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NORTHERN TRUST CORP - Annual Report: 2019 (Form 10-K)




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________
FORM 10-K
____________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to                         
Commission File No. 001-36609
____________________________________________________________
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________________
Delaware
36-2723087
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
50 South La Salle Street
 
Chicago,
Illinois
60603
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (312630-6000
____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock, $1.66 2/3 Par Value
NTRS
The NASDAQ Stock Market LLC
Depositary Shares, each representing 1/1,000th interest in a share of Series C Non-Cumulative Perpetual Preferred Stock
NTRSP
The NASDAQ Stock Market LLC
Depositary Shares, each representing 1/1,000th interest in a share of Series E Non-Cumulative Perpetual Preferred Stock
NTRSO
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
Accelerated filer
Emerging growth company
Non-accelerated filer
Smaller reporting company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes     No  
The aggregate market value of the registrant’s common stock as of June 28, 2019 (the last business day of the registrant’s most recently completed second quarter), based upon the last sale price of the common stock at June 28, 2019 as reported by The NASDAQ Stock Market LLC, held by non-affiliates was approximately $19.2 billion. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.
At January 31, 2020, 209,247,666 shares of common stock, $1.66 2/3 par value, were outstanding.
Portions of the registrant’s Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.





NORTHERN TRUST CORPORATION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 
Page
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Supplemental Item
Information About Our Executive Officers
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
 
 
Item 15
Item 16
 
 
 
 

i 2019 Annual Report | Northern Trust Corporation
 




PART I
ITEM 1 – BUSINESS
Northern Trust Corporation
Northern Trust Corporation (Corporation) is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation is a financial holding company conducting business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (Bank).
The Bank is an Illinois banking corporation headquartered in Chicago and the Corporation’s principal subsidiary. Founded in 1889, the Bank conducts its business through its U.S. operations and its various U.S. and non-U.S. branches and subsidiaries. At December 31, 2019, the Bank had consolidated assets of $135.9 billion and common bank equity capital of $9.3 billion.
The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a network of offices in 21 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. At December 31, 2019, the Corporation had consolidated total assets of $136.8 billion and stockholders’ equity of $11.1 billion.
The Corporation expects that the Bank will continue in the foreseeable future to be the major source of the Corporation’s consolidated assets, revenues, and net income. Except where the context otherwise requires, references to “Northern Trust,” “we,” “us,” “our,” "its," or similar terms mean Northern Trust Corporation and its subsidiaries on a consolidated basis.

Business Overview
Northern Trust focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management. Northern Trust reports certain income and expense items not allocated to C&IS and Wealth Management in a third reporting segment, Treasury and Other.

CORPORATE & INSTITUTIONAL SERVICES
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including, but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking; and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region. At December 31, 2019, total C&IS assets under custody/administration, assets under custody, and assets under management were $11.31 trillion, $8.50 trillion, and $917.5 billion, respectively.

WEALTH MANAGEMENT
Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. The business also includes the Global Family Office, which provides customized services to meet the complex financial needs of individuals and family offices in the United States and throughout the world with assets typically exceeding $200 million. In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking.
Wealth Management is one of the largest providers of advisory services in the United States, with assets under custody/administration, assets under custody, and assets under management of $738.8 billion, $735.7 billion, and $313.8 billion, respectively, at December 31, 2019. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.

ASSET MANAGEMENT
Asset Management, through the Corporation’s various subsidiaries, supports the C&IS and Wealth Management reporting segments by providing a broad range of asset management and related services and other products to clients around the world. Investment solutions are delivered through separately managed accounts, bank common and collective funds, registered investment companies, exchange traded funds, non-U.S. collective investment funds, and unregistered private investment funds. Asset Management’s capabilities include active and passive equity; active and passive fixed income; cash management; alternative asset classes (such as private equity and hedge funds of funds); and multi-manager advisory services and products. Asset Management’s activities also include overlay services and other risk management services. Asset Management operates

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 1




internationally through subsidiaries and distribution arrangements and its revenue and expense are fully allocated to C&IS and Wealth Management. As discussed above, Northern Trust managed $1.23 trillion in assets as of December 31, 2019, including $917.5 billion for C&IS clients and $313.8 billion for Wealth Management clients.

Competition
Northern Trust faces intense competition in all aspects and areas of its business. Competition comes from both regulated and unregulated financial services organizations, whose products and services span the local, national, and global markets in which Northern Trust conducts operations. Our competitors include a broad range of financial institutions and service companies, including other custodial banks, deposit-taking institutions, asset management firms, benefits consultants, trust companies, investment banking firms, insurance companies, investment counseling firms, and various financial technology companies, including software providers and data services firms. As our businesses grow and markets evolve, we may encounter increasing and new forms of competition around the world.
Northern Trust’s business strategy is to provide quality financial services to targeted market segments in which it believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to differentiate itself from its competitors with premier, holistic solutions and exceptional experiences tailored to meet clients’ needs. In addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and continual productivity improvements. Northern Trust also seeks to maintain its foundational strength with a strong, conservative balance sheet and a globally respected brand.

Economic Conditions And Government Policies
The earnings of Northern Trust are affected by numerous external influences. Chief among these are general economic conditions, both domestic and international, and actions that governments and their central banks take in managing their economies. These general conditions affect all of Northern Trust’s businesses, as well as the quality, value, and profitability of its loan and investment portfolios.
The Board of Governors of the Federal Reserve System (Federal Reserve Board) implements monetary policy through its open market operations in United States Government securities, its setting of the discount rate at which member banks may borrow from Federal Reserve Banks, and its changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve Board directly affect interest rates and therefore what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds.

Supervision and Regulation
Northern Trust is subject to extensive regulation under state and federal laws in the United States and in each of the jurisdictions in which it does business. The discussion below outlines significant elements of selected laws and regulations applicable to Northern Trust. Changes in laws or regulations applicable to Northern Trust may have a material effect on its businesses and results of operations.

FINANCIAL HOLDING COMPANY REGULATION
Under U.S. law, the Corporation is a bank holding company that has elected to be a financial holding company subject to the supervision, examination, and regulation of the Federal Reserve Board. A financial holding company is permitted to engage in a broader range of financial activities than a bank holding company. To maintain the Corporation’s status as a financial holding company, the Bank and the Corporation must remain “well-capitalized” and “well-managed,” and the Bank must have received at least a “satisfactory” rating in its most recent Community Reinvestment Act (CRA) examination. Failure to meet one or more of these requirements may result in restrictions on the Corporation’s ability to exercise powers granted to financial holding companies, to engage in new activities, to continue current activities, or to make acquisitions.

SUBSIDIARY REGULATION
The Bank is a member of the Federal Reserve System, with deposits insured by the Federal Deposit Insurance Corporation (FDIC), and is subject to regulation by both agencies. As an Illinois banking corporation, the Bank is also subject to Illinois state laws and regulations and to examination and supervision by the Division of Banking of the Illinois Department of Financial and Professional Regulation. The Bank is also registered as a transfer agent with the Federal Reserve Board and is registered provisionally as a swap dealer with the U.S. Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act. As a result, the Bank is subject to supervision, examination and enforcement by certain other regulatory bodies, including the CFTC and the National Futures Association (NFA).
The Corporation’s nonbanking affiliates are subject to examination by the Federal Reserve Board and, in certain circumstances, other functional regulators. The Corporation’s broker-dealer subsidiary is a member of the Financial Industry Regulatory Authority (FINRA), is registered with the U.S. Securities and Exchange Commission (SEC) as a broker-dealer, investment adviser, and municipal securities dealer, and is subject to the rules and regulations of these bodies. Certain

 
 
 
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nonbanking affiliates are registered with the CFTC as commodity trading advisors and commodity pool operators and subject to supervision and regulation by the CFTC and NFA. Other subsidiaries of the Corporation are registered with the SEC as investment advisers and are subject to regulation by the SEC. Subsidiaries may also be regulated by state regulators in various states.

THE DODD-FRANK ACT, AS AMENDED
In May 2018, the U.S. Congress passed, and the President signed, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Regulatory Relief Act), which amended parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and directed the Federal Reserve Board and other federal regulators to revise parts of their regulations that implement the Dodd-Frank Act. In October 2019, the Federal Reserve Board and other federal regulators finalized the revisions required by the Regulatory Relief Act. The following items provide a brief description of certain provisions of the Dodd-Frank Act, as implemented through final rules promulgated by the Federal Reserve Board and other agencies and amended by the Regulatory 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. The Corporation is required to submit its next Section 165(d) resolution plan by July 1, 2021. The FDIC has indicated that the Bank is not required to submit a resolution plan under the CIDI Resolution Plan Rule before the conclusion of a rulemaking regarding the CIDI Resolution Plan Rule requirements.
On March 24, 2017, the Federal Reserve Board and the FDIC provided joint written feedback to the Corporation regarding the resolution plan submitted by the Corporation in December 2015 pursuant to Section 165(d) of the Dodd-Frank Act (the 2015 165(d) Plan). The joint written feedback identified certain “shortcomings” in the Corporation’s 2015 165(d) Plan. While the identification of these shortcomings is different from a determination that the plan is not “credible,” the Corporation was required to address the shortcomings in a satisfactory manner in the Corporation’s resolution plan submitted to the Federal Reserve Board and the FDIC in December 2017 (the 2017 165(d) Plan). On March 29, 2019, the Federal Reserve Board and the FDIC jointly announced that they did not identify shortcomings or deficiencies in the 2017 165(d) Plan.
In addition, on June 27, 2018, the Bank submitted its resolution plan (the 2018 CIDI Plan) to the FDIC under the CIDI Resolution Plan Rule. To date, no formal written feedback or guidance has been received regarding the 2018 CIDI Plan.
Separately, the European Union Bank Recovery and Resolution Directive (BRRD), was adopted for European Union credit institutions, including certain of the Bank’s subsidiaries and branches, effective January 1, 2015. In accordance with applicable Commission de Surveillance du Secteur Financier (CSSF) guidance, a Simplified Recovery Plan for Northern Trust Global Services SE, a Luxembourg-registered indirect subsidiary of the Bank, has been established and will be reviewed and filed with the CSSF at least biennially. CSSF regulations also require institutions to submit resolution related data on an annual basis, a requirement for which Northern Trust Global Services SE has an established process.
Orderly Liquidation Authority. Under the Dodd-Frank Act, certain financial companies, such as the Corporation and certain of its covered subsidiaries, can be subjected to an orderly liquidation authority if in default or danger of default and their resolution under the U.S. Bankruptcy Code would have serious adverse effects on financial stability in the United States,

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 3




among other requirements set by statute. If the Corporation were subject to orderly liquidation authority, the FDIC would be appointed as its receiver, which would give the FDIC considerable powers to resolve the Corporation. Absent such actions, the Corporation, as a bank holding company, would remain subject to the U.S. Bankruptcy Code.
The Volcker Rule. The Volcker Rule bans proprietary trading subject to exceptions for market-making, hedging, certain trading activities in U.S. and foreign sovereign debt, certain trading activities of non-U.S. banking entities trading outside the United States, certain customer-driven matched swaps, and trading activities related to liquidity management. The Volcker Rule also imposes significant restrictions on sponsoring or investing in certain “covered funds,” such as hedge funds or private equity funds, again subject to exceptions. Northern Trust maintains an enterprise-wide compliance program to comply with the Volcker Rule.
Swaps and Other Derivatives. The Dodd-Frank Act imposed a regulatory structure on the over-the-counter derivatives market, including requirements for clearing, exchange trading, capital, margin, trade reporting, and recordkeeping. The Dodd-Frank Act also requires certain entities to register as a “major swap participant,” a “swap dealer,” a “major-security-based swap participant” or a “security-based swap dealer.” The Bank’s activities as a swap dealer are subject to the CFTC’s rules and regulations, including rules regarding internal and external business conduct standards, reporting and recordkeeping, mandatory clearing for certain swaps, trade documentation and confirmation requirements, and cross-border swap activities. The Bank is also subject to Federal Reserve Board regulations regarding mandatory posting and collection of margin by certain swap counterparties. The SEC’s rules related to security-based swaps are not currently applicable to the Bank’s swap-dealing activity and the Bank’s current trading activity does not mandate its regulation as a security-based swap dealer.

HOLDING COMPANY SUPPORT UNDER THE FEDERAL DEPOSIT INSURANCE ACT
The Dodd-Frank Act amended the Federal Deposit Insurance Act (FDIA) to obligate the Federal Reserve Board to require bank holding companies, such as the Corporation, to serve as a source of financial strength for any subsidiary depository institution. Under this requirement, the Corporation in the future could be required to provide financial assistance to the Bank should the Bank experience financial distress.

PAYMENT OF DIVIDENDS
The Corporation may pay dividends, repurchase stock, and make other capital distributions only in accordance with a capital plan that has been reviewed without objection by the Federal Reserve Board. Dividends from the Bank are a significant source of funds for the Corporation, and the Corporation’s ability to pay dividends on its common stock therefore depends on the ability of the Bank to pay sufficient dividends to the Corporation.
Various federal and state laws and regulations limit the amount of dividends that may be paid by the Bank to the Corporation without regulatory consent. The Bank may not pay any dividends if it is undercapitalized, or if the payment of the dividend would cause it to become undercapitalized. In general, the amount of dividends that may be paid in a calendar year is limited to its “recent earnings” (the current year’s net income combined with the retained net income of the two preceding years), or its “undivided profits” (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus), whichever is less. The ability of the Bank to pay dividends to the Corporation may also be affected by the capital adequacy standards applicable to the Bank (discussed further below), which include minimum requirements and buffers.

CAPITAL PLANNING AND STRESS TESTING
The Corporation’s capital distributions are subject to the Federal Reserve Board’s capital plan rules, which require the Corporation to submit annual capital plans to the Federal Reserve Board for review. The Corporation and other affected bank holding companies may pay dividends, repurchase stock, and make other capital distributions only in accordance with a capital plan to which the Federal Reserve Board has not objected.
The major components of that oversight are the Federal Reserve Board’s Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress tests (DFAST). These requirements involve both company-run and supervisory-run testing of capital under various scenarios, including baseline, adverse and severely adverse scenarios provided by the appropriate banking regulator. Results from the Corporation’s and the Bank’s annual company-run stress tests are reported to the appropriate regulators and made publicly available.
The Corporation submitted its most recent capital plan to the Federal Reserve Board in April 2019 as part of the Federal Reserve Board’s 2019 CCAR exercise, and the Federal Reserve Board did not object to the Corporation’s plan and proposed capital actions, including authority to increase its dividend payments and share repurchases, in mid-2019.
The Regulatory Relief Act and the Federal Reserve Board’s tailoring rule implementing changes required by such act did not directly affect the CCAR exercise or capital plan requirements that apply to the Corporation. The Corporation remains subject to annual company-run stress testing, annual supervisory stress testing, and annual capital plan submission requirements.

 
 
 
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The Corporation will submit its 2020 capital plan to the Federal Reserve Board by April 6, 2020. The Federal Reserve Board is expected to publish either its objection or non-objection to the 2020 capital plan and proposed capital actions, such as dividend payments and share repurchases, in mid-2020.
Under the DFAST regulations, the Corporation is required to undergo regulatory stress tests conducted by the Federal Reserve Board annually. The Bank also is required to conduct its own annual internal stress test (although it is permitted to combine certain reporting and disclosure of its stress test results with the results of the Corporation). Results from the Corporation’s and the Bank’s annual company-run stress tests are reported to the appropriate regulators and made publicly available. Northern Trust published the results of its company-run stress tests on June 21, 2019, and the results of its company-run mid-cycle stress tests on October 31, 2019.
In April 2018, the Federal Reserve Board proposed revisions to the CCAR exercise and DFAST regulations that would in part integrate the forward-looking stress test results with the non-stress capital requirements discussed below by using the results of the annual supervisory stress test to set specific buffer requirements above minimum capital requirements, which restrict capital distributions under the capital rule and establish a single approach to capital distribution limitations. The April 2018 proposal also would replace the 2.5% capital conservation buffer requirement discussed below with a stress capital buffer requirement and establish a stress leverage buffer requirement in addition to the minimum 4% Tier 1 leverage ratio requirement. Under the April 2018 proposal, an institution would be required to maintain capital ratios above its minimum plus its buffer requirements in order to avoid restrictions on its capital distributions and discretionary bonus payments. An institution would be bound by the most stringent distribution limitations, if any, as determined by its capital conservation buffer requirement, its stress leverage buffer requirement and, if applicable, its advanced approaches capital conservation buffer requirement and enhanced supplementary leverage ratio standard.
The April 2018 proposal also would remove the stress testing assumption that an institution would make all planned capital distributions over the planning horizon, including any planned common stock dividends and repurchases of common stock. Instead, the stress buffer requirements would include only four quarters of planned common stock dividends in order to preserve the incentives for an institution to engage in disciplined, forward-looking dividend planning. Further, the April 2018 proposal would adjust the methodology used in the supervisory stress test to assume that the institution takes actions to maintain a constant level of assets, including loans, trading assets, and securities over the planning horizon and assume that the institution’s risk-weighted assets and leverage ratio denominator generally remain unchanged over the planning horizon. The April 2018 proposal also would remove the quantitative objection in CCAR and eliminate the 30 percent dividend payout ratio as a criterion for heightened scrutiny of an institution's capital plan. The Federal Reserve Board would retain the CCAR qualitative supervisory review and the ability to object to an institution’s capital plan on qualitative grounds based on the adequacy of the institution’s capital planning processes for institutions supervised by the Large Institution Supervision Coordination Committee and other large and complex institutions.
As of the date of this filing, the Federal Reserve Board has not finalized the April 2018 proposal, and the Corporation cannot predict whether it will be finalized and whether such finalization would alter the way in which the CCAR exercise and DFAST regulations are applied to the Corporation.

CAPITAL ADEQUACY REQUIREMENTS
The Corporation, as a bank holding company, is subject to risk-based and leverage capital guidelines implemented by the Federal Reserve Board that are based on industry-standard guidelines published by the International Basel Committee on Banking Supervision (Basel Committee), known as Basel III. The Bank, as an FDIC-insured depository institution, is also required to meet risk-based and leverage capital guidelines established by regulators which are generally similar to those established by the Federal Reserve Board for bank holding companies.
Under the final Basel III rules, the Corporation, with the Bank, is one of a small number of “core” banking organizations that are required to use the advanced approaches methodologies to calculate and disclose publicly their risk-based capital ratios. The Corporation also is subject to a capital floor that is based on the Basel III standardized approach to calculating risk-based capital ratios. The Corporation is therefore required to calculate its risk-based capital ratios under both the standardized and advanced approaches, and is subject to the more stringent of the two in the assessment of its capital adequacy.

 
 
 
 
 
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The Bank’s risk-based and leverage capital ratios at December 31, 2019, were well above the minimum regulatory requirements established by U.S. banking regulators. The risk-based and leverage capital ratios for the Corporation and the Bank, together with the regulatory minimum ratios and the ratios required for classification as “well-capitalized,” are provided in the following chart.

