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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In addition to the Report of Independent Registered Public Accounting Firm and the consolidated financial statements and accompanying notes provided below, the table titled “Quarterly Financial Data (Unaudited)” in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K is incorporated herein by reference.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF NORTHERN TRUST CORPORATION:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Northern Trust Corporation and subsidiaries (the Corporation) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2020 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for credit losses related to loans and leases collectively evaluated for inherent impairment
As discussed in Notes 1 and 7 to the consolidated financial statements, the Corporation’s allowance for credit losses related to loans and leases collectively evaluated for inherent impairment (ALLL) was $99.5 million of a total allowance for credit losses of $104.5 million as of December 31, 2019. The ALLL is estimated using a historical loss methodology that estimates the probability of default and loss given default for all loans and leases. The ALLL also incorporates adjustments in accordance with the Corporation’s qualitative adjustment framework.
| 92 2019 Annual Report | Northern Trust Corporation |
We identified the assessment of the ALLL as a critical audit matter because it involved significant measurement uncertainty regarding complex auditor judgment, and knowledge and experience in the industry. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The assessment of the ALLL encompassed the evaluation of the ALLL methodology, including the methodologies used to estimate the probability of default and loss given default, and their key factors and assumptions, including the borrower ratings, the historical observation period, and the loss emergence period. The assessment also included an evaluation of the ALLL calculations.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Corporation’s ALLL process, including controls related to the (1) development of the ALLL methodology, (2) determination of key factors and assumptions used to estimate the probability of default and loss given default, and (3) calculations of the ALLL estimate. We evaluated the Corporation’s process to develop the ALLL estimate by testing certain source data, factors and assumptions that the Corporation used and considered the relevance and reliability of such data, factors and assumptions. In addition, we involved credit risk professionals with specialized industry knowledge and experience, who assisted in:
| • | evaluating the Corporation’s ALLL methodology for compliance with U.S. generally accepted accounting principles, |
| • | testing the historical observation period assumption used in the probability of default and loss given default methodologies to evaluate the length of the periods, |
| • | testing borrower ratings for a selection of loan relationships by evaluating financial performance of the borrower and underlying collateral, |
| • | evaluating the methodology used to develop the probability of default, loss emergence period, and loss given default assumptions, and |
| • | evaluating the ALLL calculations, including testing the mathematical accuracy of certain key assumption calculations. |
We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the Corporation’s ALLL.
We have served as the Corporation’s auditor since 2002.
CHICAGO, ILLINOIS
FEBRUARY 25, 2020
| 2019 Annual Report | Northern Trust Corporation 93 |
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
| DECEMBER 31, | ||||||
| (In Millions Except Share Information) | 2019 | 2018 | ||||
| ASSETS | ||||||
| Cash and Due from Banks | $ | 4,459.2 | $ | 4,581.6 | ||
| Federal Reserve and Other Central Bank Deposits | 33,886.0 | 30,080.2 | ||||
| Interest-Bearing Deposits with Banks | 4,877.1 | 4,264.2 | ||||
| Federal Funds Sold and Securities Purchased under Agreements to Resell | 712.8 | 1,165.2 | ||||
| Debt Securities | ||||||
| Available for Sale | 38,876.3 | 36,888.8 | ||||
| Held to Maturity (Fair value of $12,249.3 and $14,267.0) | 12,284.5 | 14,354.0 | ||||
| Trading Account | 0.3 | 0.3 | ||||
| Total Debt Securities | 51,161.1 | 51,243.1 | ||||
