6)
(1.0)
331.8
82.1
425.7
105.7
2.2
51.2
6.4
3.0
49.5
6.2
0.1
96.4
23.9
2019
82.5
0.2
82.7
20.4
$
249.7
$
320.0
$
44.8
$
43.3
$
72.5
$
62.3
($
In Millions)
Service Cost
Interest Cost
Expected
Return
on
Plan Assets
Settlement Expense
Amortization:
Net
Actuarial Loss
Prior
Service
(Benefit) Cost
U.S.
QUALIFIED PLAN
NON-U.S.
PENSION PLANS
U.S.
NON-QUALIFIED PLAN
2020
2019
2018
2020
2019
2018
2020
2019
2018
$
47.4
$
41.6
$
41.4
$
43.3
(76.8)
—
35.0
(0.4)
47.2
(86.9)
44.3
(88.2)
—
—
17.2
(0.4)
28.2
(0.4)
1.9
2.9
(3.1)
0.8
0.8
0.4
3.7
$
$
2.0
3.9
(4.4)
—
0.6
0.3
2.4
$
$
1.7
4.0
(4.4)
0.5
0.9
0.2
2.9
$
4.6
4.8
—
—
7.0
0.2
$
$
4.1
5.8
—
—
5.6
0.2
4.3
5.3
N/A
—
7.4
0.2
$
16.6
$
15.7
$
17.2
Net
Periodic
Pension Expense
$
48.5
$
18.7
$
25.3
$
Weighted-Average Assumptions:
Discount Rates
3.37 %
4.47 %
3.79 %
1.40 %
2.16 %
2.08 %
3.37 %
4.47 %
3.79 %
of
Rate
Level
Increase
in
Compensation
4.97
4.39
4.39
1.50
1.75
1.75
4.97
4.39
4.39
Expected
Return
on Assets
Long-Term
Rate
of
5.25
6.00
6.00
1.72
2.39
2.61
N/A
N/A
N/A
The components of net periodic pension expense are included in Employee Benefits expense on the consolidated
statements of income.
142 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 113: 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
2020
2019
2020
2019
2020
$
1,323.4
$
1,092.0
$
211.1
$
183.5
$
149.2
$
47.4
43.3
—
—
136.5
—
(80.0)
—
41.6
47.2
—
—
213.3
—
(70.7)
—
1.9
2.9
0.6
(0.5)
19.1
(5.4)
(4.1)
10.5
2.0
3.9
0.6
(0.4)
20.9
—
(3.6)
4.2
4.6
4.8
—
—
20.4
—
(16.7)
—
Ending Balance
$
1,470.6
$
1,323.4
$
236.1
$
211.1
$
162.3
$
2019
135.6
4.1
5.8
—
—
22.0
—
(18.3)
—
149.2
Actuarial losses of $176.0 million and $256.2 million in 2020 and 2019, respectively, were primarily caused by decreases
in discount rates.
TABLE 114: ESTIMATED FUTURE BENEFIT PAYMENTS
(In Millions)
2021
2022
2023
2024
2025
2026-2030
TABLE 115: CHANGE IN PLAN ASSETS
U.S.
QUALIFIED PLAN
NON-U.S.PENSION PLANS
U.S.
NON-QUALIFIED PLAN
$
86.8
$
4.4
$
88.9
96.3
96.4
98.6
495.5
4.3
4.8
5.0
5.0
32.4
18.0
20.0
18.2
11.6
12.7
62.0
U.S.
QUALIFIED PLAN
NON-U.S
PENSION PLANS
(In Millions)
2020
2019
2020
Fair
Value
of
Assets
at
Beginning
of Period
$
1,601.2
$
1,380.1
$
190.1
$
Actual
Return
on Assets
Employer Contributions
Employee Contributions
Settlement
Benefits Paid
Foreign
Exchange
Rate Changes
Fair
Value
of
Assets
at
End
of Period
272.5
291.8
—
—
—
(80.0)
—
—
—
—
(70.7)
—
17.9
5.0
0.6
(5.4)
(4.1)
7.4
$
1,793.7
$
1,601.2
$
211.5
$
2019
166.7
18.6
3.1
0.6
—
(3.6)
4.7
190.1
The minimum required and maximum remaining deductible contributions for the U.S. Qualified Plan in 2021 are estimated
to be zero and $255.0 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 2020, the glide path was adjusted
to allow for a greater component of return-seeking investments.
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.
2020 Annual Report | Northern Trust Corporation 143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 had been adjusted in August 2020 and consists of 45% U.S. long
credit bonds, 20% global equities (developed and emerging markets), 10% custom completion, 5% high yield bonds, 5%
private equity, 4% emerging market debt, 4% global listed infrastructure, 4% private real estate, and 3% hedge funds.
Global 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,
corporate bonds, 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 20% of each of the total limited partnership or fund of funds 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.
Derivatives may be used, depending on the nature of the asset class to which they relate, to gain market exposure in an
efficient and timely manner, to hedge foreign currency exposure or interest rate risk, or to alter the duration of a portfolio.
There were five derivatives held by the U.S. Qualified Plan at December 31, 2020 and 2019.
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 assets 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 net asset value (NAV).
Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The
U.S. Qualified Plan did not hold Level 3 assets as of December 31, 2020 and 2019.
Assets valued at fair value using NAV per share - The U.S. Qualified Plan’s assets valued at fair value using NAV
per share include investments in private equity funds and a hedge fund, 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 investments in the private equity funds and a hedge fund are considered to be long-
144 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
term investments. There are no capital withdrawal options related to the investments in the private equity funds. However,
capital is occasionally distributed as underlying investments are sold. It is estimated that the current private equity
investments would be liquidated over 1 year to 8 years. The Plan’s investment in the hedge fund can be withdrawn
quarterly, after a sixty days notice period.
The U.S. Qualified Plan’s assets valued at fair value using NAV per share also include investments in 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. The Plan’s investment in real estate funds are considered to be long-term investments and can
be withdrawn quarterly to the extent the real estate funds have liquid assets, after a forty-five days notice period.
As investments in the private equity funds, hedge fund, and real estate fund are valued at fair value using NAV per
share, they are not required to be categorized within the fair value hierarchy.
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 could have a material effect on the
computation of the estimated fair values.
The following table presents the fair values of Northern Trust’s U.S. Qualified Plan assets, by major asset category,
and their level within the fair value hierarchy defined by GAAP as of December 31, 2020 and 2019.
TABLE 116: 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
Cash and Other
DECEMBER 31, 2020
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
$
13.5 $
— $
— $
—
—
2.9
—
—
—
—
167.0
7.5
314.4
43.6
113.1
22.9
22.4
0.3
985.5
—
—
—
—
—
—
—
—
—
—
—
13.5
314.4
43.6
116.0
22.9
22.4
0.3
985.5
167.0
7.5
Total Assets at Fair Value in the Fair Value Hierarchy
$
190.9 $
1,502.2 $
— $
1,693.1
Assets Valued at NAV per share
Northern Trust Private Equity Funds
Northern Trust Hedge Fund
Real Estate Funds
Total Assets at Fair Value
20.3
34.2
46.1
$
1,793.7
2020 Annual Report | Northern Trust Corporation 145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
Cash
and Other
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
—
—
—
—
—
—
—
—
—
—
—
12.3
254.6
45.0
168.3
18.8
23.1
0.3
866.6
112.8
2.6
Total
Assets
at
Fair
Value
in
the
Fair
Value
Hierarchy
$
127.7
$
1,376.7
$
—
$
1,504.4
Assets
Valued
at
NAV
per share
Northern
Trust
Private
Equity Funds
Northern
Trust
Hedge Fund
Real
Estate Funds
Total
Assets
at
Fair Value
20.3
30.2
46.3
$
1,601.2
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, 2020 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.