TABLE 1: RISK-BASED AND LEVERAGE CAPITAL RATIOS AS OF DECEMBER 31, 2019
 
COMMON EQUITY
TIER 1 CAPITAL
TIER 1 CAPITAL
TOTAL CAPITAL
TIER 1 LEVERAGE
SUPPLEMENTARY LEVERAGE
 
STANDARDIZED
APPROACH

ADVANCED
APPROACH

STANDARDIZED
APPROACH

ADVANCED
APPROACH

STANDARDIZED
APPROACH

ADVANCED
APPROACH

STANDARDIZED
APPROACH

ADVANCED
APPROACH

ADVANCED
APPROACH

Northern Trust Corporation
12.7
%
13.2
%
14.5
%
15.0
%
16.3
%
16.8
%
8.7
%
8.7
%
7.6
%
The Northern Trust Company
12.3
%
13.0
%
12.3
%
13.0
%
14.0
%
14.6
%
7.3
%
7.3
%
6.4
%
Minimum required ratio
4.5
%
4.5
%
6.0
%
6.0
%
8.0
%
8.0
%
4.0
%
4.0
%
3.0
%
“Well-capitalized” minimum ratios, as applicable
 
 
 
 
 
 
 
 
 
Northern Trust Corporation
N/A

N/A

6.0
%
6.0
%
10.0
%
10.0
%
N/A

N/A

N/A

The Northern Trust Company
6.5
%
6.5
%
8.0
%
8.0
%
10.0
%
10.0
%
5.0
%
5.0
%
3.0
%

Advanced approaches institutions, such as the Corporation and the Bank, are subject to a minimum supplementary leverage ratio of 3.0%. Advanced approaches institutions that are insured depository institutions, such as the Bank, also must maintain at least a 3.0% supplementary leverage ratio to be considered “well-capitalized.” The Corporation and Bank are also subject to a capital conservation buffer, which requires them to hold a buffer of common equity Tier 1 capital above the minimum risk-based capital requirements in order to avoid constraints on dividends, equity repurchases and compensation. The minimum capital conservation buffer increased to 2.5% in 2019 from 1.875% in 2018.
A “countercyclical buffer” of 0% to 2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking organizations, such as the Corporation, is also a component of the capital adequacy framework. In general, the amount of the countercyclical capital buffer is a weighted average of the countercyclical capital buffer established in the various jurisdictions in which the banking organization has credit exposures. The U.S. countercyclical buffer is currently set at 0%, but certain other jurisdictions in which the Corporation has credit exposures currently have countercyclical buffers set at levels greater than 0%, which slightly increase the weighted average countercyclical buffer to which the Corporation is subject.
As discussed above, in April 2018 the Federal Reserve Board proposed revisions to the Basel III rules that would in part integrate the forward-looking stress test results with the non-stress capital requirements discussed in this section. If implemented, the revisions would establish revised capital requirements for large banking organizations, such as the Corporation, that are institution-specific and risk-sensitive.

LIQUIDITY STANDARDS
Northern Trust is subject to the U.S. liquidity coverage ratio (LCR) requirement, which is designed to ensure that covered banking organizations including the Corporation and the Bank maintain an adequate level of unencumbered high-quality liquid assets equal to their expected net cash outflow for a 30-day time horizon under a regulatorily prescribed liquidity stress scenario. As of December 31, 2019, the Corporation and the Bank were in compliance with applicable LCR requirements.
Basel III also introduced the concept of a net stable funding ratio (NSFR) requirement, designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. The NSFR will require certain banking organizations, including the Corporation, to maintain a stable funding profile in relation to the composition of their assets and off-balance-sheet activities. The Federal Reserve Board has proposed, but has not adopted, a final rule implementing the NSFR.
The enhanced prudential standards imposed by the Dodd-Frank Act, as amended by the Regulatory Reform Act, specify certain required liquidity risk management practices for large bank holding companies and banks. The Federal Reserve Board’s October 2019 final tailoring rule targets certain aspects of these requirements based on banking organizations’ business model and risk profile, as delineated into four risk-based categories. The Corporation, a Category II institution under the final tailoring rule, is subject to the liquidity risk management, monthly liquidity stress testing, liquidity buffer, and daily liquidity reporting requirements.


 
 
 
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PROMPT CORRECTIVE ACTION
Federal banking regulators are required to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards, and are also authorized to take appropriate action against a parent bank holding company of an under-capitalized banking subsidiary. In certain instances, the Corporation could be required to guarantee the performance of a capital restoration plan for the Bank if it were under-capitalized.

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
The Bank is subject to restrictions governing transactions between it and affiliated entities, including the Corporation, its affiliates, and its subsidiaries. These transactions must be on terms and conditions that are, or in good faith would be, offered to nonaffiliated companies (i.e., on terms not less favorable to the Bank than market terms). Further, extensions of credit must be secured fully with qualifying collateral and are limited to 10% of the Bank’s capital and surplus for transactions with a single affiliate and to 20% of the Bank’s capital and surplus for transactions with all affiliates.

ANTI-MONEY LAUNDERING, ANTI-TERRORISM LEGISLATION, AND OFFICE OF FOREIGN ASSETS CONTROL
The Corporation and certain of its subsidiaries are subject to the Bank Secrecy Act of 1970, as amended by the USA PATRIOT Act of 2001 and implemented in the regulation of the federal banking regulators and Financial Crimes Enforcement Network, which contain anti-money laundering (AML) and financial transparency requirements for conducting due diligence, verifying client and beneficial owner identification, and monitoring client transactions and detecting and reporting suspicious activities. AML laws outside the United States contain similar requirements.
Various legal requirements prohibit Northern Trust entities from engaging in business in or with certain jurisdictions and parties, such as organizations and countries suspected of aiding, harboring or engaging in terrorist acts. The U.S. Department of the Treasury’s Office of Foreign Assets Control publishes lists of these prohibited parties, known as Specially Designated Nationals and Blocked Persons. If the Corporation or the Bank finds a sanctioned name or jurisdiction on any transaction or account, the Corporation or the Bank must reject or block such account or transaction and notify the appropriate authorities.
Failure to comply with these requirements could result in fines, penalties, lawsuits, regulatory sanctions or difficulties in obtaining approvals, restrictions on their business activities or harm to reputation. Many other countries have imposed similar laws and regulations that apply to the Corporation’s non-U.S. offices. The Corporation has established policies and procedures to comply with these laws and the related regulations.

DEPOSIT INSURANCE AND ASSESSMENTS
The Bank accepts deposits, and eligible deposits have the benefit of FDIC insurance up to the applicable limit, which is currently $250,000 for each depositor account. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the insured depository institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition, or has violated laws, regulations, or orders from a regulatory agency. Certain liquid assets are excluded from the deposit insurance assessment base of custody banks that satisfy certain institutional eligibility criteria. This has the effect of reducing the amount of deposit insurance fund insurance premiums payable by custody banks. The Bank qualifies as a custody bank for this purpose.

COMMUNITY REINVESTMENT ACT
The Bank is subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service areas, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. The Bank fulfills its CRA obligations by making qualified investments for the purposes of community development. The Bank received an “outstanding” CRA rating from the Federal Reserve Board in its most recent CRA examination.

PRIVACY AND SECURITY
Federal law establishes a minimum federal standard of financial privacy by, among other provisions, requiring financial institutions to adopt and disclose privacy policies with respect to consumer information, setting limitations on disclosure to third parties of consumer information, setting standards for protecting client information, and requiring notice of data breaches in certain circumstances. Most states, the European Union (EU) and other non-U.S. jurisdictions also have adopted their own statutes and/or regulations concerning data privacy and security and requiring notification of data breaches. For example, a European data protection framework - the General Data Protection Regulation (GDPR) - was adopted on April 8, 2016, and became effective in all European Economic Area (EEA) member states on May 25, 2018. GDPR is designed to harmonize data privacy laws across the EEA, to protect EEA citizens’ data privacy and to reshape the way organizations across the region approach data privacy. GDPR has extraterritorial effect as its scope includes all data controllers and processors outside the EEA whose processing activities relate to the offering of goods or services to, or monitoring the behavior of, EEA individuals. Organizations that violate certain provisions of GDPR could be fined up to €20 million or 4% of their annual worldwide

 
 
 
 
 
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revenue for the preceding fiscal year, whichever is greater. In the United States, the California Consumer Protection Act (CCPA) was adopted by the State of California and became effective January 1, 2020. The CCPA substantially increases the rights of California residents to understand how their personal data is collected and used by commercial businesses. The CCPA includes a private right of action (permitting lawsuits to be brought by private individuals instead of the 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.
The Corporation has adopted and disseminated privacy policies and communicates required information relating to financial privacy and data security in accordance with applicable law.

CONSUMER LAWS AND REGULATIONS
The Corporation’s banking subsidiaries are subject to certain federal and state laws and regulations designed to protect consumers in transactions with banks. Failure to comply with these laws and regulations could lead to substantial penalties, operating restrictions and reputational damage to the financial institution. Consumer laws and regulations are enforced by the Consumer Financial Protection Bureau (CFPB) and other federal and state regulators.

NON-U.S. REGULATION
Northern Trust is subject to the laws and regulatory authorities of the jurisdictions in which its non-U.S. branches and subsidiaries operate. For example, branches and subsidiaries conducting banking and asset servicing businesses in the United Kingdom are authorized to do so pursuant to the UK Financial Services and Markets Act 2000. They are authorized by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA) and regulated by the FCA and, in some instances, also the PRA. The PRA and FCA exercise broad supervisory and disciplinary powers that include the power to revoke temporarily or permanently authorization to conduct a regulated business upon breach of the relevant regulations, suspend registered employees, and impose censures and fines on both regulated businesses and their regulated employees.
Northern Trust’s European branches and subsidiaries are subject to the laws and regulatory authorities of the EU and the member states in which they are domiciled. For example, with the establishment of Northern Trust Global Services SE as an EU-domiciled credit institution in Luxembourg in connection with the Corporation's Brexit-related planning, such entity is subject to the prudential supervision of the European Central Bank and the CSSF. Moreover, Northern Trust’s non-European branches and subsidiaries conducting financial services activities also may be within the scope of the laws of the EU, given that some EU laws apply to the wider EEA, which includes not only all EU member states but also the non-EU member states Iceland, Liechtenstein and Norway, and because of increasing extraterritorial effect of European legislation.
The following items provide a brief description of certain recently implemented and in-progress regulatory changes in the EU and United Kingdom relevant to the Corporation and its subsidiaries, in addition to the BRRD and GDPR discussed under “The Dodd-Frank Act, as Amended—Resolution Planning” and “Privacy and Security,” respectively, above.

Revised Capital Requirements Directive and revised Capital Requirements Regulation. The EU Capital Requirements Directive of June 26, 2013 (CRD) and the EU Capital Requirements Regulation of June 26, 2013 (CRR) govern the legal framework for banking regulation in the EU, including, among other things, own fund requirements. On November 23, 2016, the EU Commission published a proposal for a revision of the CRD (CRD V) and the CRR (CRR II). Formal adoption of CRD V and CRR II by the EU Parliament and European Council has not yet occurred. Further, CRD V and CRR II currently contain mandates for the European Banking Authority (EBA) to produce a number of regulatory technical standards (RTS) and implementing technical standards (ITS), which remain under development.
Central Securities Depositories Regulation. On September 17, 2014, the EU Central Securities Depositories Regulation (CSDR) entered into force (subject to a number of transitional provisions). The CSDR aims principally to ensure that transactions between buyers and sellers of dematerialized securities are settled in a safe and timely manner by introducing common securities settlement standards across the EU. CSDR requires several “Level 2” (or implementing) measures in order for its provisions to take effect fully. A number of these “Level 2” measures were published in 2017. Most recently, on September 13, 2018, the EU Commission Delegated Regulation (EU) 2018/1229 supplementing the CSDR with regard to technical standards on settlement discipline was published in the EU’s Official Journal. The Delegated Regulation, which is expected to enter into force on February 1, 2021, sets out measures to prevent and address failed settlements and encourage settlement discipline by monitoring failed settlements, collecting and distributing cash penalties for failed settlements, and specifying the operational details of the buy-in process.
Securities Financing Transactions and Reuse of Collateral Regulation. On November 25, 2015, the EU adopted a regulation on securities financing transactions and reuse of collateral (SFTR) as part of its approach to addressing shadow banking. The regulation includes provisions for enhanced transparency and reporting of securities financing transactions. The SFTR entered into force on January 12, 2016, subject to certain transitional provisions. SFTR requires adoption of certain “Level 2” measures which were finalized in 2019.

 
 
 
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UK Criminal Finances Act. On September 30, 2017, the UK Criminal Finances Act (CFA) entered into force. The CFA has extra-territorial effect, introducing certain new corporate criminal offenses in circumstances where a corporate entity or partnership (a relevant body) fails to prevent an “associated person” (broadly meaning an employee, agent or person who performs services for or on behalf of the relevant body) from criminally facilitating the evasion of tax, whether the tax evaded is owed (i) in the United Kingdom or (ii) in a foreign country if the relevant body has a nexus, or any conduct constituting part of the foreign tax evasion facilitation offense takes place, in the United Kingdom. These corporate offenses are strict liability offenses, such that in circumstances where an associated person of a relevant body criminally facilitates the evasion of tax and such relevant body has failed to prevent the associated person from committing such criminal facilitation of tax evasion, the relevant body will itself be guilty of a criminal offense carrying unlimited fines, unless it can show that it put in place reasonable prevention procedures (or by showing that it was not reasonable in all the circumstances to expect the relevant body to have any prevention procedures in place).
Benchmarks Regulation. On January 1, 2018, the EU Benchmarks Regulation (BMR) became applicable in all EU member states, subject to certain transitional provisions. The principal objectives of the BMR are to restore investor confidence in the accuracy, robustness and integrity of indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, and the benchmark-setting process itself. The BMR aims to achieve these objectives by ensuring that benchmarks are not subject to conflicts of interest, are used appropriately, and reflect the actual market or economic reality they are intended to measure.
Market in Financial Instruments Directive. On January 3, 2018, the recast Market in Financial Instruments Directive (MiFID II) became applicable to investment services and activities in the EU. MiFID II, together with the Markets in Financial Instruments Regulation (MiFIR I), repealed and recast the Markets in Financial Instruments Directive (2004/39/EC) (MiFID). Going forward, MiFID II and MiFIR I form the EU legal framework governing the requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services or activities in the EU.
Money Market Funds Regulation. On June 30, 2017, an EU regulation on money market funds (MMFR) with a view of making money market funds more resistant to crises and market turbulence was published. Subject to certain transitional provisions, the MMFR became applicable on July 21, 2018 for new money market funds and January 21, 2019 for existing money market funds. It imposes detailed rules relating to the investment policies, risk management and other operational aspects of such funds. Further “Level 2” regulations containing the technical implementation of the MMFR were published in 2018. Technical guidelines to clarify how to comply with certain reporting obligations under MMFR came into force on September 19, 2019.
European Deposit Insurance Scheme. On October 11, 2017, the EU Commission announced that it aimed to complete all parts of the European Banking Union by 2018. The banking union is in place and operational except for the creation of a single European Deposit Insurance Scheme (EDIS). The EDIS will apply to deposit guarantee schemes (DGSs) in EU member states participating in the single supervisory mechanism (SSM) and credit institutions in those member states. The EDIS will not directly affect member states that are not participating in the SSM, such as the United Kingdom, meaning that the Financial Services Compensation Scheme (FSCS), the UK DGS, will not be subject to the EDIS. The EU Council and Parliament continue to consider the legislative proposal for the EDIS regulation, which was published by the EU Commission in November 2015. The EU Commission proposed changes to its approach to the EDIS in its October 2017 communication on completing the banking union but has not yet published any revisions to the text of the EDIS regulation to reflect these changes. The communication also urged the European Parliament and European Council to adopt these measures quickly to complete the banking union however this remains outstanding.
Fifth EU Money Laundering Directive. On July 9, 2018, the Fifth EU Money Laundering Directive (MLD5) entered into force. MLD5 was required to be transposed into local law by EU member states by January 10, 2020 and introduces the following key changes to the current EU AML regime: (i) EU member states must ensure that registers of ultimate beneficial owners of companies and other legal entities become accessible to the general public; (ii) the current AML regime is extended to additional service providers, such as electronic wallet providers, virtual currency exchange service providers, and art dealers, and further specifications regarding the scope of application of MLD5 with respect to tax advisors and estate agents are provided; (iii) the threshold for identifying holders of prepaid cards is lowered to €150; and (iv) EU member states will be required to implement enhanced due diligence measures to monitor suspicious transactions involving high-risk countries more strictly.
Shareholder Rights Directive. On May 17, 2017 the recast Shareholder Rights Directive (EU) 2017/828 was published (SRD II). Member states of the EU were required to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by June 10, 2019. SRD was designed to establish requirements in relation to the exercise of shareholder rights and, recognizing that shares are often held through complex chains of intermediaries, SRD II is designed to improve mechanisms for the identification of shareholders by companies, as well as improve the transmission of information along the chain of intermediaries to facilitate the exercise of shareholder rights. Non-EU intermediaries are

 
 
 
 
 
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required to comply with the requirements if they provide services with respect to shares of companies that have their registered office in the EU. The EU Commission Implementing Regulation (EU) 2018/1212 of September 3, 2018 set out minimum requirements for implementing SRD II, which will apply from September 3, 2020.
Depositary Books & Records. Following the European Securities and Markets Authority’s opinion on asset segregation and application of depositary delegation rules to CSDs published on July 20, 2017, and entering into force on April 1, 2020, changes have been introduced by two EU regulations modifying the existing Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for the Collective Investment in Transferable Securities (UCITS) Level 2 Regulations: Commission Delegated Regulation (EU) No 2018/1618 relating to the safe-keeping duties of depositaries of alternative investment funds and Commission Delegated Regulation (EU) No 2018/1619 relating to the safe-keeping duties of depositaries of UCITS. The changes aim to better define asset segregation requirements and to add additional safeguards, primarily focusing on information flow between the depositary and any third party to whom safe-keeping functions have been delegated. The key changes (i) impact the frequency of reconciliations between the depositary’s internal accounts and records and those of any third party in the custody chain, (ii) require the depositary to maintain an independent record separate from the record maintained by the third party, and (iii) increase due diligence obligations where custody of assets is delegated to third parties outside of the EU. The changes impact Northern Trust’s subsidiaries providing depositary services to European-domiciled fund clients.

In addition to the above, the Bank’s and the Corporation’s subsidiary banks located outside the United States are subject to regulatory capital requirements in the jurisdictions in which they operate. As of December 31, 2019, each of our non-U.S. banking subsidiaries had capital ratios above their specified minimum requirements.

Staff
Northern Trust employed approximately 19,800 full-time equivalent staff members as of December 31, 2019.

Available Information
Through the Corporation’s website at www.northerntrust.com, the Corporation makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all other reports and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after it files such material with, or furnishes such material to, the SEC. The contents of the Corporation’s website, the website of the SEC or any other website referenced herein are not a part of this Annual Report on Form 10-K.