| Loans and Leases | ||||||
| Commercial | 14,274.2 | 15,175.2 | ||||
| Personal | 17,135.4 | 17,314.8 | ||||
| Total Loans and Leases (Net of unearned income of $14.1 and $13.2) | 31,409.6 | 32,490.0 | ||||
| Allowance for Credit Losses Assigned to Loans and Leases | (104.5 | ) | (112.6 | ) | ||
| Buildings and Equipment | 483.3 | 428.2 | ||||
| Client Security Settlement Receivables | 845.7 | 1,646.1 | ||||
| Goodwill | 696.8 | 669.3 | ||||
| Other Assets | 8,401.3 | 5,757.2 | ||||
| Total Assets | $ | 136,828.4 | $ | 132,212.5 | ||
| LIABILITIES | ||||||
| Deposits | ||||||
| Demand and Other Noninterest-Bearing | $ | 14,114.7 | $ | 14,508.0 | ||
| Savings, Money Market and Other Interest-Bearing | 21,441.5 | 14,612.0 | ||||
| Savings Certificates and Other Time | 986.7 | 688.7 | ||||
| Non U.S. Offices — Noninterest-Bearing | 12,177.4 | 8,220.1 | ||||
| — Interest-Bearing | 60,400.3 | 66,468.0 | ||||
| Total Deposits | 109,120.6 | 104,496.8 | ||||
| Federal Funds Purchased | 552.9 | 2,594.2 | ||||
| Securities Sold Under Agreements to Repurchase | 489.7 | 168.3 | ||||
| Other Borrowings | 6,744.8 | 7,901.7 | ||||
| Senior Notes | 2,573.0 | 2,011.3 | ||||
| Long-Term Debt | 1,148.1 | 1,112.4 | ||||
| Floating Rate Capital Debt | 277.7 | 277.6 | ||||
| Other Liabilities | 4,830.6 | 3,141.9 | ||||
| Total Liabilities | 125,737.4 | 121,704.2 | ||||
| STOCKHOLDERS’ EQUITY | ||||||
| Preferred Stock, No Par Value; Authorized 10,000,000 shares: | ||||||
| Series C, outstanding shares of 16,000 | 388.5 | 388.5 | ||||
| Series D, outstanding shares of 5,000 | 493.5 | 493.5 | ||||
| Series E, outstanding shares of 16,000 | 391.4 | — | ||||
| Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 209,709,046 and 219,012,050 | 408.6 | 408.6 | ||||
| Additional Paid-In Capital | 1,013.1 | 1,068.5 | ||||
| Retained Earnings | 11,656.7 | 10,776.8 | ||||
| Accumulated Other Comprehensive Loss | (194.7 | ) | (453.7 | ) | ||
| Treasury Stock (35,462,478 and 26,159,474 shares, at cost) | (3,066.1 | ) | (2,173.9 | ) | ||
| Total Stockholders’ Equity | 11,091.0 | 10,508.3 | ||||
| Total Liabilities and Stockholders’ Equity | $ | 136,828.4 | $ | 132,212.5 |
See accompanying notes to consolidated financial statements on pages 98-166*.*
| 94 2019 Annual Report | Northern Trust Corporation |
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions Except Share Information) | 2019 | 2018 | 2017 | ||||||
| Noninterest Income | |||||||||
| Trust, Investment and Other Servicing Fees | $ | 3,852.1 | $ | 3,753.7 | $ | 3,434.3 | |||
| Foreign Exchange Trading Income | 250.9 | 307.2 | 209.9 | ||||||
| Treasury Management Fees | 44.5 | 51.8 | 56.4 | ||||||
| Security Commissions and Trading Income | 103.6 | 98.3 | 89.6 | ||||||
| Other Operating Income | 145.5 | 127.5 | 157.5 | ||||||
| Investment Security Gains (Losses), net (Note) | (1.4 | ) | (1.0 | ) | (1.6 | ) | |||
| Total Noninterest Income | 4,395.2 | 4,337.5 | 3,946.1 | ||||||
| Net Interest Income | |||||||||
| Interest Income | 2,499.9 | 2,321.4 | 1,769.4 | ||||||
| Interest Expense | 822.0 | 698.7 | 340.2 | ||||||
| Net Interest Income | 1,677.9 | 1,622.7 | 1,429.2 | ||||||
| Provision for Credit Losses | (14.5 | ) | (14.5 | ) | (28.0 | ) | |||
| Net Interest Income after Provision for Credit Losses | 1,692.4 | 1,637.2 | 1,457.2 | ||||||
| Noninterest Expense | |||||||||
| Compensation | 1,859.0 | 1,806.9 | 1,733.7 | ||||||
| Employee Benefits | 355.2 | 356.7 | 319.9 | ||||||
| Outside Services | 774.5 | 739.4 | 668.4 | ||||||
| Equipment and Software | 612.1 | 582.2 | 524.0 | ||||||
| Occupancy | 212.9 | 201.1 | 191.8 | ||||||
| Other Operating Expense | 329.8 | 330.6 | 331.6 | ||||||
| Total Noninterest Expense | 4,143.5 | 4,016.9 | 3,769.4 | ||||||
| Income before Income Taxes | 1,944.1 | 1,957.8 | 1,633.9 | ||||||
| Provision for Income Taxes | 451.9 | 401.4 | 434.9 | ||||||
| NET INCOME | $ | 1,492.2 | $ | 1,556.4 | $ | 1,199.0 | |||
| Preferred Stock Dividends | 46.4 | 46.4 | 49.8 | ||||||
| Net Income Applicable to Common Stock | $ | 1,445.8 | $ | 1,510.0 | $ | 1,149.2 | |||
| PER COMMON SHARE | |||||||||
| Net Income – Basic | $ | 6.66 | $ | 6.68 | $ | 4.95 | |||
| – Diluted | 6.63 | 6.64 | 4.92 | ||||||
| Average Number of Common Shares Outstanding – Basic | 214,525,547 | 223,148,335 | 228,257,664 | ||||||