Northern Trust changed the plan design of its post-retirement health care plan as of January 1, 2021, which resulted in
the recognition of negative prior-service cost of $12.7 million at the time these changes were communicated to participants
in August 2020. Concurrently, a further shift in population from active to inactive participants required an adjustment to
the amortization period from the average remaining service period of active participants to the average life expectancy of
the inactive participants. The change in plan design and amortization period resulted in a decrease of the benefit obligation
and 2020 benefit expense at the time of recognition by $12.6 million and $0.3 million, respectively. Negative prior service
costs are being amortized on a straight-line basis over 13.9 years.
The following tables set forth the postretirement health care plan status and amounts included in AOCI at
December 31, 2020 and 2019, the net periodic postretirement benefit cost of the plan for 2020 and 2019, and the change in
the accumulated postretirement benefit obligation during 2020 and 2019.
TABLE 117: 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
DECEMBER 31,
2020
2019
$
$
13.2
$
2.5
15.7
$
25.2
3.6
28.8
146 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 118: 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,
2020
(4.9)
$
(12.4)
(17.3)
(4.3)
Net
Amount
in
Accumulated
Other
Comprehensive Income
$
(13.0)
$
TABLE 119: NET PERIODIC POSTRETIREMENT EXPENSE (BENEFIT)
(In Millions)
Service Cost
Interest Cost
Expected
Amortization
Return
on
Plan Assets
Net Gain
Prior
Periodic
Service Benefit
Net
Postretirement Expense
FOR
THE
YEAR
ENDED
DECEMBER 31,
$
$
$
2020
—
0.7
—
(0.6)
(0.3)
$
(0.2)
2019
— $
1.2
—
(1.1)
—
$
0.1
2019
(5.4)
—
(5.4)
(1.4)
(4.0)
2018
—
1.3
—
—
—
1.3
TABLE 120: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
(In Millions)
Beginning Balance
Service Cost
Interest Cost
Plan Amendment
Actuarial
Loss (Gain)
Net
Claims Paid
Ending Balance
FOR
THE
YEAR
ENDED
DECEMBER 31,
$
$
2020
28.8
$
—
0.7
(12.7)
(0.1)
(1.0)
15.7
$
2019
28.1
—
1.2
—
0.2
(0.7)
28.8
Northern Trust uses the aggregate Pri-2012 mortality table with a 2012 base year and proposed future improvements under
scale MP-2020, as released by the Society of Actuaries in October 2020. The assumption for future mortality
improvements was updated at December 31, 2020 from the prior year’s improvement scale MP-2019.
TABLE 121: ESTIMATED FUTURE BENEFIT PAYMENTS
(In Millions)
2021
2022
2023
2024
2025
2026-2030
TOTAL
POSTRETIREMENT
MEDICAL
BENEFITS
$
1.7
1.5
1.4
1.3
1.2
5.1
weighted average discount rate used in determining the accumulated postretirement benefit obligation was 2.16% at
The
December 31, 2020, and 3.37% at December 31, 2019. For measurement purposes, a 5.75% annual increase in the cost of
pre-age 65 medical benefits and post-age 65 medical benefits were assumed for 2020. For drug claims, a 7.50% annual
increase in cost was assumed for 2020. 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
2020 Annual Report | Northern Trust Corporation 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
matching component. The expense associated with defined contribution plans is charged to Employee Benefits and totaled
$62.9 million in 2020, $57.6 million in 2019, and $54.4 million in 2018.
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 122: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS TO EMPLOYEES
(In Millions)
Restricted
Stock
Unit Awards
Stock Options
Performance
Stock Units
Total
Share-Based
Compensation Expense
Tax
Benefits Recognized
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
78.1
$
0.5
12.8
91.4
22.9
$
$
2019
81.4
$
1.4
25.1
107.9
26.7
$
$
2018
96.3
2.6
32.0
130.9
32.5
$
$
$
As of December 31, 2020, there was $70.8 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, 2020, shares available for future grant under the 2017 Plan, including shares
forfeited under the 2012 Plan and 2002 Plan, totaled 17,168,019.
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 years 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, 2020, 2019, and 2018.
148 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about stock options granted, vested, and exercised in the years ended
December 31, 2020, 2019, and 2018.
TABLE 123: STOCK OPTIONS GRANTED, VESTED, AND EXERCISED
(In
Millions,
Except
Per
Share Information)
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,
$
2020
4.5
$
2019
6.6
$
13.6
19.5
13.4
35.4
44.0
35.2
2018
8.1
28.5
32.6
27.7
The following is a summary of changes in nonvested stock options for the year ended December 31, 2020.
TABLE 124: CHANGES IN NONVESTED STOCK OPTIONS
NONVESTED OPTIONS
Nonvested
at
December
31, 2019
Granted
Vested
Forfeited
or Cancelled
Nonvested
at
December
31, 2020
WEIGHTED- AVERAGE
GRANT-DATE
VALUE
PER SHARE
FAIR
17.45
—
16.71
—
19.18
SHARES
384,939
$
—
(270,110)
—
114,829
$
A summary of the status of stock options at December 31, 2020, and changes during the year then ended, are presented in
the following table.
TABLE 125: STATUS OF STOCK OPTIONS AND CHANGES
($
In
Millions
Except
Per
Share Information)
Options
Outstanding,
December
31, 2019
Granted
Exercised
Forfeited,
Expired
or Cancelled
Options
Outstanding,
December
31, 2020
Options
Exercisable,
December
31, 2020
SHARES
1,696,936
$
—
(344,686)
(2,325)
1,349,925
1,235,096
$
$
WEIGHTED
EXERCISE
AVERAGE
PRICE
PER SHARE
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
TERM (YEARS)
AGGREGATE
INTRINSIC VALUE
64.77
—
56.65
49.54
66.87
64.90
3.3
$
3.2
$
35.5
34.9
Restricted Stock Unit Awards. Restricted stock unit awards may be granted to participants which entitle them to receive a
payment in the Corporation’s common stock or cash 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 2020 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 772,848, 855,112, and 815,314, with weighted average grant-date fair values of $99.58, $91.89, and $103.74
per share, for the years ended December 31, 2020, 2019, and 2018, respectively. The total fair value of restricted stock
units vested during the years ended December 31, 2020, 2019, and 2018, was $100.2 million, $89.3 million, and $66.4
million, respectively.
A summary of the status of outstanding restricted stock unit awards at December 31, 2020, and changes during the
year then ended, is presented in the following table.
2020 Annual Report | Northern Trust Corporation 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 126: OUTSTANDING RESTRICTED STOCK UNIT AWARDS
($ In Millions)
Restricted Stock Unit Awards Outstanding, December 31, 2019
Granted
Distributed
Forfeited
Restricted Stock Unit Awards Outstanding, December 31, 2020
Units Convertible, December 31, 2020
NUMBER
AGGREGATE
INTRINSIC VALUE
2,644,762 $
281.0
772,848
(1,245,412)
(26,547)
2,145,651 $
19,770 $
199.8
1.8
The following is a summary of nonvested restricted stock unit awards at December 31, 2020, and changes during the year
then ended.