Statistical Disclosure by Bank Holding Companies
The following statistical disclosures, included under Items 6, 7 and 8 of this Annual Report on Form 10-K, are incorporated herein by reference.
Item 6, “Selected Financial Data,” includes the Corporation’s consolidated return on average common equity, return on average assets, dividend payout ratio and ratio of average equity to average assets.
The "Average Consolidated Balance Sheets With Analysis Of Net Interest Income (Interest And Rate On A Fully Taxable Equivalent Basis)" table (Item 7) provides the Average Consolidated Balance Sheets with Analysis of Net Interest Income for the years ended December 31, 2019, 2018 and 2017.
The "Changes In Net Interest Income" table (Item 7) provides the changes in Net Interest Income for the years ended December 31, 2019 and 2018.
The “Securities Portfolio” table (Item 7) provides the book values of investments in obligations of the U.S. government, states and political subdivisions, and other held to maturity and available for sale debt securities as of December 31, 2019, 2018 and 2017.
The "Remaining Maturity and Average Yield of Debt Securities Held to Maturity and Available for Sale" table (Item 7) provides the remaining maturity by major security grouping and yield as of December 31, 2019.
The “Composition of Loan Portfolio” table (Item 7) provides loans and leases by type as of December 31, 2019, 2018, 2017, 2016 and 2015.
The "Distribution of Non-U.S. Loans by Type" table (Item 7) as of December 31, 2019, 2018, 2017, 2016 and 2015.
The "Remaining Maturity of Selected Loans and Leases" table (Item 7) as of December 31, 2019.
The “Commercial Real Estate Loans” table (Item 7) provides details of loan concentrations as of December 31, 2019 and 2018.
The “Nonperforming Assets” table (Item 7) provides information about the Corporation’s nonaccrual, past due and restructured loans receivable as of December 31, 2019, 2018, 2017, 2016 and 2015.

 
 
 
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The “Allowance and Provision for Credit Losses” section (Item 7) provides a discussion of the factors which influenced management’s judgment in determining the provision for credit losses, as well as information with respect to allowance for credit losses relating to non-U.S. operations for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
The “Analysis of Allowance for Credit Losses” table (Item 7) for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
The “Allocation of the Allowance for Credit Losses” table (Item 7) provides a breakdown of the allowance for credit losses by loan class and illustrates the proportion of each loan class to total loans for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
The "Average Deposits by Type" table (Item 7) as of December 31, 2019, 2018 and 2017.
The "Distribution of Non-U.S. Deposits by Type" table (Item 7) as of December 31, 2019, 2018 and 2017.
The "Remaining Maturity of Time Deposits $100,000 or More" table (Item 7) as of December 31, 2019.
The "Average Rates Paid on Interest-Related Deposits by Type" table (Item 7) for the years ended December 31, 2019, 2018 and 2017.
The "Purchased Funds" table (Item 7) as of December 31, 2019, 2018 and 2017.
The "Selected Average Assets and Liabilities Attributable to Non-U.S. Operations" table (Item 7) for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
The "Percent of Non-U.S.-Related Average Assets and Liabilities to Total Consolidated Average Assets" table (Item 7) for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.
The "Non-U.S. Outstandings" table (Item 7) provides information on non-U.S. outstandings by country that exceed 1.00% of Northern Trust’s assets as of December 31, 2019, 2018 and 2017.
Note 1, “Summary of Significant Accounting Policies,” (Item 8) provides a discussion of Northern Trust’s policy for placing loans on non-accrual status.
Note 6, “Loans and Leases,” (Item 8) provides the Corporation’s forgone interest income on nonaccrual loans, as well as a description of the nature of non-U.S. loans as of December 31, 2019 and 2018.
Note 12, "Deposits," (Item 8) provides the remaining maturity of time deposits $100,000 or more as of December 31, 2019 and time deposits $100,000 or more as of December 31, 2018.
Further discussion of Northern Trust’s management of credit risk with respect to the provision and allowance for credit losses is provided in the following information that is incorporated herein by reference to the notes to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.”
Note 1, “Summary of Significant Accounting Policies”:
H. Loans and Leases.
I. Allowance for Credit Losses.
L. Other Real Estate Owned (OREO).
Note 6, “Loans and Leases.”
Note 7, “Allowance for Credit Losses.”
Note 8, “Concentrations of Credit Risk.”
Note 29, “Off-Balance-Sheet Financial Instruments, Guarantees and Other Commitments.”


 
 
 
 
 
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ITEM 1A - RISK FACTORS
In the normal course of our business activities, we are exposed to a variety of risks. The following discussion sets forth the risk factors that we have identified as being most significant to Northern Trust. Although we discuss these risk factors primarily in the context of their potential effects on our business, financial condition or results of operations, you should understand that these effects can have further negative implications such as: reducing the price of our common stock and other securities; reducing our capital, which can have regulatory and other consequences; affecting the confidence that clients and counterparties have in us, with a resulting negative effect on our ability to conduct and grow our businesses; and reducing the attractiveness of our securities to rating agencies and potential purchasers, which may affect adversely our ability to raise capital and secure other funding or the cost at which we are able to do so. Further, additional risks beyond those discussed below, elsewhere in this Annual Report on Form 10-K or in other of our reports filed with, or furnished to, the SEC also could affect us adversely. We cannot assure you that the risk factors herein or elsewhere in our other reports address all potential risks that we may face.
These risk factors also serve to describe factors which may cause our results to differ materially from those described in forward-looking statements included herein or in other documents or statements that make reference to this Annual Report on Form 10-K. Forward-looking statements and other factors that may affect future results are discussed under “Forward-Looking Statements” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K.

Market Risks
We are dependent on fee-based business for a majority of our revenues, which may be affected adversely by market volatility, a downturn in economic conditions, underperformance and/or negative trends in investment preferences.
Our principal operational focus is on fee-based business, which is distinct from commercial banking institutions that earn most of their revenues from loans and other traditional interest-generating products and services. Fees for many of our products and services are based on the market value of assets under management, custody or administration; the volume of transactions processed; securities lending volume and spreads; and fees for other services rendered, all of which may be impacted negatively by market volatility, a downturn in economic conditions, underperformance and/or negative trends in investment preferences. For example, downturns in equity markets and decreases in the value of debt-related investments resulting from market disruption, illiquidity or other factors historically have reduced the valuations of the assets we manage or service for others, which generally impacted our earnings negatively. Market volatility and/or weak economic conditions also may affect wealth creation, investment preferences, trading activities, and savings patterns, which impact demand for certain products and services that we provide.
Our earnings also may be affected by poor investment returns or changes in investment preferences driven by factors beyond market volatility or weak economic conditions. For example, poor investment performance in funds or client accounts that we manage or in investment products that we design or provide that is due to underperformance relative to our competitors or benchmarks could result in declines in the market values of portfolios that we manage and/or administer and may affect our ability to retain existing assets and to attract new clients or additional assets from existing clients. Further, broader changes in investment preferences that lead to less investment in mutual funds or other collective funds, such as the shift in investor preference to lower fee products, could impact our earnings negatively.

Changes in interest rates can affect our earnings negatively.
The direction and level of interest rates are important factors in our earnings. Interest rates generally remain low relative to historical levels. Low interest rate environments have had in the past, and may have in the future, a negative impact on our net interest margin, which is the difference between what we earn on our assets and the interest rates we pay for deposits and other sources of funding. Low interest rate environments also have historically had a negative impact on our fees earned on certain of our products. For example, in the past, we have from time to time waived certain fees associated with money market mutual funds due to short-term interest rate levels and we may do so in the future if short-term interest rate levels decline. Low net interest margins and fee waivers each negatively impact our earnings.
Conversely, in some circumstances, a rise in interest rates also may affect us negatively. For example, we may be impacted negatively if such an increase were to cause: market volatility and downturns in equity markets, resulting in a decrease in the valuations of the assets we manage or service for others, which generally impact our earnings negatively; our clients to transfer funds into investments with higher rates of return, resulting in decreased deposit levels and higher fund or account redemptions; our borrowers to experience difficulties in making higher interest payments, resulting in increased credit costs, provisions for loan and lease losses and charge-offs; reduced bond and fixed income fund liquidity, resulting in lower performance, yields and fees; a decline in the value of securities held in our portfolio of investment securities, resulting in decreased levels of capital and liquidity; or higher funding costs.

 
 
 
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Further, although we have policies and procedures in place to assess and mitigate potential impacts of interest rate risks, if our assumptions about any number of variables are incorrect, these policies and procedures to mitigate risk may be ineffective, which could impact earnings negatively.
Please see “Market Risk” in the “Risk Management” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K for a more detailed discussion of interest rate and market risks we face.

Changes in the monetary, trade and other policies of various regulatory authorities, central banks, governments and international agencies may reduce our earnings and affect our growth prospects negatively.
The monetary, trade and other policies of U.S. and international governments, agencies and regulatory bodies have a significant impact on economic conditions and overall financial market performance. For example, the Federal Reserve Board regulates the supply of money and credit in the United States, and its policies determine in large part the level of interest rates and our cost of funds for lending and investing, which are important factors in our earnings. The actions of the Federal Reserve Board or other regulatory authorities also may reduce the value of financial instruments we hold. Further, their policies can affect our borrowers by increasing interest rates or making sources of funding less available, which may increase the risk that borrowers fail to repay their loans from us. Changes in monetary, trade and other governmental policies are beyond our control and can be difficult to predict, and we cannot determine the ultimate effect that any such changes would have upon our business, financial condition or results of operations.

The ultimate impact on us of the United Kingdom’s withdrawal from the European Union remains uncertain.
In June 2016, United Kingdom (UK) voters approved a departure from the European Union (EU), commonly referred to as “Brexit.” Following delivery of the UK’s formal notice of withdrawal in March 2017, a subsequent negotiation period, and approval of a withdrawal agreement by each of the UK and the EU, the UK formally exited the EU on January 31, 2020. The ultimate impact of Brexit on the Corporation and the Bank remains uncertain and will depend on the final terms of the post-Brexit relationships negotiated between the UK and other EU nations. Brexit has contributed, and may continue to contribute, to market volatility, particularly the valuation of the Euro and British pound, and could have significant adverse effects on our businesses, financial condition and results of operations. In conjunction with our Brexit-related preparations, and to mitigate the potential risk that our UK subsidiaries will be unable to retain their EU financial services “passports,” we have implemented certain changes to our organizational structure, including the establishment of an EU-domiciled credit institution in Luxembourg. We have incurred, and may in the future continue to incur, additional costs associated with such measures and unforeseen political, regulatory, or other developments related to Brexit, or operational issues associated with the organizational restructuring related thereto, also may result in additional costs and disruption to our EU banking business.

Uncertainty about the financial stability of various regions or countries across the globe, including the risk of defaults on sovereign debt and related stresses on financial markets, could have a significant adverse effect on our earnings.
Risks and concerns about the financial stability of various regions or countries across the globe could have a detrimental impact on economic and market conditions in these or other markets across the world. Foreign market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence of and default on consumer debt, and home prices. Economic challenges faced in various foreign markets, including negative interest rates in some jurisdictions, or lack of confidence in the financial markets may adversely affect certain portions of our business, financial condition, and results of operations.

Declines in the value of securities held in our investment portfolio can affect us negatively.
Our investment securities portfolio represents a greater proportion, and our loan and lease portfolios represent a smaller proportion, of our total consolidated assets in comparison to many other financial institutions. The value of securities available for sale and held to maturity within our investment portfolio, which is generally determined based upon market values available from third-party sources, may fluctuate as a result of market volatility and economic or financial market conditions. Declines in the value of securities held in our investment portfolio negatively impact our levels of capital and liquidity. Although we have policies and procedures in place to assess and mitigate potential impacts of market risks, including hedging-related strategies, those policies and procedures are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Accordingly, we could suffer adverse effects as a result of our failure to anticipate and manage these risks properly.

 
 
 
 
 
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Volatility levels and fluctuations in foreign currency exchange rates may affect our earnings.
We provide foreign exchange services to our clients, primarily in connection with our global custody business. Foreign currency volatility influences our foreign exchange trading income as does the level of client activity. Foreign currency volatility and changes in client activity may result in reduced foreign exchange trading income. Fluctuations in exchange rates may raise the potential for losses resulting from foreign currency trading positions, where aggregate obligations to purchase and sell a currency other than the U.S. dollar do not offset each other or offset each other in different time periods. We also are exposed to non-trading foreign currency risk as a result of our holdings of non-U.S. dollar denominated assets and liabilities, investments in non-U.S. subsidiaries, and future non-U.S. dollar denominated revenue and expense.
We have policies and procedures in place to assess and mitigate potential impacts of foreign exchange risks, including hedging-related strategies. Any failure or circumvention of our procedures to mitigate risk may impact earnings negatively. Please see “Market Risk” in the “Risk Management” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K for a more detailed discussion of market risks we face.

Changes in a number of particular market conditions can affect our earnings negatively.
In past periods, reductions in the volatility of currency-trading markets, the level of cross-border investing activity, and the demand for borrowing securities or willingness to lend such securities have affected our earnings from activities such as foreign exchange trading and securities lending negatively. If these conditions occur in the future, our earnings from these activities may be affected negatively. In a few of our businesses, such as securities lending, our fee is calculated as a percentage of our client’s earnings, such that market and other factors that reduce our clients’ earnings from investments or trading activities also reduce our revenues.

Operational Risks
Many types of operational risks can affect our earnings negatively.
We regularly assess and monitor operational risk in our businesses. Despite our efforts to assess and monitor operational risk, our risk management program may not be effective in all cases. Factors that can impact operations and expose us to risks varying in size, scale and scope include:
failures of technological systems or breaches of security measures, including, but not limited to, those resulting from computer viruses or cyber-attacks;
human errors or omissions, including failures to comply with applicable laws or corporate policies and procedures;
theft, fraud or misappropriation of assets, whether arising from the intentional actions of internal personnel or external third parties;
defects or interruptions in computer or communications systems;
breakdowns in processes, over-reliance on manual processes, which are inherently more prone to error than automated processes, breakdowns in internal controls or failures of the systems and facilities that support our operations;
unsuccessful or difficult implementation of computer systems upgrades;
defects in product design or delivery;
difficulty in accurately pricing assets, which can be aggravated by market volatility and illiquidity and lack of reliable pricing from third-party vendors;
negative developments in relationships with key counterparties, third-party vendors, employees or associates in our day-to-day operations; and
external events that are wholly or partially beyond our control, such as natural disasters, pandemics, geopolitical events, political unrest or acts of terrorism.

While we have in place many controls and business continuity plans designed to address many of these factors, these plans may not operate successfully to mitigate these risks effectively. We also may fail to identify or fully understand the implications and risks associated with changes in the financial markets or our businesses—particularly as we expand our geographic footprint, product pipeline and client types—and consequently fail to enhance our controls and business continuity plans to address those changes in an adequate or timely fashion. If our controls and business continuity plans do not address the factors noted above and operate to mitigate the associated risks successfully, such factors may have a negative impact on our business, financial condition or results of operations. In addition, an important aspect of managing our operational risk is creating a risk culture in which all employees fully understand that there is risk in every aspect of our business and the importance of managing risk as it relates to their job functions. We continue to enhance our risk management program to support our risk culture, ensuring that it is sustainable and appropriate for our role as a major financial institution. Nonetheless, if we fail to provide the appropriate environment that sensitizes all of our employees to managing risk, our business could be impacted adversely.


 
 
 
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Failures of our technological systems or breaches of our security measures, including, but not limited to, those resulting from cyber-attacks, may result in losses.
Any failure, interruption or breach in the security of our systems could severely disrupt our operations. Our systems involve the use of clients’ and our proprietary and confidential information, and security breaches, including cyber-attacks, could expose us to a risk of theft, loss or other misappropriation of this information. Our security measures may be breached due to the actions of outside parties, employee error, failure of our controls with respect to granting access to our systems, malfeasance or otherwise, and, as a result, an unauthorized party may obtain access to our or our clients’ proprietary and confidential information, resulting in theft, loss or other misappropriation of this information. Regulators globally are also introducing the potential for greater monetary fines on institutions that suffer from breaches leading to the theft, loss or other misappropriation of such information. Most states, the EU and other non-U.S. jurisdictions also have adopted their own statutes and/or regulations concerning data privacy and security and requiring notification of data breaches. For example, the General Data Protection Regulation (GDPR), which became effective in May 2018, establishes new requirements regarding the handling of personal information. Noncompliance with the GDPR may result in monetary penalties of up to 4% of worldwide revenue. In the United States, the California Consumer Privacy Act (CCPA) was adopted by the State of California and became effective January 1, 2020. The CCPA substantially increases the rights of California residents to understand how their personal data is collected and used by commercial businesses and includes a private right of action permitting lawsuits to be brought by private individuals instead of the state Attorney General or other government actor for breaches. These and other changes in laws or regulations associated with the enhanced protection of personal and other types of information could greatly increase the size of potential fines related to the protection of such information.
Information security risks for large financial institutions like us are significant in part because of the proliferation of new technologies to conduct financial transactions and the increased sophistication and activities of hackers, terrorists, organized crime and other external parties, including foreign state actors. If we fail to continue to upgrade our technology infrastructure to ensure effective information security relative to the type, size and complexity of our operations, we could become more vulnerable to cyber-attack and, consequently, subject to significant regulatory penalties. Additionally, our computer, communications, data processing, networks, backup, business continuity or other operating, information or technology systems, including those that we outsource to other providers, may fail to operate properly or become disabled, overloaded or damaged as a result of a number of factors, including events that are wholly or partially beyond our control, which could have a negative effect on our ability to conduct our business activities.
The third parties with which we do business also are susceptible to the foregoing risks (including regarding the third parties with which they are similarly interconnected or on which they otherwise rely), and our or their business operations and activities may therefore be affected adversely, perhaps materially, by failures, terminations, errors or malfeasance by, or attacks or constraints on, one or more financial, technology, infrastructure or government institutions or intermediaries with whom we or they are interconnected or conduct business. In addition, our clients often use their own devices, such as computers, smart phones and tablets, to manage their accounts, which may heighten the risk of system failures, interruptions or security breaches.
In recent years, several financial services firms suffered successful cyber-attacks launched both domestically and from abroad, resulting in the disruption of services to clients, loss or misappropriation of sensitive or private information, and reputational harm. Although we have not to our knowledge suffered a material breach of our systems, we and our clients have been subject to cyber-attacks, and it is possible that we could suffer a material breach in the future. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques, to implement adequate preventative measures, or to address them until they are discovered. In addition, a successful cyber-attack could persist for an extended period of time before being detected. Because any investigation of an information security incident would be inherently unpredictable, the extent of a particular information security incident and the path of investigating the incident may not be immediately clear. It may take a significant amount of time before such an investigation can be completed and full and reliable information about the incident is known. While such an investigation is ongoing, we may not necessarily know the extent of the harm or how best to remediate it, certain errors or actions could be repeated or compounded before they are discovered and remediated, and communication to the public, regulators, clients and other stakeholders may be inaccurate, any or all of which could further increase the costs and consequences of an information security incident.
We expect to continue to face a wide variety of cyber-threats, including computer viruses, ransomware and other malicious code, distributed denial of service attacks, phishing attacks, information security breaches or employee or contractor error or malfeasance that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our, our clients’ or other parties’ confidential, personal, proprietary or other information or otherwise disrupt, compromise or damage our or our clients’ or other parties’ business assets, operations and activities. Our status as a global financial institution and the nature of our client base may enhance the risk that we are targeted by such cyber-threats. If a breach of our security occurs, we could be the subject of legal claims or proceedings, including regulatory investigations and actions, the market perception of the

 
 
 
 
 
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effectiveness of our security measures could be harmed, our reputation could suffer and we could lose clients, each of which could have a negative effect on our business, financial condition and results of operations. A breach of our security also may affect adversely our ability to effect transactions, service our clients, manage our exposure to risk or expand our business. An event that results in the loss of information also may require us to reconstruct lost data or reimburse clients for data and credit monitoring services, which could be costly and have a negative impact on our business and reputation.
Further, even if not directed at us, attacks on financial or other institutions important to the overall functioning of the financial system or on our counterparties could affect, directly or indirectly, aspects of our business.

Errors, breakdowns in controls or other mistakes in the provision of services to clients or in carrying out transactions for our own account can subject us to liability, result in losses or have a negative effect on our earnings in other ways.
In our asset servicing, investment management, fiduciary administration and other business activities, we effect or process transactions for clients and for ourselves that involve very large amounts of money. Failure to manage or mitigate operational risks properly can have adverse consequences, and increased volatility in the financial markets may increase the magnitude of resulting losses. Given the high volume of transactions we process, errors that affect earnings may be repeated or compounded before they are discovered and corrected.

Our dependence on technology, and the need to update frequently our technology infrastructure, exposes us to risks that also can result in losses.
Our businesses depend on information technology infrastructure, both internal and external, to record and process, among other things, a large volume of increasingly complex transactions and other data, in many currencies, on a daily basis, across numerous and diverse markets and jurisdictions. Due to our dependence on technology and the important role it plays in our business operations, we must constantly improve and update our information technology infrastructure. Upgrading, replacing, and modernizing these systems can require significant resources and often involves implementation, integration and security risks that could cause financial, reputational and operational harm. Failure to ensure adequate review and consideration of critical business and regulatory issues prior to and during the introduction and deployment of key technological systems or failure to align operational capabilities adequately with evolving client commitments and expectations may have a negative impact on our results of operations. The failure to respond properly to and invest in changes and advancements in technology could limit our ability to attract and retain clients, prevent us from offering products and services comparable to those offered by our competitors, inhibit our ability to meet regulatory requirements or otherwise have a material adverse effect on our operations.

The systems and models we employ to analyze, monitor and mitigate risks, as well as for other business purposes, are
inherently limited, may 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.


 
 
 
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A failure or circumvention of our controls and procedures could have a material adverse effect on our business, financial condition and results of operations.
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system will be met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operations. If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. In addition, there are risks that individuals, either employees or contractors, consciously circumvent established control mechanisms by, for example, exceeding trading or investment management limitations, or committing fraud.

Failure of any of our third-party vendors to perform can result in losses.
Third-party vendors provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, and network access. Our use of third-party vendors exposes us to the risk that such vendors may not comply with their servicing and other contractual obligations to us, including with respect to indemnification and information security, and to the risk that we may not satisfy applicable regulatory responsibilities regarding the management and oversight of third parties and outsourcing providers. While we have established risk management processes and continuity plans, any disruptions in service from a key vendor for any reason or poor performance of services could have a negative effect on our ability to deliver products and services to our clients and conduct our business. Replacing these third-party vendors or performing the tasks they perform for ourselves could create significant delay and expense.

We are subject to certain risks inherent in operating globally which may affect our business adversely.
In conducting our U.S. and non-U.S. business, we are subject to risks of loss from various unfavorable political, economic, legal or other developments, including social or political instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, unfavorable tax rates and tax court rulings and changes in laws and regulations. Less mature and often less regulated business and investment environments heighten these risks in various emerging markets, in which we have been expanding our business activities. Our non-U.S. operations accounted for 31% of our revenue in 2019. Our non-U.S. businesses are subject to extensive regulation by various non-U.S. regulators, including governments, securities exchanges, central banks and other regulatory bodies in the jurisdictions in which those businesses operate. In many countries, the laws and regulations applicable to the financial services industry are uncertain and evolving and may be applied with extra scrutiny to foreign companies. Moreover, the regulatory and supervisory standards and expectations in one jurisdiction may not conform with standards or expectations in other jurisdictions. Even within a particular jurisdiction, the standards and expectations of multiple supervisory agencies exercising authority over our affairs may not be harmonized fully. Accordingly, it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could have an adverse effect not only on our businesses in that market but also on our reputation generally. The failure to mitigate properly such risks or the failure of our operating infrastructure to support such international activities could result in operational failures and regulatory fines or sanctions, which could affect our business and results of operations adversely.
We actively strive to optimize our geographic footprint. This optimization may occur by establishing operations in lower-cost locations or by outsourcing to third-party vendors in various jurisdictions. These efforts expose us to the risk that we may not maintain service quality, control or effective management within these operations. In addition, we are exposed to the relevant macroeconomic, political and similar risks generally involved in doing business in those jurisdictions. The increased elements of risk that arise from conducting certain operating processes in some jurisdictions could lead to an increase in reputational risk. During periods of transition, greater operational risk and client concern exist with respect to maintaining a high level of service delivery.
In addition, we are subject in our global operations to rules and regulations relating to corrupt and illegal payments, money laundering, and laws relating to doing business with certain individuals, groups and countries, such as the U.S. Foreign Corrupt Practices Act, the USA PATRIOT Act, the UK Bribery Act, and economic sanctions and embargo programs administered by the U.S. Office of Foreign Assets Control and similar agencies worldwide. While we have invested and continue to invest significant resources in training and in compliance monitoring, the geographic diversity of our operations, employees, clients and customers, as well as the vendors and other third parties with whom we deal, presents the risk that we may be found in violation of such rules, regulations, laws or programs and any such violation could subject us to significant penalties or affect our reputation adversely.

 
 
 
 
 
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Failure to control our costs and expenses adequately could affect our earnings negatively.
Our success in controlling the costs and expenses of our business operations also impacts operating results. Through various parts of our business strategy, we aim to produce efficiencies in operations that help reduce and control costs and expenses, including the costs of losses associated with operating risks attributable to servicing and managing financial assets. Failure to control these and other costs could affect our earnings negatively and reduce our competitive position. In October 2017, we announced our “Value for Spend” expense management initiative, with the goal of realizing $250 million in expense run-rate savings by 2020 through improved organizational alignment, process optimization and strategic sourcing. Although we have made substantial progress toward achieving this goal, we cannot predict its overall effect on our financial condition or results of operations in the future.

Acts of terrorism, natural disasters, global climate change, pandemics and global conflicts may have a negative impact on our business and operations.
Acts of terrorism, natural disasters, global climate change, pandemics, global conflicts or other similar events could have a negative impact on our business and operations. While we have in place business continuity plans, such events could still damage our facilities, disrupt or delay the normal operations of our business (including communications and technology), result in harm to or cause travel limitations on our employees, and have a similar impact on our clients, suppliers, third-party vendors and counterparties. These events also could impact us negatively to the extent that they result in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States or abroad, or in financial market settlement functions. In addition, these or similar events may impact economic growth negatively, which could have an adverse effect on our business and operations, and may have other adverse effects on us in ways that we are unable to predict.

Credit Risks
Failure to evaluate accurately the prospects for repayment when we extend credit or maintain an adequate allowance for credit losses can result in losses or the need to make additional provisions for credit losses, both of which reduce our earnings.
We evaluate extensions of credit before we make them and then provide for credit risks based on our assessment of the credit losses inherent in our loan portfolio, including undrawn credit commitments. This process requires us to make difficult and complex judgments. Challenges associated with our credit risk assessments include identifying the proper factors to be used in assessments and accurately estimating the impacts of those factors. Allowances that prove to be inadequate may require us to realize increased provisions for credit losses or write down the value of certain assets on our balance sheet, which in turn would affect earnings negatively.

Market volatility and/or weak economic conditions can result in losses or the need for additional provisions for credit losses, both of which reduce our earnings.
Credit risk levels and our earnings also can be affected by market volatility and/or weakness in the economy in general and in the particular locales in which we extend credit, a deterioration in credit quality or a reduced demand for credit. Adverse changes in the financial performance or condition of our borrowers resulting from market volatility and/or weakened economic conditions could impact the borrowers’ abilities to repay outstanding loans, which could in turn impact our financial condition and results of operations negatively.


 
 
 
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The failure or perceived weakness of any of our significant counterparties could expose us to loss.
The financial markets are characterized by extensive interconnections among financial institutions, including banks, broker/dealers, collective investment funds and insurance companies. As a result of these interconnections, we and many of our clients have counterparty exposure to other financial institutions. This counterparty exposure presents risks to us and to our clients because the failure or perceived weakness of any of our counterparties has the potential to expose us to risk of loss. Instability in the financial markets has resulted historically in some financial institutions becoming less creditworthy. During such periods of instability, we are exposed to increased counterparty risks, both as principal and in our capacity as agent for our clients. Changes in market perception of the financial strength of particular financial institutions can occur rapidly, are often based upon a variety of factors and can be difficult to predict. In addition, the criteria for and manner of governmental support of financial institutions and other economically important sectors remain uncertain. Further, the consolidation of financial services firms and the failures of other financial institutions has in the past, and may in the future increase the concentration of our counterparty risk. These risks are heightened by the fact that our operating model relies on the use of unaffiliated sub-custodians to a greater degree than certain of our competitors that have banking operations in more jurisdictions than we do. We are not able to mitigate all of our and our clients’ counterparty credit risk. If a significant individual counterparty defaults on an obligation to us, we could incur financial losses that have a material and adverse effect on our business, financial condition and results of operations.

Changes in the method pursuant to which the London Interbank Offered Rate (LIBOR) or other interest rate benchmarks are determined could adversely impact our business and results of operations.
Many financial markets currently rely on interbank offered rates (each, an IBOR) as mutually agreed upon reference rates serving as the basis for the pricing and valuation of assets, trading positions, loans and other financial transactions. Following historical concerns about attempted manipulation of IBOR levels, as well as a potential lack of liquidity in the underlying activity that contributes to an IBOR setting, global regulators have signaled interest in replacing existing IBOR rates with alternative reference rates. While there are multiple IBORs, LIBOR is the most widely used interest rate benchmark in the world and serves as the reference rate for our floating-rate funding, certain of the products that we own or offer, various lending and securities transactions in which we are involved, and many derivatives that we use to manage our or our clients’ risk. In July 2017, the United Kingdom Financial Conduct Authority, which regulates the process for establishing LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021, and as a result, the continuation of LIBOR on the current basis cannot be guaranteed after 2021. Any change in the availability or calculation of LIBOR or other interest rate benchmarks may affect adversely the cost or availability of floating-rate funding; the yield on loans or securities held by us; the amounts received and paid on derivative instruments we have entered into; the value of loans, securities, or derivative instruments held by us or our clients, which, in the case of assets held by our clients, could also negatively impact the amount of fees we earn in relation to such assets; the trading market for securities based on LIBOR or other benchmarks; the terms of new loans being made using different or modified reference rates; or our ability to use derivative instruments to manage risk effectively. While we are working to facilitate an orderly transition from LIBOR to alternative interest rate benchmarks for us and our clients, there continues to be uncertainty regarding the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other interest rate benchmarks, or the establishment of alternative reference rates may have on LIBOR or other interest rate benchmarks. Further, the potential transition away from the use of LIBOR or other interest rate benchmarks, or uncertainty related to any such potential transition, may cause us to recognize additional costs or experience operational disruptions, which may negatively impact our business, financial condition or results of operations.

Liquidity Risks
If we do not manage our liquidity effectively, our business could suffer.
Liquidity is essential for the operation of our business. Market conditions, unforeseen outflows of funds or other events could have a negative effect on our level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business transactions at a reasonable cost and in a timely manner. If our access to stable and low-cost sources of funding, such as customer deposits, is reduced, we may need to use alternative funding, which could be more expensive or of limited availability. Further evolution in the regulatory requirements relating to liquidity and risk management also may impact us negatively. Additional regulations may impose more stringent liquidity requirements for large financial institutions, including the Corporation and the Bank. Given the overlap and complex interactions of these regulations with other regulatory changes, the full impact of the adopted and proposed regulations remains uncertain until their full implementation. For more information on these regulations and other regulatory changes, see “Supervision and Regulation—Liquidity Standards” in Item 1, “Business,” of this Annual Report on Form 10-K. Any substantial, unexpected or prolonged changes in the level or cost of liquidity could affect our business adversely.


 
 
 
 
 
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If the Bank is unable to supply the Corporation with funds over time, the Corporation could be unable to meet its various obligations.
The Corporation is a legal entity separate and distinct from the Bank and the Corporation’s other subsidiaries. The Corporation relies on dividends paid to it by the Bank to meet its obligations and to pay dividends to stockholders of the Corporation. There are various legal limitations on the extent to which the Bank and the Corporation’s other subsidiaries can supply funds to the Corporation by dividend or otherwise. Dividend payments by the Bank to the Corporation in the future will require continued generation of earnings by the Bank and could require regulatory approval under certain circumstances. For more information on dividend restrictions, see “Supervision and Regulation—Payment of Dividends” in Item 1, “Business,” of this Annual Report on Form 10-K.

We may need to raise additional capital in the future, which may not be available to us or may only be available on unfavorable terms.
We may need to raise additional capital to provide sufficient resources to meet our business needs and commitments, to accommodate the transaction and cash management needs of our clients, to maintain our credit ratings in response to regulatory changes, including capital rules, or for other purposes. However, our ability to access the capital markets, if needed, will depend on a number of factors, including the state of the financial markets. Rising interest rates, disruptions in financial markets, negative perceptions of our business or our financial strength, or other factors may impact our ability to raise additional capital, if needed, on terms acceptable to us. Any diminished ability to raise additional capital, if needed, could subject us to liability, restrict our ability to grow, require us to take actions that would affect our earnings negatively or otherwise affect our business and our ability to implement our business plan, capital plan and strategic goals adversely.

Any downgrades in our credit ratings, or an actual or perceived reduction in our financial strength, could affect our borrowing costs, capital costs and liquidity adversely.
Rating agencies publish credit ratings and outlooks on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities. Our credit ratings are subject to ongoing review by the rating agencies and thus may change from time to time based on a number of factors, including our own financial strength, performance, prospects and operations as well as factors not under our control, such as rating-agency-specific criteria or frameworks for our industry or certain security types, which are subject to revision from time to time, and conditions affecting the financial services industry generally.
Downgrades in our credit ratings may affect our borrowing costs, our capital costs and our ability to raise capital and, in turn, our liquidity adversely. A failure to maintain an acceptable credit rating also may preclude us from being competitive in certain products. Additionally, our counterparties, as well as our clients, rely on our financial strength and stability and evaluate the risks of doing business with us. If we experience diminished financial strength or stability, actual or perceived, a decline in our stock price or a reduced credit rating, our counterparties may be less willing to enter into transactions, secured or unsecured, with us, our clients may reduce or place limits on the level of services we provide them or seek other service providers, or our prospective clients may select other service providers, all of which may have other adverse effects on our business.
The risk that we may be perceived as less creditworthy relative to other market participants is higher in a market environment in which the consolidation, and in some instances failure, of financial institutions, including major global financial institutions, could result in a smaller number of larger counterparties and competitors. If our counterparties perceive us to be a less viable counterparty, our ability to enter into financial transactions on terms acceptable to us or our clients, on our or our clients’ behalf, will be compromised materially. If our clients reduce their deposits with us or select other service providers for all or a portion of the services we provide to them, our revenues will decrease accordingly.

Our success with large, complex clients requires substantial liquidity.
A significant portion of our business involves providing certain services to large, complex clients, which, by their nature, require substantial liquidity. Our failure to manage successfully the liquidity and balance sheet issues attendant to this portion of our business may have a negative impact on our ability to meet client needs and grow.


 
 
 
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Regulatory and Legal Risks
Failure to comply with regulations can result in penalties and regulatory constraints that restrict our ability to grow or even conduct our business, or that reduce earnings.
Virtually every aspect of our business around the world is regulated, generally by governmental agencies that have broad supervisory powers and the ability to impose sanctions. In the United States, the Corporation, the Bank and many of the Corporation’s other subsidiaries are regulated heavily by bank regulatory agencies at the federal and state levels. These regulations cover a variety of matters ranging from required capital levels to prohibited activities. They are directed specifically at protecting depositors, the federal deposit insurance fund and the banking system as a whole, not our stockholders or other security holders. The Corporation and its subsidiaries also are regulated heavily by bank, securities and other regulators globally and subject to evolving laws and regulations regarding privacy and data protection. Regulatory violations or the failure to meet formal or informal commitments made to regulators could generate penalties, require corrective actions that increase costs of conducting business, result in limitations on our ability to conduct business, restrict our ability to expand or impact our reputation adversely. Failure to obtain necessary approvals from regulatory agencies on a timely basis could affect proposed business opportunities and results of operations adversely. Similarly, changes in laws or failure to comply with new requirements or with future changes in laws or regulations may impact our results of operations and financial condition negatively.

Changes by the U.S. and other governments to laws, regulations and policies applicable to the financial services industry may heighten the challenges we face and make regulatory compliance more difficult and costly.
Various regulatory bodies have demonstrated heightened enforcement scrutiny of financial institutions through many regulatory initiatives. These initiatives have increased compliance costs and regulatory risks and may lead to financial and reputational damage in the event of a compliance violation. While we have programs in place, including policies, training and various forms of monitoring, designed to ensure compliance with legislative and regulatory requirements, these programs and policies may not always protect us from conduct by individual employees. Governments may take further actions to change significantly the way financial institutions are regulated, either through new legislation, new regulations, new applications of existing regulations or a combination of all of these methods. We cannot currently predict the impact, if any, of these changes to our business. Additionally, governments and regulators may take actions that increase intervention in the normal operation of our businesses and the businesses of our competitors in the financial services industry, and likely would involve additional legislative and regulatory requirements imposed on banks and other financial services companies. Any such actions could increase compliance costs and regulatory risks, lead to financial and reputational damage in the event of a violation, affect our ability to compete successfully, and also may impact the nature and level of competition in the industry in unpredictable ways. The full scope and impact of possible legislative or regulatory changes and the extent of regulatory activity is uncertain and difficult to predict.

We may be impacted adversely by claims or litigation, including claims or litigation relating to our fiduciary responsibilities.
Our businesses involve the risk that clients or others may sue us, claiming that we have failed to perform under a contract or otherwise failed to carry out a duty perceived to be owed to them. Our trust, custody and investment management businesses are particularly subject to this risk. This risk is heightened when we act as a fiduciary for our clients and may be further heightened during periods when credit, equity or other financial markets are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses. In addition, as a publicly-held company, we are subject to the risk of claims under the federal securities laws, and volatility in our stock price and those of other financial institutions increases this risk. Claims made or actions brought against us, whether founded or unfounded, may result in injunctions, settlements, damages, fines or penalties, which could have a material adverse effect on our financial condition or results of operations or require changes to our business. Even if we defend ourselves successfully, the cost of litigation is often substantial, and public reports regarding claims made against us may cause damage to our reputation among existing and prospective clients or negatively impact the confidence of counterparties, rating agencies and stockholders, consequently affecting our earnings negatively.

We may be impacted adversely by regulatory enforcement matters.
In the ordinary course of our business, we are subject to various regulatory, governmental and enforcement inquiries, investigations and subpoenas. These may be directed generally to participants in the businesses in which we are involved or may be directed specifically at us. In conjunction with enforcement matters, we may face claims for disgorgement, the imposition of civil and criminal penalties or the imposition of other remedial sanctions, any of which could have an adverse impact on us.