TABLE 127: NONVESTED RESTRICTED STOCK UNIT AWARDS
NONVESTED RESTRICTED
STOCK UNITS
Nonvested
at
December
31, 2019
Granted
Vested
Forfeited
Nonvested
at
December
31, 2020
NUMBER
2,624,210
$
772,848
(1,244,630)
(26,547)
2,125,881
$
WEIGHTED
GRANT- DATE
VALUE
AVERAGE
FAIR
PER UNIT
WEIGHTED
REMAINING
AVERAGE
VESTING
TERM (YEARS)
1.7
2.1
87.26
99.58
80.46
95.41
95.61
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. For performance stock unit
awards granted in 2018 and 2019, the number of units that vest are subject to the attainment of specified performance
targets that are a function of internal return on equity goals. For performance stock unit awards granted in 2020, the
number of units that vest are subject to the attainment of specified performance targets that are a function of internal return
on equity goals and relative return on equity performance compared to a performance peer group of companies. For
performance stock units outstanding as of December 31, 2020, and granted in 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 205,847, 213,044, and 242,232 for the years ended December 31, 2020, 2019,
and 2018, respectively, with weighted average grant-date fair values of $100.83, $93.00, and $104.72. Performance stock
units outstanding at target level performance totaled 660,510, 667,741, and 797,531 at December 31, 2020, 2019, and
2018, respectively. Performance stock units had aggregate intrinsic values of $61.5 million, $70.9 million, and $66.7
million, and weighted average remaining vesting terms of 1.0 year each at December 31, 2020, 2019, and 2018,
respectively.
Non-employee Director Stock Awards. Stock units with total values of $1.5 million (20,148 units), $1.3 million (14,232
units), and $1.2 million (11,363 units) were granted to non-employee directors in 2020, 2019, and 2018, 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 $1.6 million, $1.4 million, and $1.3 million in 2020, 2019, and 2018, 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.
150 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $296.2 million in 2020, $326.1
million in 2019, and $326.5 million in 2018.
Note 26 – Commitments and Contingent Liabilities
Off-Balance Sheet Financial Instruments, Guarantees and Other Commitments. Northern Trust, in the normal course
of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit
enhancement needs of its clients. The contractual amounts of these instruments represent the potential credit exposure
should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into
commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring
controls as its lending activities.
The following table provides details of Northern Trust's off-balance sheet financial instruments as of December 31,
2020 and 2019.
TABLE 128: SUMMARY OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
DECEMBER 31,
2020
2019
($
In Millions)
ONE
YEAR
AND LESS
OVER
ONE
YEAR
TOTAL
ONE
YEAR
AND LESS
OVER
ONE
YEAR
TOTAL
Undrawn
Commitments
to
Extend Credit(1)
$
11,260.5
$
17,678.0
$
28,938.5
$
7,500.2
$
16,906.0
$
24,406.2
Standby
Letters
of
Credit
and
Financial Guarantees(2)
Commercial
Letters
of Credit
Custody
Securities
Lent
with Indemnification
1,228.1
54.6
157,478.0
763.5
—
—
1,991.6
54.6
1,567.6
32.3
157,478.0
138,085.9
845.9
—
—
2,413.5
32.3
138,085.9
Total
Off-Balance
Sheet
Financial Instruments
$
170,021.2
$
18,441.5
$
188,462.7
$
147,186.0
$
17,751.9
$
164,937.9
(1) These amounts exclude $384.7 million and $243.6 million of commitments participated to others at December 31, 2020 and 2019, respectively.
(2) These amounts include $24.2 million and $44.5 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2020 and 2019,
respectively.
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.
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, 2020 and 2019 subject to indemnification was $157.5 billion
and $138.1 billion, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize
securities borrowed, management believes that the exposure to credit loss from this activity is not significant and no
liability was recorded at December 31, 2020, or 2019 related to these indemnifications.
2020 Annual Report | Northern Trust Corporation 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020, 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. In January 2021, the Cour de Cassation, the highest court in France, reversed the June 2018 appellate court ruling,
requiring a re-trial at the appellate court level. The re-trial proceedings in the appellate court have not yet been scheduled.
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.
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,
152 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020 and 2019.
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, 2020 and 2019, 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.
2020 Annual Report | Northern Trust Corporation 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the notional and fair values of all derivative financial instruments as of December 31, 2020
and 2019.
TABLE 129: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
20.9
0.2
11.5
11.9
44.5
0.7
33.4
34.1
(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, 2020
DECEMBER
31, 2019
FAIR VALUE
FAIR VALUE
NOTIONAL
VALUE
ASSET(1) LIABILITY(2)
NOTIONAL
VALUE
ASSET(1)
LIABILITY(2)
$
4,717.6
$
50.0
6,554.4
3,480.3
8.2
$
0.1
10.2
$
4,538.2
$
20.3
$
—
200.0
0.2
15.4
0.1
104.0
207.7
1,661.5
2,873.8
8.5
73.7
Total
Derivatives
Designated
as
Hedging
under GAAP
$
14,802.3
$
23.8
$
321.9
$
9,273.5
$
102.7
$
Derivatives
Not
Designated
as
Hedging under GAAP
Non-Designated
Risk
Management Derivatives
Exchange Contracts
Foreign
Other Financial Derivatives(3)
Total
Non-Designated
Risk
Management Derivatives
Client-Related
and
Trading Derivatives
$
$
67.7
$
745.4
813.1
$
0.1
$
—
0.1
$
176.5
$
35.3
640.3
0.1
$
35.4
$
816.8
$
0.9
$
—
0.9
$
Foreign
Exchange Contracts
Interest
Rate Contracts
$
320,563.4
$
4,245.1
$
4,410.7
$
291,533.6
$
3,151.7
$
3,158.1
10,573.3
289.2
114.8
8,976.8
132.4
76.3
Total
Client-Related
and
Trading Derivatives
$
331,136.7
$
4,534.3
$
4,525.5
$
300,510.4
$
3,284.1
$
3,234.4
Derivatives
Total
GAAP
Not
Designated
as
Hedging
under
Gross Derivatives
Total
Less: Netting(4)
Total
Derivative
Financial Instruments
$
$
331,949.8
346,752.1
$
$
$
4,534.4
4,558.2
$
$
4,560.9
4,882.8
$
$
301,327.2
310,600.7
3,507.8
2,817.1
1,050.4
$
2,065.7
$
$
$
3,285.0
3,387.7
$
$
2,338.0
3,268.5
3,313.0
1,618.4
1,049.7
$
1,694.6
(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.
(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 on 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 within the consolidated statements of 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, 2020, 2019, and
2018 as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated
that net losses of $3.2 million and $83.1 million will be reclassified into net income within the next twelve months relating
to cash flow hedges of foreign-currency-denominated transactions and cash flow hedges of foreign-currency-denominated
debt securities, respectively. It is estimated that a net gain of $0.1 million will be reclassified into net income upon the
154 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020, 23 months was the maximum length of time over which the exposure to
variability in future cash flows of forecasted foreign-currency-denominated transactions was being hedged.
The following table provides fair value and cash flow hedge derivative gains and losses recognized in income during
the years ended December 31, 2020, 2019 and 2018.