 
 
 
 
 
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We may fail to set aside adequate reserves for, or otherwise underestimate our liability relating to, pending and threatened claims, with a negative effect on our earnings.
We estimate our potential liability for pending and threatened claims and record reserves when appropriate pursuant to generally accepted accounting principles (GAAP). The process is inherently subject to risk, including the risks that a judge or jury could decide a case contrary to our evaluation of the law or the facts or that a court could change or modify existing law on a particular issue important to the case. Our earnings will be adversely affected if our reserves are not adequate.

If we fail to comply with legal standards, we could incur liability to our clients or lose clients, which could affect our earnings negatively.
Managing or servicing assets with reasonable prudence in accordance with the terms of governing documents and applicable laws is an important part of our business. Failure to comply with the terms of governing documents and applicable laws, manage adequately the risks or manage appropriately the differing interests often involved in the exercise of fiduciary responsibilities may subject us to liability or cause client dissatisfaction, which may impact negatively our earnings and growth.

Strategic Risks
If we do not execute strategic plans successfully, we will not grow as we have planned and our earnings growth will be impacted negatively.
Our growth depends upon successful, consistent execution of our business strategies. A failure to execute these strategies will impact growth negatively. A failure to grow organically or to integrate successfully an acquisition could have an adverse effect on our business. The challenges arising from generating organic growth or the integration of an acquired business may include preserving valuable relationships with employees, clients, suppliers and other business partners, delivering enhanced products and services, as well as combining accounting, data processing and internal control systems. To the extent we enter into transactions to acquire complementary businesses and/or technologies, we may not achieve the expected benefits of such transactions, which could result in increased costs, lowered revenues, ineffective deployment of capital, regulatory concerns, exit costs or diminished competitive position or reputation. These risks may be increased if the acquired company operates internationally or in a geographic location where we do not already have significant business operations.
Execution of our business strategies also may require certain regulatory approvals or consents, which may include approvals of the Federal Reserve Board and other domestic and non-U.S. regulatory authorities. These regulatory authorities may impose conditions on the activities or transactions contemplated by our business strategies which may impact negatively our ability to realize fully the expected benefits of certain opportunities. Further, acquisitions we announce may not be completed if we do not receive the required regulatory approvals, if regulatory approvals are significantly delayed or if other closing conditions are not satisfied.

If we are not able to attract, retain and motivate key personnel, our business could be negatively affected.
Our success depends, in large part, on our ability to attract new employees, retain and motivate our existing employees, and continue to compensate our employees competitively. Competition for the best employees in most activities in which we engage can be intense, and there can be no assurance that we will be successful in our efforts to recruit and retain key personnel. Factors that affect our ability to attract and retain talented and diverse employees include our compensation and benefits programs, our profitability and our reputation for rewarding and promoting qualified employees. Our ability to attract and retain key executives and other employees may be hindered as a result of existing and potential regulations applicable to incentive compensation and other aspects of our compensation programs. These regulations may not apply to some of our competitors and to other institutions with which we compete for talent. The unexpected loss of services of key personnel, both in businesses and corporate functions, could have a material adverse impact on our business because of their skills, knowledge of our markets, operations and clients, years of industry experience and, in some cases, the difficulty of promptly finding qualified replacement personnel. Similarly, the loss of key employees, either individually or as a group, could affect our clients’ perception of our abilities adversely.

We are subject to intense competition in all aspects of our businesses, which could have a negative effect on our ability to maintain satisfactory prices and grow our earnings.
We provide a broad range of financial products and services in highly competitive markets. We compete against large, well-capitalized, and geographically diverse companies that are capable of offering a wide array of financial products and services at competitive prices. In certain businesses, such as foreign exchange trading, electronic networks present a competitive challenge. Additionally, technological advances and the growth of internet-based commerce have made it possible for other types of institutions to offer a variety of products and services competitive with certain areas of our business. Many of these nontraditional service providers have fewer regulatory constraints and some have lower cost structures. The same may be said for competitors based in non-U.S. jurisdictions, where legal and regulatory environments may be more favorable than those

 
 
 
22   2019 Annual Report | Northern Trust Corporation
 
 





applicable to the Corporation and the Bank as U.S.-domiciled financial institutions. These competitive pressures may have a negative effect on our earnings and ability to grow. Pricing pressures, as a result of the willingness of competitors to offer comparable or improved products or services at a lower price, also may result in a reduction in the price we can charge for our products and services, which could have, and in some cases has had, a negative effect on our ability to maintain or increase our profitability.

Damage to our reputation could have a direct and negative effect on our ability to compete, grow and generate revenue.
The failure to meet client expectations or fiduciary or other obligations, operational failures, litigation, regulatory actions or fines, the actual or alleged actions of our affiliates, vendors or other third parties with which we do business, the actual or alleged actions or statements of our employees or adverse publicity could materially and adversely affect our reputation as well as our ability to attract and retain clients or key employees. Damage to our reputation for delivery of a high level of service could undermine the confidence of clients and prospects in our ability to serve them and accordingly affect our earnings negatively. Damage to our reputation also could affect the confidence of rating agencies, regulators, stockholders and other parties in a wide range of transactions that are important to our business and the performance of our common stock. Failure to maintain our reputation ultimately would have an adverse effect on our ability to manage our balance sheet or grow our business. Actions by the financial services industry generally or by other members of or individuals in the financial services industry also could impact our reputation negatively. Further, whereas negative public opinion once was driven primarily by adverse news coverage in traditional media, the proliferation of social media channels utilized by us and third parties, as well as the personal use of social media by our employees and others, may increase the risk of negative publicity, including through the rapid dissemination of inaccurate, misleading or false information, which could harm our reputation or have other negative consequences.

We need to invest in innovation constantly, and the inability or failure to do so may affect our businesses and earnings negatively.
Our success in the competitive environment in which we operate requires consistent investment of capital and human resources in innovation, particularly in light of the current “FinTech” environment, in which financial institutions are investing significantly in evaluating new technologies, such as artificial intelligence, machine learning, blockchain and other distributed ledger technologies, and developing potentially industry-changing new products, services and industry standards. Our investment is directed at generating new products and services, and adapting existing products and services to the evolving standards and demands of the marketplace. Among other things, investing in innovation helps us maintain a mix of products and services that keeps pace with our competitors and achieve acceptable margins. Our investment also focuses on enhancing the delivery of our products and services in order to compete successfully for new clients or gain additional business from existing clients, and includes investment in technological innovation as well. Effectively identifying gaps or weaknesses in our product offerings also is important to our success. Falling behind our competition in any of these areas could affect our business opportunities, growth and earnings adversely. There are substantial risks and uncertainties associated with innovation efforts, including an increased risk that new and emerging technologies may expose us to increased cybersecurity and other information technology threats. We must invest significant time and resources in developing and marketing new products and services, and expected timetables for the introduction and development of new products or services may not be achieved and price and profitability targets may not be met. Further, our revenues and costs may fluctuate because new products and services generally require start-up costs while corresponding revenues take time to develop or may not develop at all.

Failure to understand or appreciate fully the risks associated with development or delivery of new product and service offerings will affect our businesses and earnings negatively.
The success of our innovation efforts depends, in part, on the successful implementation of new product and service initiatives. Not only must we keep pace with competitors in the development of these new offerings, but we must accurately price them (as well as existing products) on a risk-adjusted basis and deliver them to clients effectively. Our identification of risks arising from new products and services, both in their design and implementation, and effective responses to those identified risks, including pricing, is key to the success of our efforts at innovation and investment in new product and service offerings.


 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 23




Our success with large, complex clients requires an understanding of the market and legal, regulatory and accounting standards in various jurisdictions.
A significant portion of our business involves providing certain services to large, complex clients which require an understanding of the market and legal, regulatory and accounting standards in various jurisdictions. Any failure to understand, address or comply with those standards appropriately could affect our growth prospects or affect our reputation negatively. We identify and manage risk through our business strategies and plans and our risk management practices and controls. If we fail to identify and manage significant risks successfully, we could incur financial loss, suffer damage to our reputation that could restrict our ability to grow or conduct business profitably, or become subject to regulatory penalties or constraints that could limit some of our activities or make them significantly more expensive. In addition, our businesses and the markets in which we operate are continuously evolving. We may fail to understand fully the implications of changes in legal or regulatory requirements, our businesses or the financial markets or fail to enhance our risk framework to address those changes in a timely fashion. If our risk framework is ineffective, either because it fails to keep pace with changes in the financial markets, legal and regulatory requirements, our businesses, our counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates or expectations. These risks are magnified as client requirements become more complex and as our increasingly global business requires end-to-end management of operational and other processes across multiple time zones and many inter-related products and services.

We may take actions to maintain client satisfaction that result in losses or reduced earnings.
We may take action or incur expenses in order to maintain client satisfaction or preserve the usefulness of investments or investment vehicles we manage in light of changes in security ratings, liquidity or valuation issues or other developments, even though we are not required to do so by law or the terms of governing instruments. The risk that we will decide to take actions to maintain client satisfaction that result in losses or reduced earnings is greater in periods when credit or equity markets are deteriorating in value or are particularly volatile and liquidity in markets is disrupted.

Other Risks
Changes in tax laws and interpretations and tax challenges may affect our earnings negatively.
Both U.S. and non-U.S. governments and tax authorities, including states and municipalities, from time to time issue new, or modify existing, tax laws and regulations. These authorities may also issue new, or modify existing, interpretations of those laws and regulations. These new laws, regulations or interpretations, and our actions taken in response to, or reliance upon, such changes in the tax laws may impact our tax position in a manner that affects our earnings negatively.
In December 2017, the Tax Cuts and Jobs Act (H.R. 1) (TCJA) was signed into law. The TCJA introduced a number of changes in then-existing tax law impacting businesses including, among other things, a reduction in the corporate income tax rate from 35% to 21%, disallowance of certain deductions that had previously been allowed, limitations on interest deductions, alteration of the expensing of capital expenditures, adoption of a territorial tax system, assessment of a one-time repatriation tax or “toll-charge” on undistributed earnings and profits of U.S.-owned foreign corporations, and introduction of certain anti-base erosion provisions. The ultimate impact of the TCJA on our financial condition and results of operations in future years remains uncertain and may differ materially from our expectations due to the anticipated issuance of technical guidance regarding certain elements of the TCJA (including elements impacting the U.S. taxes payable on the income of the Corporation’s non-U.S. branches), changes in interpretations and assumptions we have made with respect to the TCJA, and changes to the competitive landscape in which we operate and other factors.
In the course of our business, we are sometimes subject to challenges from U.S. and non-U.S. tax authorities, including states and municipalities, regarding the amount of taxes due. These challenges may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions, all of which may require a greater provision for taxes or otherwise affect earnings negatively.

Changes in accounting standards may be difficult to predict and could have a material impact on our consolidated financial statements.
New accounting standards, changes to existing accounting standards, or changes in the interpretation of existing accounting standards by the Financial Accounting Standards Board, the International Accounting Standards Board, the SEC or bank regulatory agencies, or otherwise reflected in GAAP, potentially could have a material impact on our financial condition and results of operations. These changes are difficult to predict and in some cases we could be required to apply a new or revised standard retroactively, resulting in the revised treatment of certain transactions or activities, or even the restatement of consolidated financial statements for prior periods.


 
 
 
24   2019 Annual Report | Northern Trust Corporation
 
 





Our ability to return capital to stockholders is subject to the discretion of our Board of Directors and may be limited by U.S. banking laws and regulations, applicable provisions of Delaware law, or our failure to pay full and timely dividends on our preferred stock and the terms of our outstanding debt.
Holders of our common stock are entitled to receive only such dividends and other distributions of capital as our Board of Directors may declare out of funds legally available for such payments under Delaware law. Although we have declared cash dividends on shares of our common stock historically, we are not required to do so. In addition to the approval of our Board of Directors, our ability to take certain actions, including our ability to pay dividends, repurchase stock, and make other capital distributions, is dependent upon, among other things, their payment being made in accordance with a capital plan as to which the Federal Reserve Board has not objected. There can be no assurance that the Federal Reserve Board will not object to our future capital plans. In addition to imposing restrictions on our ability to return capital to stockholders, an objection by the Federal Reserve Board to a future capital plan would negatively impact our reputation and investor perceptions of us.
A significant source of funds for the Corporation is dividends from the Bank. As a result, our ability to pay dividends on the Corporation’s common stock will depend on the ability of the Bank to pay dividends to the Corporation. There are various legal limitations on the extent to which the Bank and the Corporation’s other subsidiaries can supply funds to the Corporation by dividend or otherwise. Dividend payments by the Bank to the Corporation in the future will require continued generation of earnings by the Bank and could require regulatory approval under certain circumstances. If the Bank is unable to pay dividends to the Corporation in the future, our ability to pay dividends on the Corporation’s common stock would be affected adversely.
Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or any of our shares that rank junior to our preferred stock as to the payment of dividends and/or the distribution of any assets on any liquidation, dissolution or winding-up of the Corporation also generally will be prohibited in the event that we do not declare and pay in full dividends on our Series D Non-Cumulative Perpetual Preferred Stock (Series D preferred stock) and Series E Non-Cumulative Perpetual Preferred Stock (Series E preferred stock). Further, in the future if we default on certain of our outstanding debt or elect to defer interest payments on our Floating Rate Capital Debt we will be prohibited from making dividend payments on our common stock until such payments have been brought current.
Any reduction or elimination of our common stock dividend, or even our failure to increase our common stock dividend along with our competitors, likely would have a negative effect on the market price of our common stock.
For more information on dividend restrictions, see “Supervision and Regulation—Payment of Dividends” in Item 1, “Business,” of this Annual Report on Form 10-K.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 – PROPERTIES
The executive offices of the Corporation and the Bank are located at 50 South La Salle Street in Chicago. This Bank-owned building is occupied by various divisions of Northern Trust’s businesses. Adjacent to this building are two office buildings in which the Bank leases space principally for corporate support functions. Financial services are provided by the Bank and other subsidiaries of the Corporation through a network of offices in 21 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. The majority of those offices are leased. The Bank’s other primary U.S. operations are located in six facilities: a leased facility at 801 South Canal Street in Chicago; a leased facility at 231 South La Salle Street in Chicago; a leased facility in Tempe, Arizona; and one leased and two Bank-owned supplementary operations/data center buildings located in the western suburbs of Chicago. A majority of the Bank’s London-based staff is located at a leased facility at Canary Wharf in London. Additional support and operations activity originates from four facilities in India, two facilities in Ireland, and one facility in the Philippines, all of which are leased. The Bank and the Corporation’s other subsidiaries operate from various other facilities in North America, Europe, the Asia-Pacific region, and the Middle East, most of which are leased. The Bank also has leased space at 333 South Wabash Avenue in Chicago, with employees moving into the space in early 2020.  
The Corporation believes that its owned and leased facilities are suitable and adequate for its business needs. The Corporation continues to evaluate its owned and leased facilities and may determine from time to time that certain of its facilities are no longer necessary for its operations. There is no assurance that the Corporation will be able to dispose of any excess facilities or that it will not incur costs in connection with such dispositions, which could be material to its operating results in a given period.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 25




For additional information relating to properties and lease commitments, refer to Note 9, “Buildings and Equipment” and Note 10, “Lease Commitments,” included under Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K and which information is incorporated herein by reference.
ITEM 3 – LEGAL PROCEEDINGS
The information presented under the caption “Legal Proceedings” in Note 26, “Contingent Liabilities,” included under Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.

 
 
 
26   2019 Annual Report | Northern Trust Corporation
 
 





SUPPLEMENTAL ITEM – INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following sets forth certain information with regard to each executive officer of the Corporation.

Michael G. O’Grady - Mr. O’Grady, age 54, joined Northern Trust in 2011 and has served as Chairman of the Board since January 2019, Chief Executive Officer since January 2018 and as President since January 2017. Prior to that, Mr. O’Grady served as Executive Vice President and President of Corporate & Institutional Services from 2014 to 2016 and as Chief Financial Officer from 2011 to 2014. Before joining Northern Trust, Mr. O’Grady served as a Managing Director in Bank of America Merrill Lynch’s Investment Banking Group.

Lauren E. Allnutt - Ms. Allnutt, age 43, joined Northern Trust in 2008 and has served as Senior Vice President and Controller since May 2019. Prior to that, Ms. Allnutt served as manager of Global Financial Control from 2014 to April 2019 and led International Accounting Policy and Control from 2013 to 2014.

Robert P. Browne - Mr. Browne, age 54, joined Northern Trust in 2009 as Executive Vice President and Chief Investment Officer. Before joining Northern Trust, Mr. Browne served in various senior investment-related roles at ING Investment Management Holdings N.V.

Peter B. Cherecwich - Mr. Cherecwich, age 55, joined Northern Trust in 2007 and has served as Executive Vice President and President of Corporate & Institutional Services since February 2017. Prior to that, Mr. Cherecwich served as Executive Vice President and President of Global Fund Services from 2010 to 2017 and as Chief Operating Officer of Corporate & Institutional Services from 2008 to 2014. From 2007 to 2008, he served as Head of Institutional Strategy & Product Development. Before joining Northern Trust, Mr. Cherecwich served in several executive and operational roles at State Street Corporation.

Steven L. Fradkin - Mr. Fradkin, age 58, joined Northern Trust in 1985 and has served as Executive Vice President and President of Wealth Management since September 2014. Prior to that, Mr. Fradkin served as President of Corporate & Institutional Services from 2009 to 2014. He served as Chief Financial Officer from 2004 to 2009.

Mark C. Gossett - Mr. Gossett, age 58, joined Northern Trust in 1983 and has served as Executive Vice President and Chief Risk Officer since February 2020. Prior to that, Mr. Gossett served as Chief Credit Officer and Head of Market and Liquidity Risk from 2014 to January 2020 and as Co-Head of Global Foreign Exchange from 2012 to 2014. Mr. Gossett served as the Chief Risk Officer for Asset Management from 2009 to 2012 and as the Chief Operating Officer of Asset Management from 2005 to 2009.

Susan C. Levy - Ms. Levy, age 62, joined Northern Trust in 2014 and has served as Executive Vice President and General Counsel since that time and as Corporate Secretary since October 2018. Before joining Northern Trust, Ms. Levy served as Managing Partner of the law firm Jenner & Block from 2008 to 2014, where she was a partner since 1990.

Teresa A. Parker - Ms. Parker, age 59, joined Northern Trust in 1982 and has served as Executive Vice President and President of Corporate & Institutional Services for Europe, Middle East and Africa since June 2017. Prior to that, Ms. Parker served as Chief Operating Officer of Corporate & Institutional Services from 2014 to 2017. From 2009 to 2014, she served as Executive Vice President, Corporate & Institutional Services for the Asia-Pacific region.

Thomas A. South - Mr. South, age 50, joined Northern Trust in 1999 and has served as Executive Vice President and Chief Information Officer since September 2018. Prior to that, Mr. South served as Chief Business Architect from 2014 to 2018 and as Chief Operating Officer for Operations & Technology from 2013 to 2014.

Joyce M. St. Clair - Ms. St. Clair, age 60, joined Northern Trust in 1992 and has served as Executive Vice President and Chief Human Resources Officer since July 2018. Prior to that, Ms. St. Clair served as Executive Vice President and Chief Capital Management Officer from 2015 to 2018, as President of Enterprise Operations from 2014 to 2015, as President of Operations & Technology from 2011 to 2014, and as Chief Risk Officer from 2007 to 2011.

Shundrawn A. Thomas - Mr. Thomas, age 46, joined Northern Trust in 2004 and has served as Executive Vice President and President of Asset Management since October 2017. Prior to that, Mr. Thomas served as Executive Vice President and Head of the Funds and Managed Accounts Group from 2014 to 2017 and as Head of the Exchange-Traded Funds Group from

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 27




2010 to 2014. He also previously served as President and Chief Executive Officer of Northern Trust Securities, Inc. from 2009 to 2010 and as Head of Corporate Strategy from 2006 to 2009.

Jason J. Tyler - Mr. Tyler, age 48, joined Northern Trust in 2011 and has served as Executive Vice President and Chief Financial Officer since January 2020. Prior to that, Mr. Tyler served as Chief Financial Officer of Wealth Management from September 2018 to December 2019, as Global Head of Asset Management’s Institutional Group from 2014 to 2018, and as Global Head of Strategy from 2011 to 2014. Before joining Northern Trust, Mr. Tyler served in certain executive and operational roles at Ariel Investments and Bank One/American National Bank.

All officers are appointed annually by the Board of Directors. Officers continue to hold office until their successors are duly elected or until their death, resignation or removal by the Board.

 
 
 
28   2019 Annual Report | Northern Trust Corporation
 
 





PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on The NASDAQ Stock Market LLC under the symbol “NTRS.” There were 1,713 shareholders of record as of January 31, 2020.
The following table shows certain information relating to the Corporation’s purchases of common stock for the three months ended December 31, 2019.

TABLE 2: PURCHASES OF COMMON STOCK IN THE FOURTH QUARTER OF 2019
PERIOD
TOTAL NUMBER OF SHARES PURCHASED

AVERAGE PRICE PAID PER SHARE

TOTAL NUMBER OF SHARES PURCHASED AS PART OF A PUBLICLY ANNOUNCED PLAN(1)

MAXIMUM NUMBER OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLAN

October 1 - 31, 2019
1,078,712

$
93.17

1,078,712

10,754,957

November 1 - 30, 2019
703,401

106.37

703,401

10,051,556

December 1 - 31, 2019
820,033

107.76

820,033

9,231,523

 
 
 
 
 
Total (Fourth Quarter)
2,602,146

$
101.34

2,602,146

9,231,523

(1) Repurchases were made pursuant to the repurchase program announced by the Corporation on July 17, 2018 under which the Corporation’s Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation's common stock. The repurchase program has no expiration date.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 29




COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

The graph below compares the cumulative total stockholder return on the Corporation’s common stock to the cumulative total return of the S&P 500 Index and the KBW Bank Index for the five fiscal years ended December 31, 2019. The cumulative total stockholder return assumes the investment of $100 in the Corporation’s common stock and in each index on December 31, 2014 and assumes reinvestment of dividends. The KBW Bank Index is a modified-capitalization-weighted index made up of 24 of the largest banking companies in the United States. The Corporation is included in the S&P 500 Index and the KBW Bank Index.

Total Return Assumes $100 Invested on
December 31, 2014 with Reinvestment of Dividends
chart-3c823ef063365e3cbea.jpg
 
DECEMBER 31,
 
2014

2015

2016

2017

2018

2019

Northern Trust
$
100

$
109

$
138

$
157

$
134

$
175

S&P 500
100

101

114

138

132

174

KBW Bank Index
100

100

129

153

126

172



 
 
 
30   2019 Annual Report | Northern Trust Corporation
 
 





ITEM 6 – SELECTED FINANCIAL DATA
 
2019

2018

2017

2016

2015

FOR THE YEAR ENDED DECEMBER 31,
 
 
 
 
 
CONDENSED STATEMENTS OF INCOME (In Millions)
 
 
 
 
 
Noninterest Income
$
4,395.2

$
4,337.5

$
3,946.1

$
3,726.9

$
3,632.5

Net Interest Income
1,677.9

1,622.7

1,429.2

1,234.9

1,070.1

Total Revenue
$
6,073.1

$
5,960.2

$
5,375.3

$
4,961.8

$
4,702.6

Provision for Credit Losses
(14.5
)
(14.5
)
(28.0
)
(26.0
)
(43.0
)
Noninterest Expense
4,143.5

4,016.9

3,769.4

3,470.7

3,280.6

Income before Income Taxes
$
1,944.1

$
1,957.8

$
1,633.9

$
1,517.1

$
1,465.0

Provision for Income Taxes
451.9

401.4

434.9

484.6

491.2

Net Income
$
1,492.2

$
1,556.4

$
1,199.0

$
1,032.5

$
973.8

Preferred Stock Dividends
46.4

46.4

49.8

23.4

23.4

Net Income Applicable to Common Stock
$
1,445.8

$
1,510.0

$
1,149.2

$
1,009.1

$
950.4

 
 
 
 
 
 
PER COMMON SHARE
 
 
 
 
 
Net Income – Basic
$
6.66

$
6.68

$
4.95

$
4.35

$
4.03

  – Diluted
6.63

6.64

4.92

4.32

3.99

Cash Dividends Declared Per Common Share
2.60

1.94

1.60

1.48

1.41

Book Value – End of Period (EOP)
46.82

43.95

41.28

38.88

36.27

Market Price – EOP
106.24

83.59

99.89

89.05

72.09

 
 
 
 
 
 
SELECTED BALANCE SHEET DATA (In Millions)
 
 
 
 
 
At Year End:
 
 
 
 
 
Earning Assets
$
125,236.6

$
122,847.3

$
129,656.6

$
115,446.4

$
106,848.9

Total Assets
136,828.4

132,212.5

138,590.5

123,926.9

116,749.6

Deposits
109,120.6

104,496.8

112,390.8

101,651.7

96,868.9

Senior Notes
2,573.0

2,011.3

1,497.3

1,496.6

1,497.4

Long-Term Debt
1,148.1

1,112.4

1,449.5

1,330.9

1,371.3

Stockholders’ Equity
11,091.0

10,508.3

10,216.2

9,770.4

8,705.9

Average Balances:
 
 
 
 
 
Earning Assets
$
107,109.4

$
113,731.0

$
111,178.3

$
107,037.6

$
102,249.8

Total Assets
117,551.4

122,946.6

119,607.4

115,570.3

110,715.1

Deposits
89,786.0

95,103.1

96,504.8

93,613.9

90,768.0

Senior Notes
2,389.1

1,704.0

1,496.9

1,496.6

1,497.2

Long-Term Debt
1,139.0

1,296.8

1,519.4

1,392.4

1,426.4

Stockholders’ Equity
10,648.4

10,228.9

9,980.6

9,085.3

8,624.5

 
 
 
 
 
 
CLIENT ASSETS (In Billions)
 
 
 
 
 
Assets Under Custody/Administration
$
12,050.4

$
10,125.3

$
10,722.6

$
8,541.3

$
7,797.0

Assets Under Custody
9,233.5

7,593.9

8,084.6

6,720.5

6,072.1

Assets Under Management
1,231.3

1,069.4

1,161.0

942.4

875.3

 
 
 
 
 
 
SELECTED RATIOS AND METRICS
 
 
 
 
 
Financial Ratios and Metrics:
 
 
 
 
 
Return on Average Common Equity
14.9
%
16.2
%
12.6
%
11.9
%
11.5
%
Return on Average Assets
1.27

1.27

1.00

0.89

0.88

Dividend Payout Ratio
39.2

29.2

32.5

34.3

35.3

Net Interest Margin (1)
1.60

1.46

1.33

1.18

1.07

Average Stockholders’ Equity to Average Assets
9.1

8.3

8.3

7.9

7.8

Capital Ratios:
DECEMBER 31, 2019
DECEMBER 31, 2018
DECEMBER 31, 2017
 
STANDARDIZED APPROACH
ADVANCED APPROACH
STANDARDIZED APPROACH
ADVANCED APPROACH
STANDARDIZED APPROACH
ADVANCED
APPROACH
Common Equity Tier 1 Capital
12.7
%
13.2
%
12.9
%
13.7
%
12.6
%
13.5
%
Tier 1 Capital
14.5

15.0

14.1

15.0

13.8

14.8

Total Capital
16.3

16.8

16.1

16.9

15.8

16.7

Tier 1 Leverage
8.7

8.7

8.0

8.0

7.8

7.8

Supplementary Leverage(2)
N/A

7.6

N/A

7.0

N/A

6.8

 
 
 
 
 
 
 
 
DECEMBER 31, 2016
DECEMBER 31, 2015
 
 
 
STANDARDIZED APPROACH
ADVANCED
APPROACH
STANDARDIZED APPROACH
ADVANCED
APPROACH
WELL-CAPITALIZED RATIOS
MINIMUM CAPITAL RATIOS
Common Equity Tier 1 Capital
11.8
%
12.4
%
10.8
%
11.9
%
N/A

4.5
%
Tier 1 Capital
12.9

13.7

11.4

12.5

6.0

6.0

Total Capital
14.5

15.1

13.2

14.2

10.0

8.0

Tier 1 Leverage
8.0

8.0

7.5

7.5

N/A

4.0

Supplementary Leverage(2)
N/A

6.8

N/A

6.2

N/A

3.0

(1) Net interest margin is presented on a fully taxable equivalent (FTE) basis, a non-GAAP financial measure that facilitates the analysis of asset yields. The net interest margin on a GAAP basis and a reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis are presented on page 89.
(2) Effective January 1, 2018, the Corporation and Bank are subject to a minimum supplementary leverage ratio of 3 percent.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
Northern Trust Corporation (the Corporation) is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business.
The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (the Bank). The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a global presence with offices in 21 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. Except where the context requires otherwise, the terms “Northern Trust,” “we,” “us,” “our” or similar terms refers to the Corporation and its subsidiaries on a consolidated basis.
FINANCIAL OVERVIEW
Net income decreased $64.2 million, or 4%, to $1.49 billion in 2019 from $1.56 billion in 2018. Earnings per diluted common share was $6.63 in 2019 compared to $6.64 in 2018. Return on average common equity decreased to 14.9% in 2019 from 16.2% in 2018.
Revenue increased $112.8 million, or 2%, to $6.07 billion in 2019 from $5.96 billion in the prior year, primarily driven by an increase in trust, investment and other servicing fees of 3%, an increase in net interest income of 3%, and an increase in other operating income of 14%, partially offset by a decrease in foreign exchange trading income of 18%.
Client assets under custody/administration (AUC/A) increased 19% from $10.13 trillion as of December 31, 2018 to $12.05 trillion as of December 31, 2019. Client assets under custody, a component of AUC/A, increased 22% from $7.59 trillion as of December 31, 2018 to $9.23 trillion as of December 31, 2019. Client assets under custody included $5.89 trillion of global custody assets as of December 31, 2019, which increased 25% from $4.70 trillion as of December 31, 2018. Client assets under management increased 15% to $1.23 trillion as of December 31, 2019 from $1.07 trillion at December 31, 2018.
Trust, investment and other servicing fees, which represent the largest component of total revenue, increased 3% to $3.85 billion in 2019, from $3.75 billion in 2018, primarily due to new business and favorable markets, partially offset by unfavorable currency translation and lower securities lending revenue.
Foreign exchange trading income of $250.9 million in 2019 decreased 18% from $307.2 million in 2018, primarily resulting from lower foreign exchange swap activity in Treasury.
Other operating income of $145.5 million in 2019 increased 14% from $127.5 million in 2018, primarily due to income related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year impairment of a community development equity investment previously held at cost, partially offset by a charge related to the decision made in 2019 to sell substantially all of the lease portfolio.
Net interest income on a fully taxable equivalent (FTE) basis of $1.71 billion in 2019, increased $46.8 million, or 3%, from $1.66 billion in 2018, due to an increased net interest margin, partially offset by lower levels of average earning assets. The net interest margin on an FTE basis increased to 1.60% in 2019 from 1.46% in 2018, primarily due to higher short-term interest rates and the impact of lower foreign exchange swap activity.
The provision for credit losses in each of 2019 and 2018 was a credit provision of $14.5 million. The current-year credit provision reflected a decrease in the inherent reserve related to the residential real estate portfolio due to a reduction in outstanding loans and improved credit quality and reductions to the specific reserve related to the commercial and institutional and residential real estate portfolios, partially offset by an increase in the inherent reserve related to the private client portfolio due to an increase in outstanding loans and lower credit quality. The prior-year credit provision primarily reflected reductions in outstanding loans and undrawn loan commitments and standby letters of credit and improved credit quality across the portfolio. This was partially offset by increases in specific reserves primarily related to the commercial and institutional portfolio. Loans and leases of $31.4 billion as of December 31, 2019 decreased from $32.5 billion as of December 31, 2018. Net recoveries for the year ended December 31, 2019 were $0.7 million, compared to net charge-offs of $1.1 million for the year ended December 31, 2018. Nonperforming assets decreased to $86.8 million as of December 31, 2019 from $117.7 million as of December 31, 2018.
Noninterest expense of $4.14 billion in 2019 increased $126.6 million, or 3%, from $4.02 billion in 2018, primarily reflecting increased compensation, outside services, equipment and software expense, and occupancy expense.

 
 
 
32   2019 Annual Report | Northern Trust Corporation
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The provision for income taxes in 2019 totaled $451.9 million, representing an effective tax rate of 23.2%. The provision for income taxes in 2018 totaled $401.4 million, representing an effective tax rate of 20.5%. The increase in the provision for income taxes was primarily attributable to higher U.S. taxes payable on the income of the Corporation's non-U.S. branches in 2019 as well as income tax benefits recorded in 2018 associated with the timing of tax deductions for software development-related expenses and the implementation of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017.
Northern Trust continued to maintain a strong capital position during 2019, with all capital ratios exceeding those required for classification as “well-capitalized” under federal bank regulatory capital requirements. Total stockholders’ equity increased 6% from $10.5 billion in 2018 to $11.1 billion at year-end. During 2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Non-Cumulative Perpetual Preferred Stock for proceeds of $391.4 million, net of underwriting discounts, commissions, and other issuance costs. These proceeds were subsequently used to fund the redemption of all outstanding shares of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock on January 2, 2020.
During the year ended December 31, 2019, Northern Trust increased its quarterly common stock dividend to $0.70 per share and repurchased 11.8 million shares of common stock, returning $1.7 billion in capital to common stockholders, compared to $1.4 billion during the year ended December 31, 2018.
CONSOLIDATED RESULTS OF OPERATIONS
The following information summarizes our consolidated results of operations for 2019 compared to 2018. For a discussion related to the consolidated results of operations for 2018 compared to 2017, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K), which was filed with the United States Securities and Exchange Commission on February 26, 2019.
Revenue
Northern Trust generates the majority of its revenue from noninterest income that primarily consists of trust, investment and other servicing fees. Net interest income comprises the remainder of revenue and consists of interest income generated by earning assets, net of interest expense on deposits and borrowed funds.
Revenue in 2019 of $6.07 billion increased 2% from $5.96 billion in 2018. Noninterest income represented 72% and 73% of total revenue in 2019 and 2018, respectively, and totaled $4.40 billion in 2019, which increased 1% from $4.34 billion in 2018.
Noninterest income in 2019 increased primarily reflecting higher trust, investment and other servicing fees and other operating income, partially offset by lower foreign exchange trading income. Trust, investment and other servicing fees of $3.85 billion in 2019 increased $98.5 million, or 3%, from $3.75 billion in 2018, primarily due to new business and favorable markets, partially offset by unfavorable currency translation and lower securities lending revenue. Foreign exchange trading income in 2019 of $250.9 million decreased $56.3 million, or 18%, compared with $307.2 million in 2018, primarily resulting from lower foreign exchange swap activity in Treasury. Other operating income of $145.5 million in 2019 increased 14% from $127.5 million in the prior year, primarily due to income related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year impairment of a community development equity investment previously held at cost, partially offset by a charge related to the decision made in 2019 to sell substantially all of the lease portfolio.
Net interest income on an FTE basis in 2019 of $1.71 billion increased $46.8 million, or 3%, from $1.66 billion in 2018, due to an increased net interest margin, partially offset by lower levels of average earning assets. The net interest margin on an FTE basis increased to 1.60% in 2019 from 1.46% in 2018, primarily due to higher short-term interest rates and the impact of lower foreign exchange swap activity. Average earning assets decreased $6.6 billion, or 6%, from $113.7 billion in 2018 to $107.1 billion in 2019, primarily reflecting lower levels of short-term interest bearing deposits and loans and leases.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Additional information regarding Northern Trust’s revenue by type is provided below.

2019 TOTAL REVENUE OF $6.07 BILLION
chart-bdefc99495b75ebb8c2.jpg
n
 
63% Trust, Investment and Other Servicing Fees
 
 
 
n
 
28% Net Interest Income
 
 
 
n
 
5% Other Noninterest Income
 
 
 
n
 
4% Foreign Exchange Trading Income
 
 
 
 
 
 
Noninterest Income
The components of noninterest income, and a discussion of significant changes during 2019 and 2018, are provided below.

TABLE 3: NONINTEREST INCOME
 
FOR THE YEAR ENDED DECEMBER 31,
 
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Trust, Investment and Other Servicing Fees
$
3,852.1

$
3,753.7

$
3,434.3

3
 %
9
 %
Foreign Exchange Trading Income
250.9

307.2

209.9

(18
)
46

Treasury Management Fees
44.5

51.8

56.4

(14
)
(8
)
Security Commissions and Trading Income
103.6

98.3

89.6

5

10

Other Operating Income
145.5

127.5

157.5

14

(19
)
Investment Security Losses, net
(1.4
)
(1.0
)
(1.6
)
N/M

N/M

 
 
 
 
 
 
Total Noninterest Income
$
4,395.2

$
4,337.5

$
3,946.1

1
 %
10
 %
 
Trust, Investment and Other Servicing Fees
Trust, investment and other servicing fees were $3.85 billion in 2019 compared with $3.75 billion in 2018. Trust, investment and other servicing fees are based primarily on the market value of assets held in custody, managed and serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears. For a more detailed discussion of 2019 trust, investment and other servicing fees, refer to the “Reporting Segments and Related Information” section.
The following tables present selected market indices and the percentage changes year over year to provide context regarding equity and fixed income market impacts on the Corporation’s results.