TABLE 130: LOCATION AND AMOUNT OF FAIR VALUE AND CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECORDED
IN INCOME
(in Millions)
INTEREST INCOME
INTEREST EXPENSE
OTHER
OPERATING
INCOME
For
the
Year
Ended
December 31,
2020
2019
2018
2020
2019
2018
2020
2019
2018
Total
amounts
on
the
consolidated
statements
of income
$1,643.5
$2,499.9
$2,321.4
$
200.3
$
822.0
$
698.7
$
194.0
$
145.5
$
127.5
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
(66.3)
(95.9)
13.9
100.2
99.4
(9.5)
66.3
(13.2)
95.9
21.2
(13.9)
(100.2)
(99.4)
17.8
29.9
5.2
9.5
7.9
—
—
—
—
—
—
Total
gains
(losses)
recognized
on
fair
value hedges
$
(13.2)
$
21.2
$
17.8
$
29.9
$
5.2
$
7.9
$
—
$
—
$
—
—
—
—
Gains
(Losses)
on
cash
flow
hedges
recognized on
Foreign
Exchange Contracts
gains
Net
income
(losses)
reclassified
from
AOCI
to
net
Interest
Rate Contracts
gains
Net
income
(losses)
reclassified
from
AOCI
to
net
27.4
26.4
67.4
—
—
—
0.2
0.8
3.9
0.5
(0.5)
(0.2)
—
—
—
—
—
—
Total
income
gains
on
(losses)
cash
flow hedges
reclassified
from
AOCI
to
net
$
27.9
$
25.9
$
67.2
$
—
$
— $
—
$
0.2
$
0.8
$
3.9
The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged
items as of December 31, 2020 and 2019.
TABLE 131: HEDGED ITEMS IN FAIR VALUE HEDGES
DECEMBER
31, 2020
DECEMBER
31, 2019
(In Millions)
Available
for
Sale
Debt Securities(3)
Senior
Notes
and
Long-Term
Subordinated Debt
Total
CARRYING
OF
THE
VALUE
HEDGED
ITEMS
CUMULATIVE
ACCOUNTING
HEDGE
BASIS
ADJUSTMENT(1)
CARRYING
VALUE
OF
HEDGED ITEMS
THE
CUMULATIVE
ACCOUNTING
HEDGE
BASIS
ADJUSTMENT(2)
$
$
2,075.1
$
2,745.1
4,820.2
$
48.8
$
221.5
270.3
$
2,981.0
$
1,748.5
4,729.5
$
3.3
126.9
130.2
(1) The cumulative hedge accounting basis adjustment includes $10.4 million related to discontinued hedging relationships of available for sale debt securities as of
December 31, 2020. 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, 2020.
(2) 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 were 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.
(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 losses of $178.7 million and gains of $59.7 million were recognized in AOCI related to foreign
exchange contracts for the years ended December 31, 2020 and 2019, respectively.
Derivative Instruments Not Designated as Hedging under GAAP. Northern Trust’s derivative instruments that are not
designated as hedging under GAAP include derivatives for purposes of client-related and trading activities, as well as other
risk management purposes. These activities consist principally of providing foreign exchange services to clients in
connection with Northern Trust’s global custody business. However, in the normal course of business, Northern Trust also
engages in trading of currencies for its own account.
Non-designated risk management derivatives include foreign exchange contracts entered into to manage the foreign
currency risk of non-U.S.-dollar-denominated assets and liabilities, the net investment in certain non-U.S. affiliates,
2020 Annual Report | Northern Trust Corporation 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on the consolidated statements
of income for the years ended December 31, 2020, 2019, and 2018 for derivative instruments not designated as hedges
under GAAP.
TABLE 132: 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
DERIVATIVE
GAINS
(LOSSES)
LOCATION
RECOGNIZED
IN INCOME
AMOUNT
OF
DERIVATIVE
(LOSSES)
RECOGNIZED
GAINS
IN INCOME
2020
2019
2018
Foreign
Other
Exchange Contracts
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
gains (losses)
Total
under GAAP
from
derivatives
not
designated
as
hedging
Other
Operating
Income
Other
Operating
Income
$
$
6.4
$
(1.6)
$
(18.3)
(20.0)
(11.9)
$
(21.6)
$
(4.1)
(19.2)
(23.3)
Foreign
Exchange
Trading Income
$
290.4
$
250.9
$
307.2
Security
Commissions
Income
and
Trading
22.4
12.9
312.8
$
263.8
$
7.7
314.9
300.9
$
242.2
$
291.6
$
$
(1)
This
line
includes
swaps
related
to
the
sale
of
certain
Visa
Class
B
common
shares
and
total
return
swap contracts.
156 2020 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, 2020 and 2019.
TABLE 133: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
293.5
293.4
1.6
588.5
461.0
1,049.5
—
340.5
148.0
1.0
489.5
543.4
1,032.9
—
DECEMBER
31, 2020
GROSS
RECOGNIZED
ASSETS
OFFSET
GROSS
AMOUNTS
IN
THE
BALANCE
SHEET(2)
NET
PRESENTED
THE
AMOUNTS
IN
BALANCE
SHEET
GROSS
AMOUNTS
OFFSET
IN
BALANCE
SHEET
NOT
THE
NET
AMOUNT(3)
(In Millions)
Derivative Assets(1)
Foreign
(OTC)
Exchange
Contracts
Over
the
Counter
$
3,799.7
$
3,505.3
$
294.4
$
Interest
Rate
Swaps OTC
Interest
Rate
Swaps
Exchange Cleared
Derivatives
Total
Arrangement
Subject
to a
Master
Netting
Derivatives
Total
Arrangement
Not
Subject
to a
Master
Netting
Total Derivatives
295.9
1.6
2.5
—
4,097.2
3,507.8
461.0
4,558.2
—
3,507.8
293.4
1.6
589.4
461.0
1,050.4
0.9
$
—
—
0.9
—
0.9
Securities
Purchased
under
Agreements
to Resell
$
1,596.5
$
—
$
1,596.5
$
1,596.5
$
DECEMBER
31, 2019
GROSS
RECOGNIZED
ASSETS
OFFSET
GROSS
AMOUNTS
IN
THE
BALANCE
SHEET(2)
NET
PRESENTED
THE
AMOUNTS
IN
BALANCE
SHEET
GROSS
AMOUNTS
OFFSET
IN
BALANCE
SHEET
NOT
THE
NET
AMOUNT(3)
(In Millions)
Derivative Assets(1)
Foreign
Exchange
Contracts OTC
$
2,691.1
$
2,334.1
$
357.0
$
16.5
$
Interest
Rate
Swaps OTC
Interest
Rate
Swaps
Exchange Cleared
Derivatives
Total
Arrangement
Subject
to a
Master
Netting
Derivatives
Total
Arrangement
Not
Subject
to a
Master
Netting
Total Derivatives
151.9
1.0
3.9
—
2,844.0
2,338.0
543.7
3,387.7
—
2,338.0
148.0
1.0
506.0
543.7
1,049.7
—
—
16.5
0.3
16.8
Securities
Purchased
under
Agreements
to Resell
$
707.8
$
—
$
707.8
$
707.8
$
(1) Derivative assets are reported in Other Assets on the consolidated balance sheets. Other Assets (excluding derivative assets) totaled $7.3 billion and $7.4 billion as of
December 31, 2020 and 2019, respectively.
(2) Including cash collateral received from counterparties.
(3) Northern Trust did not possess any cash collateral that was not offset on the consolidated balance sheets that could have been used to offset the net amounts presented on the
consolidated balance sheets as of December 31, 2020 and 2019.
2020 Annual Report | Northern Trust Corporation 157
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, 2020 and 2019.
TABLE 134: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
858.6
26.5
—
35.3
920.4
1,144.8
2,065.2
—
632.9
39.4
0.7
20.9
693.9
1,000.6
1,694.5
—
DECEMBER
31, 2020
GROSS
RECOGNIZED
LIABILITIES
OFFSET
GROSS
AMOUNTS
THE
IN
BALANCE
SHEET(2)
NET
PRESENTED
THE
AMOUNTS
IN
BALANCE
SHEET
GROSS
AMOUNTS
IN
OFFSET
BALANCE
SHEET
NOT
THE
NET
AMOUNT(3)
(In Millions)
Derivative Liabilities(1)
Exchange
Foreign
Contracts OTC
$
3,577.7
$
2,718.6
$
859.1
$
0.5
$
Interest
Rate
Swaps OTC
Interest
Rate
Swaps
Exchange Cleared
Other
Financial Derivatives
Derivatives
Total
Arrangement
Subject
to a
Master
Netting
Derivatives
Total
Arrangement
Not
Subject
to a
Master
Netting
Total Derivatives
125.0
—
35.3
98.5
—
—
26.5
—
35.3
3,738.0
2,817.1
920.9
1,144.8
4,882.8
—
2,817.1
1,144.8
2,065.7
—
—
—
0.5
—
0.5
Securities
Sold
under
Agreements
to Repurchase
$
39.8
$
—
$
39.8
$
39.8
$
DECEMBER
31, 2019
GROSS
RECOGNIZED
LIABILITIES
OFFSET
GROSS
AMOUNTS
IN
THE
BALANCE
SHEET(2)
NET
PRESENTED
THE
AMOUNTS
IN
BALANCE
SHEET
GROSS
AMOUNTS
OFFSET
IN
BALANCE
SHEET
NOT
THE
NET
AMOUNT(3)
(In Millions)
Derivative Liabilities(1)
Exchange
Foreign
Contracts OTC
$
2,181.6
$
1,548.6
$
633.0
$
0.1
$
Interest
Rate
Swaps OTC
Interest
Rate
Swaps
Exchange Cleared
Other
Financial Derivatives
Derivatives
Total
Arrangement
Subject
to a
Master
Netting
Derivatives
Total
Arrangement
Not
Subject
to a
Master
Netting
Total Derivatives
96.7
0.7
33.4
57.3
—
12.5
39.4
0.7
20.9
2,312.4
1,618.4
694.0
1,000.6
3,313.0
—
1,618.4
1,000.6
1,694.6
—
—
—
0.1
—
0.1
Securities
Sold
under
Agreements
to Repurchase
$
489.7
$
—
$
489.7
$
489.7
$
(1) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets. Other Liabilities (excluding derivative liabilities) totaled $3.5 billion and $3.1
billion as of December 31, 2020 and 2019, respectively.
(2) Including cash collateral deposited with counterparties.
(3) Northern Trust did not place any cash collateral with counterparties that was not offset on the consolidated balance sheets that could have been used to offset the net
amounts presented on the consolidated balance sheets as of December 31, 2020 and 2019.
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 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
158 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $111.0 million and $49.0
million, respectively, as of December 31, 2020, and $196.3 million and $2.0 million, respectively, as of December 31,
2019, 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 $1,648.2 million and $766.2 million at December 31, 2020 and 2019, respectively. Cash collateral
amounts deposited with derivative counterparties on those dates included $1,044.0 million and $327.1 million,
respectively, posted against these liabilities, resulting in a net maximum amount of termination payments that could have
been required at December 31, 2020 and 2019 of $604.2 million and $439.1 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 – Variable Interest Entities
Variable Interest Entities (VIEs) are defined within GAAP as entities which either (1) lack sufficient equity at risk to
permit the entity to finance its activities without additional subordinated financial support, (2) have equity investors that
lack attributes typical of an equity investor, such as the ability to make significant decisions through voting rights affecting
the entity’s operations, or the obligation to absorb expected losses or the right to receive residual returns of the entity, or (3)
are structured with voting rights that are disproportionate to the equity investor’s obligation to absorb losses or right to
receive returns, and substantially all of the activities are conducted on behalf of the holder of the equity investment at risk
with disproportionately few voting rights. Investors that finance a VIE through debt or equity interests 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’s economic performance and, through its variable interest, the obligation to absorb losses or
the right to receive returns 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, 2020 and 2019, the carrying amounts of these
investments, which are included in Loans and Leases on the consolidated balance sheets, were $11.4 million and $42.6
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
2020 Annual Report | Northern Trust Corporation 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020 and
2019, the carrying amounts of these investments in community development projects that generate tax credits, included in
Other Assets on the consolidated balance sheets, totaled $919.6 million and $749.3 million, respectively, of which $874.0
million and $700.3 million are VIEs as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019,
liabilities related to unfunded commitments on investments in tax credit community development projects, included in
Other Liabilities on the consolidated balance sheets, totaled $351.6 million and $376.2 million, respectively, of which
$335.9 million and $354.3 million related to undrawn commitments on VIEs as of December 31, 2020 and 2019,
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 $78.9 million and $67.4
million, respectively, as of December 31, 2020 and 2019.
Investment Funds. Northern Trust acts as asset manager for various funds in which clients of Northern Trust are
investors. As an asset manager of funds, Northern Trust earns a competitively priced fee that is based on assets managed
and varies with each fund’s investment objective. Based on its analysis, Northern Trust has determined that it is not the
primary beneficiary of these VIEs under GAAP.
Some of the funds for which Northern Trust acts as asset manager comply or operate in accordance with requirements
that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds and
therefore the funds are exempt from the consolidation requirements in ASC 810-10. Northern Trust voluntarily waived
$36.4 million of money market mutual fund fees for the year ended December 31, 2020 related to the low-interest-rate
environment and certain competitive factors. Northern Trust did not waive any money market mutual fund fees for the year
ended December 31, 2019. Northern Trust does not have any contractual obligations to provide financial support to the
funds. Any potential future support of the funds will be at the discretion of Northern Trust after an evaluation of the
specific facts and circumstances.
Periodically, Northern Trust makes seed capital investments to certain funds. As of December 31, 2020, Northern
Trust had no seed capital investments and no unfunded commitments related to seed capital investments. 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.
160 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 30 – Pledged and Restricted Assets
Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits,
repurchase agreements and borrowings, as well as for other purposes, including support for securities settlement, primarily
related to client activities, and for derivative contracts.
The following table presents Northern Trust’s pledged assets.
TABLE 135: 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,
2020
2.9
$
32.5
12.1
47.5
$
2019
1.0
33.4
7.7
42.1
$
$
Collateral required for these purposes totaled $5.7 billion and $8.5 billion at December 31, 2020 and 2019, respectively.
The following table presents the available for sale debt securities pledged as collateral that are included in pledged assets.
TABLE 136: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES INCLUDED IN PLEDGED ASSETS
SECURITIES
SOLD
TO REPURCHASE
UNDER
AGREEMENTS
DERIVATIVE CONTRACTS
(In Millions)
Debt Securities
Available
for Sale
DECEMBER
31, 2020
DECEMBER
31, 2019
DECEMBER
31, 2020
DECEMBER
31, 2019
$
33.0
$
487.1
$
27.1
$
14.4
The secured parties to these transactions have the right to repledge or sell the securities as it relates to $33.5 million
and $487.2 million of the pledged collateral as of December 31, 2020 and 2019, 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 reverse 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, 2020 or 2019.