TABLE 4: EQUITY MARKET INDICES
 
DAILY AVERAGES
YEAR-END
 
2019

2018

CHANGE

2019

2018

CHANGE

 
 
 
 
 
 
 
S&P 500
2,912

2,746

6
 %
3,231

2,507

29
%
MSCI EAFE (U.S. dollars)
1,891

1,966

(4
)
2,037

1,720

18

MSCI EAFE (local currency)
1,118

1,125

(1
)
1,190

1,008

18

 
 
 
 
 
 
 

TABLE 5: FIXED INCOME MARKET INDICES
 
AS OF DECEMBER 31,
 
 
2019

2018

CHANGE

 
 
 
 
Barclays Capital U.S. Aggregate Bond Index
2,225

2,047

9
%
Barclays Capital Global Aggregate Bond Index
512

479

7

 
 
 
 


 
 
 
34   2019 Annual Report | Northern Trust Corporation
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


ASSETS UNDER CUSTODY/ADMINISTRATION AND ASSETS UNDER MANAGEMENT
AUC/A and assets under management form the primary drivers of our trust, investment and other servicing fees. For the purposes of 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, 2019, AUC/A of $12.05 trillion increased 19% from $10.13 trillion at December 31, 2018. The increased AUC/A primarily reflected favorable markets and net client inflows. Assets under custody, a component of AUC/A, of $9.23 trillion at December 31, 2019, increased 22% from $7.59 trillion at December 31, 2018, and included $5.89 trillion of global custody assets, compared to $4.70 trillion at December 31, 2018. The increased assets under custody primarily reflected favorable markets and net client inflows. Assets under management of $1.23 trillion at the end of 2019 increased 15% from $1.07 trillion at the end of 2018. The increase primarily reflected favorable markets and net inflows.

AUC/A by reporting segment were as follows:
TABLE 6: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT
 
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE

($ In Billions)
2019

2018

2017

2016

2015

2019 /2018

2018 /2017

 
Corporate & Institutional Services
$
11,311.6

$
9,490.5

$
10,066.8

$
7,987.0

$
7,279.7

19
%
(6
)%
9
%
Wealth Management
738.8

634.8

655.8

554.3

517.3

16

(3
)
7

 
 
 
 
 
 
 
 
 
Total Assets Under Custody/Administration
$
12,050.4

$
10,125.3

$
10,722.6

$
8,541.3

$
7,797.0

19
%
(6
)%
9
%
Assets under custody by reporting segment were as follows:

TABLE 7: ASSETS UNDER CUSTODY BY REPORTING SEGMENT
 
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE

($ In Billions)
2019

2018

2017

2016

2015

2019 /2018

2018 / 2017

 
Corporate & Institutional Services
$
8,497.8

$
6,971.0

$
7,439.1

$
6,176.9

$
5,565.8

22
%
(6
)%
9
%
Wealth Management
735.7

622.9

645.5

543.6

506.3

18

(4
)
8

 
 
 
 
 
 
 
 
 
Total Assets Under Custody
$
9,233.5

$
7,593.9

$
8,084.6

$
6,720.5

$
6,072.1

22
%
(6
)%
9
%

Assets under custody were invested as follows:

TABLE 8: ASSETS UNDER CUSTODY BY INVESTMENT TYPE
 
DECEMBER 31,
 
2019

2018

2017

2016

2015

Equities
46
%
45
%
47
%
46
%
44
%
Fixed Income Securities
35

37

35

36

37

Cash and Other Assets
17

16

16

17

17

Securities Lending Collateral
2

2

2

1

2



 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Assets under management by reporting segment were as follows:

TABLE 9: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT
 
DECEMBER 31,
CHANGE
FIVE-YEAR
COMPOUND
GROWTH
RATE

($ In Billions)
2019

2018

2017

2016

2015

2019 / 2018

2018 / 2017

 
Corporate & Institutional Services
$
917.5

$
790.8

$
871.2

$
694.0

$
648.0

16
%
(9
)%
7
%
Wealth Management
313.8

278.6

289.8

248.4

227.3

13

(4
)
7

 
 
 
 
 
 
 
 
 
Total Assets Under Management
$
1,231.3

$
1,069.4

$
1,161.0

$
942.4

$
875.3

15
%
(8
)%
7
%
Assets under management were invested and managed as follows:
TABLE 10: ASSETS UNDER MANAGEMENT BY PRODUCT
 
DECEMBER 31,
 
2019

2018

2017

2016

2015

Equities
53
%
50
%
51
%
51
%
51
%
Fixed Income Securities
16

17

16

17

17

Cash and Other Assets
18

19

19

20

20

Securities Lending Collateral
13

14

14

12

12


TABLE 11: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE
 
DECEMBER 31,
 
2019

2018

2017

2016

2015

Index
51
%
49
%
46
%
47
%
47
%
Active
37

38

41

40

40

Multi-Manager
5

5

5

5

4

Other
7

8

8

8

9


Foreign Exchange Trading Income
Northern Trust provides foreign exchange services in the normal course of business as an integral part of its global custody services. Active management of currency positions, within conservative limits, also contributes to foreign exchange trading income. Foreign exchange trading income in 2019 of $250.9 million decreased $56.3 million, or 18%, compared with $307.2 million in 2018, primarily resulting from lower foreign exchange swap activity in Treasury.

Treasury Management Fees
Treasury management fees, generated from cash and treasury management products and services provided to clients, of $44.5 million in 2019 decreased 14%, or $7.3 million, from $51.8 million in 2018, primarily due to an increase in the earnings credit rate applied to client balances and lower transaction based volumes.

Security Commissions and Trading Income
Security commissions and trading income is generated primarily from securities brokerage services provided by Northern Trust Securities, Inc., and totaled $103.6 million in 2019, which increased 5%, or $5.3 million, from $98.3 million in 2018, primarily due to higher revenue from interest rate swaps and core brokerage, partially offset by lower transition management revenue.

 
 
 
36   2019 Annual Report | Northern Trust Corporation
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Other Operating Income
The components of other operating income include:

TABLE 12: OTHER OPERATING INCOME
 
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Loan Service Fees
$
48.0

$
48.9

$
50.7

(2
)%
(4
)%
Banking Service Fees
45.6

46.4

48.6

(2
)
(5
)
Other Income
51.9

32.2

58.2

60

(44
)
 
 
 
 


Total Other Operating Income
$
145.5

$
127.5

$
157.5

14
 %
(19
)%

Other income of $51.9 million in 2019 increased $19.7 million or 60%, from $32.2 million in 2018, primarily due to income related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year impairment of a community development equity investment previously held at cost, partially offset by a charge related to the decision made in 2019 to sell substantially all of the lease portfolio.

Investment Security Losses, Net
Net investment security losses totaled $1.4 million and $1.0 million in 2019 and 2018, respectively. Losses in 2019 and 2018 include $0.3 million and $0.5 million of charges related to the other-than-temporary impairment (OTTI) of certain Community Reinvestment Act (CRA) eligible held-to-maturity securities, respectively.

Net Interest Income
Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Earning assets – including federal funds sold, securities purchased under agreements to resell, interest-bearing due from banks and interest-bearing deposits with banks, Federal Reserve and other central bank deposits and other, securities, and loans and leases – are financed by a large base of interest-bearing funds that include client deposits, short-term borrowings, senior notes and long-term debt. Earning assets also are funded by net noninterest-related funds, which include demand deposits, and stockholders’ equity, reduced by nonearning assets such as noninterest-bearing cash and due from banks, items in process of collection, and buildings and equipment. Net interest income is subject to variations in the level and mix of earning assets and interest-bearing funds and their relative sensitivity to interest rates. In addition, the levels of nonperforming assets and client compensating deposit balances used to pay for services impact net interest income.
Net interest income stated on an FTE basis is a non-GAAP financial measure that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis is provided on page 89.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following tables present an analysis of average balances and interest rates affecting net interest income and an analysis of net interest income changes.

TABLE 13: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)
 
2019
2018
2017
($ In Millions)
INTEREST

AVERAGE
BALANCE

RATE(6)

INTEREST

AVERAGE
BALANCE

RATE(6)

INTEREST

AVERAGE
BALANCE

RATE(6)

AVERAGE EARNING ASSETS
 
 
 
 
 
 
 
 
 
Federal Reserve and Other Central Bank Deposits and Other(1)
$
181.7

$
18,527.7

0.98
%
$
207.1

$
23,899.3

0.87
%
$
155.1

$
23,903.9

0.65
%
Interest-Bearing Due from and Deposits with
Banks(2)
72.4

5,996.7

1.21

70.0

6,022.8

1.16

63.8

7,143.3

0.89

Federal Funds Sold and Securities Purchased under Agreements to Resell
17.9

847.8

2.11

33.3

1,498.8

2.22

27.5

1,850.2

1.48

Securities
 
 
 
 
 
 
 
 
 
U.S. Government
110.4

5,296.5

2.09

108.3

5,737.1

1.89

89.4

6,342.5

1.41

Obligations of States and Political Subdivisions
24.4

980.5

2.49

13.9

725.2

1.91

13.1

887.3

1.48

Government Sponsored Agency
583.6

22,634.1

2.58

456.0

20,682.7

2.20

283.2

17,987.0

1.57

Other(3)
381.6

21,773.3

1.75

367.5

23,136.5

1.59

253.3

19,498.9

1.30

Total Securities
1,100.0

50,684.4

2.17

945.7

50,281.5

1.88

639.0

44,715.7

1.43

Loans and Leases(4)
1,160.7

31,052.8

3.74

1,106.5

32,028.6

3.45

929.8

33,565.2

2.77

Total Earning Assets
2,532.7

107,109.4

2.36

2,362.6

113,731.0

2.08

1,815.2

111,178.3

1.63

Allowance for Credit Losses Assigned to Loans and Leases

(111.4
)


(126.3
)


(156.8
)

Cash and Due from Banks and Other Central Bank Deposits (5)

2,393.6



2,534.3



2,583.1


Buildings and Equipment

425.6



438.5



466.0


Client Security Settlement Receivables

1,070.4



1,002.0



891.6


Goodwill

682.5



642.5

 

544.0


Other Assets

5,981.3



4,724.6



4,101.2


Total Assets
$

$
117,551.4

%
$

$
122,946.6

%
$

$
119,607.4

%
AVERAGE SOURCE OF FUNDS
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
Savings, Money Market, and Other
$
160.8

$
16,577.8

0.97
%
$
82.0

$
15,149.3

0.54
%
$
24.3

$
15,575.6

0.16
%
Savings Certificates and Other Time
16.2

867.5

1.86

7.8

870.6

0.90

9.4

1,273.4

0.74

Non-U.S. Offices – Interest-Bearing
311.9

54,885.2

0.57

294.8

58,556.6

0.50

148.4

56,583.2

0.26

Total Interest-Bearing Deposits
488.9

72,330.5

0.68

384.6

74,576.5

0.52

182.1

73,432.2

0.25

Short-Term Borrowings
214.0

9,358.9

2.29

208.2

10,783.5

1.93

67.1

6,696.0

1.00

Senior Notes
72.6

2,389.1

3.04

53.4

1,704.0

3.13

46.9

1,496.9

3.13

Long-Term Debt
38.3

1,139.0

3.36

45.0

1,296.8

3.47

39.2

1,519.4

2.58

Floating Rate Capital Debt
8.2

277.6

2.98

7.5

277.6

2.72

4.9

277.5

1.75

Total Interest-Related Funds
822.0

85,495.1

0.96

698.7

88,638.4

0.79

340.2

83,422.0

0.41

Interest Rate Spread


1.40



1.29



1.22

Demand and Other Noninterest-Bearing Deposits

17,455.5



20,526.6



23,072.6


Other Liabilities

3,952.4



3,552.7



3,132.2


Stockholders’ Equity

10,648.4



10,228.9



9,980.6


Total Liabilities and Stockholders’ Equity
$

$
117,551.4

%
$

$
122,946.6

%
$

$
119,607.4

%
Net Interest Income/Margin (FTE Adjusted)
$
1,710.7

$

1.60
%
$
1,663.9

$

1.46
%
$
1,475.0

$

1.33
%
Net Interest Income/Margin (Unadjusted)
$
1,677.9

$

1.57
%
$
1,622.7

$

1.43
%
$
1,429.2

$

1.29
%
Net Interest Income/Margin Components (FTE Adjusted)
 
 
 
 
 
 
 
 
 
U.S.
$
1,127.3

$
86,071.2

1.31
%
$
1,079.9

$
88,717.0

1.22
%
$
1,076.4

$
90,090.3

1.19
%
Non-U.S.
583.4

21,038.2

2.77

584.0

25,014.0

2.33

398.6

21,088.0

1.89

Consolidated
$
1,710.7

$
107,109.4

1.60
%
$
1,663.9

$
113,731.0

1.46
%
$
1,475.0

$
111,178.3

1.33
%
Note: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 24.8%. Total taxable equivalent interest adjustments amounted to $32.8 million in 2019, $41.2 million in 2018 and $45.8 million in 2017. Interest revenue on cash collateral positions is reported above within interest-bearing due from and deposits with banks and within loans and leases. Interest expense on cash collateral positions is reported above within non-U.S. offices interest-bearing deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract within Other Assets and Other Liabilities, respectively.
(1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets in the consolidated balance sheets.
(2) Interest-Bearing Due from and Deposits with Banks includes interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(3) Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets in the consolidated balance sheets.
(4) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(5) Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits as presented on the consolidated balance sheets.
(6) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheets with Analysis of Net Interest Income.

 
 
 
38   2019 Annual Report | Northern Trust Corporation
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 14: CHANGES IN NET INTEREST INCOME
(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)
2019/2018 CHANGE DUE TO
2018/2017 CHANGE DUE TO
(In Millions)
AVERAGE
BALANCE

RATE

TOTAL

AVERAGE
BALANCE

RATE

TOTAL

Increase (Decrease) in Interest Income
 
 
 
 
 
 
Money Market Assets
 
 
 
 
 
 
Federal Reserve and Other Central Bank Deposits and Other
$
(58.1
)
$
32.7

$
(25.4
)
$

$
52.0

$
52.0

Interest-Bearing Due from and Deposits with Banks
(0.3
)
2.7

2.4

(6.7
)
12.9

6.2

Federal Funds Sold and Securities Purchased under Agreements to Resell
(13.9
)
(1.5
)
(15.4
)
(3.5
)
9.3

5.8

Securities
 
 
 
 
 
 
U.S. Government
(5.4
)
7.5

2.1

(7.3
)
26.2

18.9

Obligations of States and Political Subdivisions
5.7

4.8

10.5

(1.4
)
2.2

0.8

Government Sponsored Agency
45.1

82.5

127.6

47.0

125.8

172.8

Other
(20.0
)
34.1

14.1

52.0

62.2

114.2

Loans and Leases
(77.9
)
132.1

54.2

(20.5
)
197.2

176.7

 
 
 
 
 
 
 
Total
$
(124.8
)
$
294.9

$
170.1

$
59.6

$
487.8

$
547.4

 
 
 
 
 
 
 

 
 
 
 
 
 
Deposits
 
 
 
 
 
 
Savings and Money Market
$
8.3

$
70.5

$
78.8

$
(0.7
)
$
58.4

$
57.7

Savings Certificates and Other Time

8.4

8.4

(4.8
)
3.2

(1.6
)
Non-U.S. Offices Time
(13.9
)
31.0

17.1

5.3

141.1

146.4

Short-Term Borrowings
(14.1
)
19.9

5.8

55.9

85.2

141.1

Senior Notes
20.6

(1.4
)
19.2

6.5


6.5

Subordinated Notes
 
 
 
 
 
 
Long-Term Debt
(5.5
)
(1.2
)
(6.7
)
(5.8
)
11.6

5.8

Floating Rate Capital Debt

0.7

0.7


2.6

2.6

 
 
 
 
 
 
 
Total
$
(4.6
)
$
127.9

$
123.3

$
56.4

$
302.1

$
358.5

 
 
 
 
 
 
 
(Decrease) Increase in Net Interest Income
$
(120.2
)
$
167.0

$
46.8

$
3.2

$
185.7

$
188.9

Note: Changes not due solely to average balance changes or rate changes are allocated proportionately to average balance and rate based on their relative absolute magnitudes.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 39

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


An analysis of net interest income on an FTE basis, major balance sheet components impacting net interest income and related ratios are provided below.

TABLE 15: ANALYSIS OF NET INTEREST INCOME (FTE)
 
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Interest Income – GAAP
$
2,499.9

$
2,321.4

$
1,769.4

8
 %
31
 %
FTE Adjustment
32.8

41.2

45.8

(20
)
(10
)
 
 
 
 
 
 
Interest Income – FTE
2,532.7

2,362.6

1,815.2

7

30

Interest Expense
822.0

698.7

340.2

18

105

 
 
 
 
 
 
Net Interest Income – FTE Adjusted
1,710.7

1,663.9

1,475.0

3

13

 
 
 
 
 
 
Net Interest Income – GAAP
1,677.9

1,622.7

1,429.2

3

14

 
 
 
 
 
 
AVERAGE BALANCE
 
 
 
 
 
Earning Assets
$
107,109.4

$
113,731.0

$
111,178.3

(6
)%
2
 %
Interest-Related Funds
85,495.1

88,638.4

83,422.0

(4
)
6

Net Noninterest-Related Funds
21,614.3

25,092.6

27,756.3

(14
)
(10
)
 
 
 
 
 
 
 
 
 
 
CHANGE IN PERCENTAGE
AVERAGE RATE
 
 
 
 
 
Earning Assets
2.36
%
2.08
%
1.63
%
0.28

0.45

Interest-Related Funds
0.96

0.79

0.41

0.17

0.38

Interest Rate Spread
1.40

1.29

1.22

0.11

0.07

Total Source of Funds
0.77

0.62

0.31

0.15

0.31

Net Interest Margin – GAAP
1.57
%
1.43
%
1.29
%
0.14

0.14

Net Interest Margin – FTE
1.60
%
1.46
%
1.33
%
0.14

0.13

Refer to pages 38 and 39 for additional analysis of net interest income.

Net interest income in 2019 of $1.68 billion increased $55.2 million, or 3%, from $1.62 billion in 2018. Net interest income on an FTE basis for 2019 was $1.71 billion, which increased $46.8 million, or 3%, from $1.66 billion in 2018, due to an increased net interest margin, partially offset by lower levels of average earning assets. Average earning assets decreased $6.6 billion, or 6%, to $107.1 billion in 2019 from $113.7 billion in 2018. The net interest margin in 2019 was 1.57%, which increased from 1.43% in 2018. The net interest margin on an FTE basis in 2019 was 1.60%, which increased from 1.46% in 2018.
Average earning assets decreased primarily reflecting lower levels of short-term interest bearing deposits and loans and leases. Federal Reserve and Other Central Bank Deposits and Other averaged $18.5 billion in 2019, which decreased $5.4 billion, or 22%, from $23.9 billion in 2018. Interest-Bearing Due From and Deposits with Banks averaged $6.0 billion in each of 2019 and 2018. Loans and leases averaged $31.1 billion, which decreased $975.8 million, or 3%, from $32.0 billion in 2018. Securities, inclusive of Federal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in Other Assets in the consolidated balance sheets, averaged $50.7 billion, which increased $402.9 million, or 1%, from $50.3 billion in 2018.
Funding of the balance sheet reflected lower levels of non-U.S. interest-bearing deposits and demand and other noninterest-bearing deposits, partially offset by increases in U.S. interest-bearing deposits. Average interest-bearing deposits decreased $2.3 billion, or 3%, to $72.3 billion in 2019 from $74.6 billion in 2018. Average demand and other noninterest-bearing deposits decreased $3.0 billion, or 15%, to $17.5 billion in 2019 from $20.5 billion in 2018.
Stockholders’ equity averaged $10.6 billion in 2019, compared with $10.2 billion in 2018. The increased stockholders’ equity of $419.5 million, or 4%, was primarily attributable to current-year earnings, the issuance of preferred stock, and accumulated other comprehensive income since the prior-year period, partially offset by the repurchase of common stock pursuant to the Corporation’s share repurchase program and dividend declarations. During the year ended December 31, 2019, the Corporation increased its quarterly common stock dividend by 27% to $0.70 per share and repurchased 11.8 million shares, returning $1.7 billion in capital to common stockholders, compared to $1.4 billion in 2018.
Under the Corporation’s 2019 capital plan, which was reviewed without objection by the Federal Reserve, the Corporation may repurchase up to $828.5 million of common stock after December 31, 2019, through June 30, 2020.