TABLE 137: ACCEPTED COLLATERAL
(In Millions)
Collateral
that
may
be
repledged
or sold
Reverse
repurchase agreements
Derivative contracts
Collateral
that
may
not
be
repledged
or sold
Reverse
repurchase agreements
FOR
THE
YEAR
ENDED
DECEMBER 31,
$
2020
1,179.8
$
0.9
2019
707.8
16.8
500.0
—
Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $0.4 billion in 2020 as compared to
$1.5 billion in 2019. As a result of the economic environment arising from the COVID-19 pandemic, the Federal Reserve
reduced the reserve requirement to zero percent on March 26, 2020.
Note 31 – Restrictions on Subsidiary Dividends and Loans or Advances
Various federal and state statutory provisions limit the amount of dividends the Bank can pay to the Corporation without
regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state-chartered
bank that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year
would exceed the total of its retained net income (as defined by regulatory agencies) for that year combined with its
retained net income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount
greater than its “undivided profits,” as defined, without regulatory and stockholder approval.
Under Illinois law, an Illinois state bank, prior to paying a dividend, must carry over to surplus at least one-tenth of its
net profits since the date of the declaration of the last preceding dividend, until the bank’s surplus is equal to its capital. In
2020 Annual Report | Northern Trust Corporation 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 may pay dividends only in
accordance with the capital plan rules and capital adequacy standards of the Federal Reserve).
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 32 – Reporting Segments and Related Information
Segment Information. Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth
Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by
the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are
allocated fully to C&IS and Wealth Management.
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.” 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, 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, 2020, 2019, and 2018.
162 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 138: CORPORATE & 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
Interest Income(1)
Net
Revenue(1)
Provision
for
Credit Losses
Noninterest Expense
Income
before
Provision
for
(1)
Income Taxes
(1)
Income Taxes
Net Income
Percentage
of
Consolidated
Net Income
Average Assets
(1) Non-GAAP financial measures stated on an FTE basis.
TABLE 139: 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
Interest Income(1)
Net
Revenue(1)
Provision
for
Credit Losses
Noninterest Expense
Income
before
Provision
for
(1)
Income Taxes
(1)
Income Taxes
Net Income
Percentage
of
Consolidated
Net Income
Average Assets
(1) Non-GAAP financial measures stated on an FTE basis.
TABLE 140: TREASURY AND OTHER RESULTS OF OPERATIONS
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
$
2,321.6
$
2,211.5
$
2,173.1
276.3
222.5
2,820.4
665.5
3,485.9
38.1
2,752.7
695.1
174.4
520.7
$
232.2
178.2
2,621.9
918.7
3,540.6
1.9
2,605.5
933.2
219.4
$
713.8
$
233.4
183.0
2,589.5
992.2
3,581.7
1.9
2,421.4
1,158.4
255.3
903.1
43 %
48 %
58 %
$
104,790.6
$
87,557.1
$
82,996.5
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
$
1,673.4
$
1,640.6
$
1,580.6
14.1
168.0
1,855.5
812.1
2,667.6
86.9
1,559.7
1,021.0
291.8
729.2
$
18.7
131.1
1,790.4
792.0
2,582.4
(16.4)
1,531.6
1,067.2
271.1
$
796.1
$
4.2
102.7
1,687.5
816.5
2,504.0
(16.4)
1,460.0
1,060.4
262.1
798.3
60 %
53 %
51 %
$
32,020.5
$
29,994.3
$
26,163.7
($
In Millions)
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
Noninterest Income
Income(1)
Interest
Net
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) Non-GAAP financial measures stated on an FTE basis.
$
$
$
(18.3)
$
(17.1)
$
—
(18.3)
35.8
(54.1)
(13.5)
—
(17.1)
6.4
(23.5)
(5.8)
(40.6)
$
(17.7)
$
60.5
(144.8)
(84.3)
135.5
(219.8)
(74.8)
(145.0)
(3)%
—
$
(1)%
(9)%
—
$
13,786.4
2020 Annual Report | Northern Trust Corporation 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 141: CONSOLIDATED FINANCIAL INFORMATION
(In Millions)
Noninterest Income
Trust,
Investment
and
Other
Servicing Fees
Foreign
Exchange
Trading Income
Other
Noninterest Income
Total
Noninterest Income
Interest Income(1)
Net
Revenue(1)
Provision
for
Credit Losses
Noninterest Expense
Income
before
Provision
for
(1)
Income Taxes
(1)
Income Taxes
Net Income
Average Assets
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
$
3,995.0
$
3,852.1
$
3,753.7
290.4
372.2
4,657.6
1,477.6
6,135.2
125.0
4,348.2
1,662.0
452.7
1,209.3
136,811.1
$
$
250.9
292.2
4,395.2
1,710.7
6,105.9
307.2
276.6
4,337.5
1,663.9
6,001.4
(14.5)
(14.5)
4,143.5
1,976.9
484.7
1,492.2
117,551.4
$
$
4,016.9
1,999.0
442.6
1,556.4
122,946.6
$
$
(1) Non-GAAP financial measures stated on an FTE basis. The consolidated figures include $34.4 million, $32.8 million, and $41.2 million, of FTE adjustments for 2020, 2019,
and 2018, 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 following table summarizes Northern Trust’s performance based on the allocation process described above
without regard to guarantors or the location of collateral.
TABLE 142: DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE
(In Millions)
2020
Non-U.S.
U.S.
Total
2019
Non-U.S.
U.S.
Total
2018
Non-U.S.
U.S.
Total
TOTAL ASSETS
TOTAL
REVENUE(1)
INCOME BEFORE
INCOME TAXES
NET INCOME
$
$
$
$
$
$
38,393.8
$
131,610.1
170,003.9
$
27,888.6
$
108,939.8
136,828.4
$
32,712.9
$
99,499.6
132,212.5
$
1,737.6
$
4,363.2
6,100.8
$
1,889.5
$
4,183.6
6,073.1
$
2,018.1
$
3,942.1
5,960.2
$
404.0
$
1,223.6
1,627.6
$
600.0
$
1,344.1
1,944.1
$
786.4
$
1,171.4
1,957.8
$
302.6
906.7
1,209.3
451.0
1,041.2
1,492.2
625.7
930.7
1,556.4
(1) Total revenue is comprised of net interest income and noninterest income.
164 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 33 – Regulatory Capital Requirements
Northern Trust Corporation 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, 2020 and 2019, 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. As a result of the stress
test results published by the Federal Reserve on June 25, 2020, Northern Trust’s stress capital buffer requirement for the
2020 Capital Plan cycle was set at 2.5%. The 2020 stress capital buffer became effective October 1, 2020, and results in a
common equity tier 1 capital ratio minimum requirement of 7.0%.
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, 2020 and 2019, 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, 2020, that management believes have adversely affected the capital categorization of any Northern Trust
subsidiary bank.
2020 Annual Report | Northern Trust Corporation 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides capital ratios for the Corporation and the Bank determined by Basel III phased in
requirements.
TABLE 143: 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, 2020
DECEMBER
31, 2019
STANDARDIZED
APPROACH
ADVANCED
APPROACH
STANDARDIZED
APPROACH
ADVANCED
APPROACH
BALANCE
RATIO BALANCE
RATIO BALANCE
RATIO BALANCE
RATIO
$
9,962.2
12.8 %
$
9,962.2
13.4 %
$
8,898.7
12.7 %
$
8,898.7
13.2 %
10,003.3
13.0
10,003.3
13.8
8,476.0
12.3
8,476.0
13.0
Northern
Trust Corporation
The
Northern
Trust Company
N/A
4,994.4
N/A
6.5
N/A
4,717.1
N/A
6.5
N/A
4,472.0
N/A
6.5
N/A
4,230.0
N/A
6.5
Tier
1 Capital
Northern
Trust Corporation
The
Northern
Trust Company
10,822.2
10,003.3
13.9
13.0
10,822.2
10,003.3
14.5
13.8
10,152.0
8,476.0
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:
Northern
Trust Corporation
The
Supplementary Leverage(1)
Northern
Trust Company
Northern
Trust Corporation
The
Northern
Trust Company
Minimum
to
qualify
as well-capitalized:
Northern
Trust Corporation
The
Northern
Trust Company
4,659.7
6,147.0
12,085.7
11,123.1
7,766.2
7,683.7
10,822.2
10,003.3
N/A
7,105.0
N/A
N/A
N/A
N/A
6.0
8.0
15.6
14.5
10.0
10.0
7.6
7.0
N/A
5.0
N/A
N/A
N/A
N/A
4,467.6
5,805.6
11,825.8
10,863.3
7,446.0
7,257.0
10,822.2
10,003.3
6.0
8.0
15.9
15.0
10.0
10.0
7.6
7.0
4,205.3
5,504.0
11,456.7
9,610.4
7,008.8
6,880.1
10,152.0
8,476.0
N/A
7,105.0
N/A
5.0
N/A
5,835.4
10,822.2
10,003.3
N/A
3,883.4
8.6
7.7
N/A
3.0
N/A
N/A
N/A
N/A
14.5
12.3
6.0
8.0
16.3
14.0
10.0
10.0
8.7
7.3
N/A
5.0
N/A
N/A
N/A
N/A
10,152.0
8,476.0
4,051.6
5,206.2
11,332.3
9,486.0
6,752.7
6,507.7
10,152.0
8,476.0
N/A
5,835.4
10,152.0
8,476.0
N/A
3,983.6
15.0
13.0
6.0
8.0
16.8
14.6
10.0
10.0
8.7
7.3
N/A
5.0
7.6
6.4
N/A
3.0
(1) In November 2019, the Federal Reserve and other U.S. federal banking agencies adopted a final rule that established a deduction for central bank deposits from the total
leverage exposures of custodial banking organizations, including Northern Trust Corporation and The Northern Trust Company, equal to the lesser of (i) the total amount of
funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the
custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. The rule became effective on April 1, 2020.
Further, on April 1, 2020, the Federal Reserve issued an interim final rule that requires bank holding companies, including Northern Trust Corporation, to deduct, on a
temporary basis, deposits with the Federal Reserve and investments in U.S. Treasury securities from their total leverage exposure. The U.S. Treasury securities deduction is
applied in addition to the central bank deposits relief referred to above. This rule became effective on April 1, 2020 and will remain in effect through the first quarter of 2021.
On May 15, 2020, the U.S. federal banking agencies released an interim final rule that permits insured depository institutions of bank holding companies also to temporarily
exclude deposits with the Federal Reserve and investments in U.S. Treasury securities from their total leverage exposure. The Northern Trust Company did not elect to take this
deduction.
The supplementary leverage ratios at December 31, 2020 for the Northern Trust Corporation and The Northern Trust Company reflect the impact of these final rules.
The U.S. banking agencies’ capital rules are based on the Basel III framework. Under the Basel III framework, these
rules are currently being phased in, and will come into full effect by January 1, 2022. Northern Trust Corporation’s
remaining elements of the rules subject to the phase in requirements are not material to regulatory capital ratios.
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.
166 2020 Annual Report | Northern Trust Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Note 34 – Northern Trust Corporation (Corporation only)
Condensed financial information is presented in the following tables. Investments in wholly-owned subsidiaries are carried
on the equity method of accounting.
TABLE 144: 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,
2020
2019
$
2,516.0 $
2,670.0
10,799.9
172.8
900.9
2,559.1
2,370.0
9,349.8
163.0
1,444.7
17,059.6 $
15,886.6
$
$
3,122.4 $
1,189.3
277.8
781.8
5,371.3
884.9
408.6
963.6
12,207.7
428.0
(3,204.5)
11,688.3
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
15,886.6
$
17,059.6 $
2020 Annual Report | Northern Trust Corporation 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 145: 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 146: CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
CASH
FLOWS
FROM
OPERATING ACTIVITIES
Net Income
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
$
900.0
$
2,024.1
$
1,200.9
—
46.5
19.1
965.6
104.2
26.2
130.4
835.2
28.2
863.4
326.0
19.9
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
$
$
1,209.3
$
1,492.2
$
1,556.4
56.2
46.4
46.4
1,153.1
$
1,445.8
$
1,510.0
FOR
THE
YEAR
ENDED
DECEMBER 31,
2020
2019
2018
$
1,209.3
$
1,492.2
$
1,556.4
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
Investments
in
and
Advances
to
Subsidiaries, net
Acquisition
of a
Business,
Net
of
Cash Received
Other
Investing
Activities, net
Net
Cash
(Used
in)
Provided
by
Investing Activities
CASH
FLOWS
FROM
FINANCING ACTIVITIES
Proceeds
from
Senior Notes
Repayments
of
Senior Notes
Redemption
of
Preferred
Stock
- Series C
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
Cash
on
Deposit
with
Subsidiary
Bank
Deposit
with
Subsidiary
Bank
at
Beginning
of Year
at
End
of Year
168 2020 Annual Report | Northern Trust Corporation
(345.9)
398.5
3.7
300.3
1,565.9
—
(800.0)
—
1.8
(798.2)
993.2
(508.6)
(400.0)
—
541.7
(400.4)
114.1
141.9
1,889.5
—
540.0
—
3.7
543.7
(362.0)
(0.6)
(141.8)
125.6
1,177.6
1.0
(436.5)
(31.2)
(3.1)
(469.8)
498.0
497.9
—
—
392.5
(299.8)
(1,100.2)
19.5
(584.6)
(45.9)
15.4
(810.8)
(43.1)
2,559.1
44.0
(529.7)
(46.4)
0.9
(740.9)
1,692.3
866.8
$
2,516.0
$
2,559.1
$
—
—
—
(924.3)
32.6
(405.4)
(46.4)
2.1
(843.5)
(135.7)
1,002.5
866.8
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, 2020, 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, 2020, 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, 2020, 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, 2020, 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, 2020, included in this Annual Report on
Form 10-K, has issued an attestation report on the effectiveness of the Corporation’s internal control over financial
reporting as of December 31, 2020.
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.
2020 Annual Report | Northern Trust Corporation 169
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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes (collectively, the consolidated financial
statements), and our report dated February 23, 2021 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 23, 2021
170 2020 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 2021 Annual Meeting of Stockholders: “Item 1 – Election of Directors,” “Information
about the Nominees for Director,” “Security Ownership by Directors and Executive Officers,” “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 –
Board Committees.”
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 2021 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 2021 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 2021 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 2021 Annual Meeting of Stockholders.
2020 Annual Report | Northern Trust Corporation 171
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, 2020 and 2019
Consolidated Statements of Income - Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Stockholders’ Equity - Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows - Years Ended December 31, 2020, 2019, and 2018
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
4.1
4.2
4.3
4.4
Restated
by
reference
Certificate
to
of
Exhibit
Incorporation
3.1
the
to
of
Northern
Corporation’s
Trust
Current
Corporation,
Report
as
Form
on
amended
filed
8-K
to
date
April
(incorporated
19, 2006).
herein
of
Certificate
Corporation,
Current
Report
dated
on
Designation
August
Form
8-K
Series
2016
of
4,
filed
(incorporated
8, 2016).