 
 
 
40   2019 Annual Report | Northern Trust Corporation
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Provision for Credit Losses
The provision for credit losses was a credit provision of $14.5 million in each of 2019 and 2018. The current-year credit provision primarily reflected a decrease in the inherent reserve related to the residential real estate portfolio due to a reduction in outstanding loans and improved credit quality and reductions to the specific reserve related to the commercial and institutional and residential real estate portfolios, partially offset by an increase in the inherent reserve related to the private client portfolio due to an increase in outstanding loans and lower credit quality. The prior-year credit provision primarily reflected reductions in outstanding loans and undrawn loan commitments and standby letters of credit and improved credit quality across the portfolio. This was partially offset by increases in specific reserves primarily related to the commercial and institutional portfolio.
Nonperforming assets at December 31, 2019 decreased 26% from the prior year-end. Residential real estate, commercial and institutional, commercial real estate, private client, and non-U.S. loans accounted for 85%, 9%, 4%, 1%, and 1% respectively, of nonperforming loans and leases at December 31, 2019. For further discussion of the allowance and provision for credit losses, refer to the “Asset Quality” section.

Noninterest Expense
Noninterest expense for 2019 of $4.14 billion increased $126.6 million, or 3%, from $4.02 billion in 2018, primarily reflecting increased compensation, outside services, equipment and software expense, and occupancy expense.

The components of noninterest expense and a discussion of significant changes during 2019 and 2018 are provided below.

TABLE 16: NONINTEREST EXPENSE
 
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Compensation
$
1,859.0

$
1,806.9

$
1,733.7

3
 %
4
 %
Employee Benefits
355.2

356.7

319.9


12

Outside Services
774.5

739.4

668.4

5

11

Equipment and Software
612.1

582.2

524.0

5

11

Occupancy
212.9

201.1

191.8

6

5

Other Operating Expense
329.8

330.6

331.6



 
 
 
 
 
 
Total Noninterest Expense
$
4,143.5

$
4,016.9

$
3,769.4

3
 %
7
 %

Compensation
Compensation expense, the largest component of noninterest expense, of $1.86 billion in 2019 increased $52.1 million, or 3%, compared to $1.81 billion in 2018, primarily reflecting higher salary expense driven by staff growth and base pay adjustments, partially offset by lower incentive expense. Staff on a full-time equivalent basis totaled approximately 19,800 at December 31, 2019, up 5% from approximately 18,800 at December 31, 2018.

Employee Benefits
Employee benefits expense of $355.2 million in 2019 decreased slightly from $356.7 million in 2018, primarily reflecting lower retirement plan and medical expenses, partially offset by higher payroll taxes.

Outside Services
Outside services expense of $774.5 million in 2019 increased $35.1 million, or 5%, from $739.4 million in 2018, primarily due to higher technical services costs as well as consulting and legal services, partially offset by lower sub-custodian expenses.

Equipment and Software
Equipment and software expense of $612.1 million in 2019 increased $29.9 million, or 5%, compared to $582.2 million in 2018, primarily reflecting higher software support costs, software disposition, depreciation and amortization, and maintenance costs.

Occupancy
Occupancy expense of $212.9 million in 2019 increased $11.8 million, or 6%, from $201.1 million in 2018, primarily due to higher rent and building operating costs associated with executing workplace real estate strategies.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 41

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Other Operating Expense
Other operating expense of $329.8 million in 2019 decreased slightly from $330.6 million in 2018. The components of other operating expense are as follows:

TABLE 17: OTHER OPERATING EXPENSE
 
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Business Promotion
$
104.2

$
98.3

$
95.4

6
 %
3
 %
FDIC Insurance Premiums
9.9

27.4

34.7

(64
)
(21
)
Staff Related
42.8

33.6

42.8

27

(22
)
Other Intangibles Amortization
16.6

17.4

11.4

(4
)
52

Other Expenses
156.3

153.9

147.3

2

4

 
 
 
 
 
 
Total Other Operating Expense
$
329.8

$
330.6

$
331.6

 %
 %

Other operating expense in the current year compared to the prior year primarily reflects decreased FDIC insurance premiums, partially offset by higher staff-related expense and business promotion expense.

Provision for Income Taxes
Provisions for income tax and effective tax rates are impacted by levels of pre-tax income as well as nonrecurring items such as the resolution of tax matters and changes in income tax rates and tax laws. The 2019 provision for income taxes was $451.9 million, representing an effective rate of 23.2%. This compares with a provision for income taxes of $401.4 million and an effective rate of 20.5% in 2018.
The increase in the provision for income taxes was primarily attributable to higher U.S. taxes payable on the income of the Corporation's non-U.S. branches in 2019 as well as income tax benefits recorded in 2018 associated with the timing of tax deductions for software development-related expenses and the implementation of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017.
The TCJA was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%. It also required companies to pay a mandatory deemed repatriation tax on earnings of foreign subsidiaries that were previously tax deferred. At December 31, 2017, Northern Trust made a reasonable estimate as to the impact of the TCJA. During 2018, Northern Trust completed the related calculations and additional analyses associated with the implementation of the TCJA, resulting in a number of adjustments to the 2018 tax provision as follows:

TABLE 18: IMPACT OF TAX CUTS AND JOBS ACT
(In Millions)
2018

2017

Federal Taxes on Mandatory Deemed Repatriation
$
(16.8
)
$
150.0

Impact Related to Federal Deferred Taxes
12.7

(210.0
)
Other Adjustments
(0.7
)
6.9

 
 
 
Provision (Benefit) for Income Taxes
$
(4.8
)
$
(53.1
)

Adjustments in the above table included a tax benefit of $16.8 million resulting from an adjustment to the Corporation’s 2017 income tax provision for mandatory deemed repatriation with respect to the pre-2018 earnings of its non-U.S. subsidiaries, offset by a $12.7 million net provision recorded associated with the repricing of deferred taxes.
As a result of the TCJA, earnings which had been reinvested indefinitely outside of the United States were deemed to have been repatriated to the United States and were subject to a repatriation tax. As of December 31, 2018, Northern Trust’s repatriation tax was $133.2 million.
See Note 22, “Income Taxes,” to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data,” for more information on income taxes.
REPORTING SEGMENTS AND RELATED INFORMATION
The following information summarizes our results of operations by reporting segment for 2019 compared to 2018. For a discussion related to the results of operations by reporting segment for 2018 compared to 2017, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Form 10-K, which was filed with the United States Securities and Exchange Commission on February 26, 2019.

 
 
 
42   2019 Annual Report | Northern Trust Corporation
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management.
Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Equity is allocated to the reporting segments based on a variety of factors including, but not limited to, risk, regulatory considerations, and internal metrics. Allocations of capital and certain corporate expense may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1, “Summary of Significant Accounting Policies,” to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data.” Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between reporting segments. Northern Trust's presentations are not necessarily consistent with similar information for other financial institutions.
Effective January 1, 2019, Northern Trust implemented several enhancements to its FTP methodology, including the allocation of contingent liquidity charges to C&IS and Wealth Management client instruments and products. These methodology enhancements affect the results of each reporting segment. Due to the lack of historical information, segment results for periods ended prior to January 1, 2019 have not been revised to reflect the methodology enhancements.
Also effective January 1, 2019, all revenues, expenses and average assets are allocated to C&IS and Wealth Management, with the exception of non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments not directly attributable to a specific reporting segment.
For reporting periods ended prior to January 1, 2019, income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive-level compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and were reported in Treasury and Other.
Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis. The following table reflects the earnings and average assets for the Corporation.

TABLE 19: CONSOLIDATED FINANCIAL INFORMATION
 
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Noninterest Income
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
3,852.1

$
3,753.7

$
3,434.3

3
 %
9
 %
Foreign Exchange Trading Income
250.9

307.2

209.9

(18
)
46

Other Noninterest Income
292.2

276.6

301.9

6

(8
)
Total Noninterest Income
4,395.2

4,337.5

3,946.1

1

10

Net Interest Income (1)
1,710.7

1,663.9

1,475.0

3

13

 
 
 
 
 
 
Revenue (1)
6,105.9

6,001.4

5,421.1

2

11

Provision for Credit Losses
(14.5
)
(14.5
)
(28.0
)
N/M

N/M

Noninterest Expense
4,143.5

4,016.9

3,769.4

3

7

 
 
 
 
 
 
Income before Income Taxes (1)
1,976.9

1,999.0

1,679.7

(1
)
19

Provision for Income Taxes (1)
484.7

442.6

480.7

10

(8
)
 
 
 
 
 
 
Net Income
$
1,492.2

$
1,556.4

$
1,199.0

(4
)%
30
 %
 
 
 
 
 
 
Average Assets
$
117,551.4

$
122,946.6

$
119,607.4

(4
)%
3
 %
(1) Stated on an FTE basis. The consolidated figures include $32.8 million, $41.2 million, and $45.8 million of FTE adjustments for 2019, 2018, and 2017, respectively.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 43

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Corporate & Institutional Services
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region.
The following table summarizes the results of operations of C&IS for the years ended December 31, 2019, 2018, and 2017 on a management-reporting basis.

TABLE 20: C&IS RESULTS OF OPERATIONS
 
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Noninterest Income
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
2,211.5

$
2,173.1

$
1,984.6

2
 %
9
 %
Foreign Exchange Trading Income
232.2

233.4

197.9

(1
)
18

Other Noninterest Income
178.2

183.0

176.1

(3
)
4

Total Noninterest Income
2,621.9

2,589.5

2,358.6

1

10

Net Interest Income (1)
918.7

992.2

733.8

(7
)
35

 
 
 
 
 
 
Revenue (1)
3,540.6

3,581.7

3,092.4

(1
)
16

Provision for Credit Losses
1.9

1.9

3.4


(44
)
Noninterest Expense
2,605.5

2,421.4

2,194.5

8

10

 
 
 
 
 
 
Income before Income Taxes (1)
933.2

1,158.4

894.5

(19
)
30

Provision for Income Taxes (1)
219.4

255.3

279.5

(14
)
(9
)
 
 
 
 
 
 
Net Income
$
713.8

$
903.1

$
615.0

(21
)%
47
 %
 
 
 
 
 
 
Percentage of Consolidated Net Income
48
%
58
%
51
%
 
 
Average Assets
$
87,557.1

$
82,996.5

$
80,105.6

5
 %
4
 %
(1) Stated on an FTE basis.

C&IS net income decreased 21% in 2019 compared to 2018 primarily due to higher noninterest expense, partially offset by lower net interest income.

C&IS Trust, Investment and Other Servicing Fees
C&IS trust, investment and other servicing fees are primarily attributable to services related to custody, fund administration, investment management, and securities lending. Custody and fund administration fees are driven primarily by values of client assets under custody/administration, transaction volumes, and number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment management fees, which are based generally on client assets under management, are based primarily on market values throughout a period.
Securities lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. The other services fee category in C&IS includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.

 
 
 
44   2019 Annual Report | Northern Trust Corporation
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Provided below are the components of C&IS trust, investment and other servicing fees.

TABLE 21: C&IS TRUST, INVESTMENT AND OTHER SERVICING FEES
 
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Custody and Fund Administration
$
1,549.3

$
1,501.1

$
1,342.1

3
 %
12
 %
Investment Management
445.7

436.8

403.5

2

8

Securities Lending
87.2

102.0

96.4

(15
)
6

Other
129.3

133.2

142.6

(3
)
(7
)
 
 
 
 
 
 
Total Trust, Investment and Other Servicing Fees
$
2,211.5

$
2,173.1

$
1,984.6

2
 %
10
 %
2019 C&IS TRUST, INVESTMENT, AND OTHER SERVICING FEES
chart-999274a84dd359beb1c.jpg
n
 
70% Custody and Fund Administration
 
 
 
n
 
20% Investment Management
 
 
 
n
 
6% Other Services
 
 
 
n
 
4% Securities Lending
 
 
 
 
 
 

Custody and fund administration fees, the largest component of trust, investment and other servicing fees, increased $48.2 million, or 3%, from 2018 to 2019 primarily due to new business, partially offset by unfavorable currency translation and markets. Fees from investment management increased $8.9 million, or 2%, from 2018 to 2019 primarily due to new business and favorable markets. Securities lending revenue decreased $14.8 million, or 15% from 2018 to 2019, primarily driven by lower spreads and loan volumes.
Provided below is a breakdown of the C&IS assets under custody and under management.

TABLE 22: C&IS ASSETS UNDER CUSTODY
 
DECEMBER 31,
CHANGE
($ In Billions)
2019

2018

2017

2019 / 2018

2018 / 2017

North America
$
4,516.0

$
3,693.4

$
3,972.1

22
%
(7
)%
Europe, Middle East, and Africa
2,998.5

2,538.6

2,602.4

18

(2
)
Asia Pacific
820.3

589.2

697.1

39

(15
)
Securities Lending
163.0

149.8

167.5

9

(11
)
 
 
 
 
 
 
Total Assets Under Custody
$
8,497.8

$
6,971.0

$
7,439.1

22
%
(6
)%


 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 45

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


2019 C&IS ASSETS UNDER CUSTODY
chart-69ece86afc0a56e5b12.jpg
n
 
53% North America
 
 
 
n
 
35% Europe, Middle East, and Africa
 
 
 
n
 
10% Asia Pacific
 
 
 
n
 
2% Securities Lending
 
 
 
TABLE 23: C&IS ASSETS UNDER MANAGEMENT
 
DECEMBER 31,
CHANGE
($ In Billions)
2019

2018

2017

2019 / 2018

2018 / 2017

North America
$
588.4

$
493.1

$
533.5

19
%
(8
)%
Europe, Middle East, and Africa
125.2

113.3

127.3

11

(11
)
Asia Pacific
40.9

34.6

42.9

18

(19
)
Securities Lending
163.0

149.8

167.5

9

(11
)
 
 
 
 
 
 
Total Assets Under Management
$
917.5

$
790.8

$
871.2

16
%
(9
)%

2019 C&IS ASSETS UNDER MANAGEMENT
chart-2d8fe66c83e950e09cd.jpg
n
 
64% North America
 
 
 
n
 
18% Securities Lending
 
 
 
n
 
14% Europe, Middle East, and Africa
 
 
 
n
 
4% Asia Pacific
 
 
 
 
 
 

2019 C&IS ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
chart-509823f5b6005b5ea05.jpg
n
 
53% Equities
 
 

n
 
18% Securities Lending
 
 

n
 
17% Cash and Other Assets
 
 
 
n
 
12% Fixed Income Securities
 
 
 

C&IS assets under custody of $8.50 trillion at December 31, 2019, increased 22% from $6.97 trillion at December 31, 2018. Assets under management increased 16% to $917.5 billion at December 31, 2019, from $790.8 billion at December 31, 2018.

 
 
 
46   2019 Annual Report | Northern Trust Corporation
 
 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Cash and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed by Northern Trust and are included in assets under custody and under management. This securities lending collateral totaled $163.0 billion and $149.8 billion at December 31, 2019 and 2018, respectively.

C&IS Foreign Exchange Trading Income
Foreign exchange trading income of $232.2 million in 2019, decreased $1.2 million, or 1%, from $233.4 million in 2018, primarily due to lower foreign exchange swap activity in Treasury, partially offset by the enhanced segment reporting methodology beginning January 1, 2019.

C&IS Other Noninterest Income
Other noninterest income for 2019 of $178.2 million decreased $4.8 million, or 3%, from $183.0 million in 2018, primarily due to a decrease in other operating income and treasury management fees, partially offset by the enhanced segment reporting methodology beginning January 1, 2019.

C&IS Net Interest Income
Net interest income on an FTE basis, inclusive of the FTP methodology enhancements described above, decreased $73.5 million, or 7%, in 2019 to $918.7 million from $992.2 million in 2018, primarily reflecting higher charges due to the FTP methodology enhancements and a decrease in the net interest margin, partially offset by an increase in average earning assets. Net interest margin on an FTE basis decreased to 1.26% from 1.29%. Average earning assets of $79.1 billion, increased $2.2 billion, or 3%, from $76.9 billion in the prior year. The earning assets in C&IS consisted primarily of intercompany assets and loans and leases. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $54.9 billion in 2019, increased from $54.2 billion in 2018.

C&IS Provision for Credit Losses
The provision for credit losses was a provision of $1.9 million for both 2019 and 2018. The 2019 provision reflected an increase to the inherent reserve for outstanding loans due to lower credit quality, partially offset by a decrease to the specific reserve related to standby letters of credit and outstanding loans. The 2018 provision reflected increases to the specific reserve related to standby letters of credit, partially offset by reductions in standby letters of credit and undrawn loan commitments and improved credit quality resulting in a reduction of the inherent allowance.

C&IS Noninterest Expense
Total C&IS noninterest expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, of $2.61 billion in 2019, increased $184.1 million, or 8%, from $2.42 billion in 2018. The increase primarily reflects higher expense allocations, including those due to the enhanced segment reporting methodology beginning January 1, 2019, and higher compensation expense, partially offset by lower other operating expenses.

Wealth Management
Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. The business also includes the Global Family Office, which provides customized services to meet the complex financial needs of individuals and family offices in the United States and throughout the world with assets typically exceeding $200 million. In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking. Wealth Management is one of the largest providers of advisory services in the United States with assets under custody/administration, assets under custody, and assets under management of $738.8 billion, $735.7 billion, and $313.8 billion, respectively, at December 31, 2019. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.

 
 
 
 
 
2019 Annual Report | Northern Trust Corporation 47

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2019, 2018, and 2017 on a management-reporting basis.

TABLE 24: WEALTH MANAGEMENT RESULTS OF OPERATIONS
 
FOR THE YEAR ENDED DECEMBER 31,
CHANGE
($ In Millions)
2019

2018

2017

2019 / 2018

2018 / 2017

Noninterest Income
 
 
 
 
 
Trust, Investment and Other Servicing Fees
$
1,640.6

$
1,580.6

$
1,449.7

4
 %
9
 %
Foreign Exchange Trading Income
18.7

4.2

3.1

N/M

35

Other Noninterest Income
131.1

102.7

103.9

28

(1
)
Total Noninterest Income
1,790.4

1,687.5

1,556.7

6

8

Net Interest Income (1)
792.0

816.5

736.2

(3
)
11

Revenue (1)
2,582.4

2,504.0

2,292.9

3

9

Provision for Credit Losses
(16.4
)
(16.4
)
(31.4
)
N/M

N/M

Noninterest Expense
1,531.6

1,460.0

1,405.3

5

4

Income before Income Taxes (1)
1,067.2

1,060.4

919.0

1

15

Provision for Income Taxes (1)
271.1

262.1

347.2

3

(25
)
Net Income
$
796.1

$
798.3

$
571.8

 %
40
 %