August
D
Non-Cumulative
herein
by
Perpetual
reference
Preferred
to
Exhibit
Stock
3.1
of
Northern
Trust
Corporation’s
to
the
of
Certificate
Corporation,
Current
Report
Designation
October
8-K
Form
dated
on
of
31,
filed
November
5, 2019).
Series
2019
E
Non-Cumulative
herein
(incorporated
Perpetual
by
reference
Preferred
to
Exhibit
Stock
3.1
of
Northern
Trust
Corporation’s
to
the
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 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).
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.
172 2020 Annual Report | Northern Trust Corporation
Exhibit
Number
10.1**
(i)**
(ii)**
10.2**
10.3**
(i)**
(ii)**
10.4**
10.5**
10.6**
(i)**
(ii)**
Description
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
Exhibit 10(v) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).
to
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)**
(iii)**
(iv)**
Form of Director Stock Unit Agreement (incorporated herein by reference to Exhibit 10(iii)
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012).
to the
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).
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).
2020 Annual Report | Northern Trust Corporation 173
Exhibit
Number
(v)**
(vi)**
(vii)**
(viii)**
10.8**
10.9**
10.10**
10.11**
10.12**
10.13**
10.14**
10.15**
(i)**
(ii)**
(iii)**
(iv)**
(v)**
(vi)**
(vii)**
(viii)**
Description
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).
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).
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).
Northern Trust Corporation 1997 Stock Plan for Non-Employee Directors (incorporated herein by reference
to Exhibit 10(xix) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31,
1998).
Northern Trust Corporation 1997 Deferred Compensation Plan for Non-Employee Directors, as amended and
restated effective as of July 15, 2014 (incorporated herein by reference to Exhibit 10.1 to the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).
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).
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).
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).
Form of Non-Solicitation Agreement and Confidentiality Agreement (incorporated herein by reference to
Exhibit 10(iii) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009).
Northern Trust Corporation 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).
Form of Director Stock Unit Agreement (incorporated herein by reference to Exhibit 10.10
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017).
to the
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 2020 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, 2020).
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).
Form of 2020 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, 2020).
174 2020 Annual Report | Northern Trust Corporation
Exhibit
Number
10.16**
(i)**
(ii)**
Description
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).
First Amendment, dated and effective October 3, 2017 (incorporated herein by reference to Exhibit 10.18(i)
to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019).
Second Amendment, dated September 27, 2019 and effective October 1, 2018 (incorporated herein by
reference to Exhibit 10.18(ii) to the Corporation’s Annual Report on Form 10-K for the year ended December
31, 2019).
10.17**
Northern Trust Corporation Non-Employee Director Compensation Plan, as amended.
10.18**
Northern Partners Incentive Plan, as amended and restated on February 16, 2021.
10.19**
10.20**
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).
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).
(i)
(ii)
(iii)
21
23
31.1
31.2
32
101
Amendment Number One to The Northern Trust Company Death Benefit Plan, dated July 11, 2019 and
effective May 17, 2019.
Amendment Number Two to The Northern Trust Company Death Benefit Plan, dated July 29, 2019 and
effective May 17, 2019.
Amendment Number Three to The Northern Trust Company Death Benefit Plan, dated March 18, 2020 and
effective May 17, 2019.
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, 2020, 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.
2020 Annual Report | Northern Trust Corporation 175
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 23, 2021
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
176 2020 Annual Report | Northern Trust Corporation
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Executive Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
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
Date: February 23, 2021
Director
Director
Director
Director
Director
Director
2020 Annual Report | Northern Trust Corporation 177
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, 2020 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 23, 2021
/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, 2020 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 23, 2021
/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, 2020 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 23, 2021
/s/ Jason J. Tyler
Jason J. Tyler
Chief Financial Officer
(Principal Financial Officer)
February 23, 2021
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 Limited LLC
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
Chairman of the Board
Tropicale Foods Group
Manufacturer of frozen foods
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
Vice Chairman
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
President – 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 2021 Annual Meeting of Stockholders will be held on
Tuesday, April 20, 2021, at 10:30 A.M. (Central Time). If
you plan to attend the Annual Meeting, please review the
information regarding attendance contained in the proxy
statement relating to the Annual Meeting.
STOCK LISTING
The common stock of Northern Trust Corporation is
traded on the NASDAQ Global Select Market under the
symbol “NTRS”.
AVAILABLE INFORMATION
Through our website at northerntrust.com, we make
available free of charge our Annual Report on Form 10-
K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and all other reports and all amendments to
those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we file
such material with, or furnish such material to, the SEC.
The contents of our website, the website of the SEC or
any other website referenced herein are not a part of this
document.
STOCK TRANSFER AGENT, REGISTRAR,
AND DIVIDEND DISBURSING AGENT
EQ Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
General Phone Number: 1-800-468-9716
Internet Site: shareowneronline.com
INVESTOR RELATIONS
Please direct Investor Relations inquiries to:
Mark M. Bette, Senior Vice President, at
312-444-2301 or mark_bette@ntrs.com; or
Kelly 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.
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
2020
2019
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 Stock3
Per Common Share
Net Income — Basic
Net Income — Diluted
Cash Dividends Declared per Common Share
Book Value — End of Period
Market Value — 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
Financial Ratios and Metrics
Return on Average Common Equity
Return on Average Assets
Dividend Payout Ratio
Net Interest Margin (Fully Taxable Equivalent Basis2)
$
$
6,135.2
1,209.3
592.0
56.2
5.48
5.46
2.80
51.87
93.14
$ 158,531.6
170,003.9
143,878.0
11,688.3
$ 124,132.9
136,811.1
108,511.1
11,192.6
$
14,532.5
11,262.8
7,424.5
1,405.3
$
$
6,105.9
1,492.2
565.9
46.4
6.66
6.63
2.60
46.82
106.24
$ 125,236.6
136,828.4
109,120.6
11,091.0
$ 107,109.4
117,551.4
89,786.0
10,648.4
$ 12,050.4
9,233.5
5,894.6
1,231.3
11.2%
0.88
51.3
1.19
14.9%
1.27
39.2
1.60
—%
(19)
5
21
(18)%
(18)
8
11
(12)
27%
24
32
5
16%
16
21
5
21%
22
26
14
CAPITAL RATIOS
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Tier 1 Leverage
Supplementary Leverage
DECEMBER 31, 2020
DECEMBER 31, 2019
Standardized
Approach
Advanced
Approach
Standardized
Approach
Advanced
Approach
12.8%
13.9
15.6
7.6
N/A
13.4%
14.5
15.9
7.6
8.6
12.7%
14.5
16.3
8.7
N/A
13.2%
15.0
16.8
8.7
7.6
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.
A reconciliation of these measures prepared in accordance with GAAP to those presented on a fully taxable equivalent basis is available in the enclosed Annual Report on Form 10-K for the
year ended December 31, 2020.
3 Dividends on Preferred Stock in 2020 includes $11.5 million related to the difference between the redemption amount of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock,
which was redeemed in the first quarter of 2020, and its carrying value.
The 2020 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
Annual Report on Form 10-K
For the Year Ended December 31, 2020
NORTHERN TRUST CORPORATION
50 SOUTH LA SALLE STREET \ CHICAGO, ILLINOIS 60603
N O RT H E R N T RU ST. CO M