| – Diluted | 215,601,149 | 224,488,326 | 229,654,401 | ||||||
| Note: Changes in Other-Than-Temporary-Impairment (OTTI) Losses | $ | (0.3 | ) | $ | (0.5 | ) | $ | (0.2 | ) |
| Other Security Gains (Losses), net | (1.1 | ) | (0.5 | ) | (1.4 | ) | |||
| Investment Security Gains (Losses), net | $ | (1.4 | ) | $ | (1.0 | ) | $ | (1.6 | ) |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Net Income | $ | 1,492.2 | $ | 1,556.4 | $ | 1,199.0 | |||
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | |||||||||
| Net Unrealized Gains (Losses) on Debt Securities Available for Sale | 228.9 | (22.3 | ) | (42.4 | ) | ||||
| Net Unrealized Gains (Losses) on Cash Flow Hedges | (7.7 | ) | (1.4 | ) | (1.6 | ) | |||
| Net Foreign Currency Adjustments | 49.9 | 22.2 | 16.7 | ||||||
| Net Pension and Other Postretirement Benefit Adjustments | (12.1 | ) | (12.6 | ) | (17.0 | ) | |||
| Other Comprehensive Income (Loss) | 259.0 | (14.1 | ) | (44.3 | ) | ||||
| Comprehensive Income | $ | 1,751.2 | $ | 1,542.3 | $ | 1,154.7 |
See accompanying notes to consolidated financial statements on pages 98-166*.*
| 2019 Annual Report | Northern Trust Corporation 95 |
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| (In Millions Except Per Share Information) | Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||
| Balance at January 1, 2017 | $ | 882.0 | $ | 408.6 | $ | 1,035.8 | $ | 8,908.4 | $ | (370.0 | ) | $ | (1,094.4 | ) | $ | 9,770.4 | |||||
| Net income | — | — | — | 1,199.0 | — | — | 1,199.0 | ||||||||||||||
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | — | — | — | (44.3 | ) | — | (44.3 | ) | ||||||||||||
| Dividends: | |||||||||||||||||||||
| Common stock, $1.60 per share | — | — | — | (372.5 | ) | — | — | (372.5 | ) | ||||||||||||
| Preferred stock | — | — | — | (49.8 | ) | — | — | (49.8 | ) | ||||||||||||
| Stock Options and Awards | — | — | — | — | — | 225.1 | 225.1 | ||||||||||||||
| Stock Purchased | — | — | — | — | — | (523.1 | ) | (523.1 | ) | ||||||||||||
| Treasury Stock Transactions — Stock Options and Awards | — | — | (117.1 | ) | — | — | — | (117.1 | ) | ||||||||||||
| Stock Options and Awards — Amortization | — | — | 128.5 | — | — | — | 128.5 | ||||||||||||||
| Balance at December 31, 2017 | $ | 882.0 | $ | 408.6 | $ | 1,047.2 | $ | 9,685.1 | $ | (414.3 | ) | $ | (1,392.4 | ) | $ | 10,216.2 | |||||
| Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | — | — | — | 25.3 | (25.3 | ) | — | — | |||||||||||||
| Change in Accounting Principle | — | — | — | (4.5 | ) | — | — | (4.5 | ) | ||||||||||||
| Net income | — | — | — | 1,556.4 | — | — | 1,556.4 | ||||||||||||||
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | — | — | — | (14.1 | ) | — | (14.1 | ) | ||||||||||||
| Dividends Declared: | |||||||||||||||||||||
| Common Stock, $1.94 per share | — | — | — | (439.1 | ) | — | — | (439.1 | ) | ||||||||||||
| Preferred Stock | — | — | — | (46.4 | ) | — | — | (46.4 | ) | ||||||||||||
| Stock Options and Awards | — | — | — | — | — | 142.8 | 142.8 | ||||||||||||||
| Stock Purchased | — | — | — | — | — | (924.3 | ) | (924.3 | ) | ||||||||||||
| Treasury Stock Transactions — Stock Options and Awards | — | — | (110.2 | ) | — | — | — | (110.2 | ) | ||||||||||||
| Stock Options and Awards — Amortization | — | — | 131.5 | — | — | — | 131.5 | ||||||||||||||
| Balance at December 31, 2018 | $ | 882.0 | $ | 408.6 | $ | 1,068.5 | $ | 10,776.8 | $ | (453.7 | ) | $ | (2,173.9 | ) | $ | 10,508.3 | |||||
| Net income | — | — | — | 1,492.2 | — | — | 1,492.2 | ||||||||||||||
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | — | — | — | 259.0 | — | 259.0 | ||||||||||||||
| Dividends: | |||||||||||||||||||||
| Common Stock, $2.60 per share | — | — | — | (565.9 | ) | — | — | (565.9 | ) | ||||||||||||
| Preferred Stock | — | — | — | (46.4 | ) | — | — | (46.4 | ) | ||||||||||||
| Issuance of Preferred Stock, Series E | 391.4 | 391.4 | |||||||||||||||||||
| Stock Options and Awards | — | — | — | — | — | 208.0 | 208.0 | ||||||||||||||
| Stock Purchased | — | — | — | — | — | (1,100.2 | ) | (1,100.2 | ) | ||||||||||||
| Treasury Stock Transactions — Stock Options and Awards | — | — | (163.9 | ) | — | — | — | (163.9 | ) | ||||||||||||
| Stock Options and Awards — Amortization | — | — | 108.5 | — | — | — | 108.5 | ||||||||||||||
| Balance at December 31, 2019 | $ | 1,273.4 | $ | 408.6 | $ | 1,013.1 | $ | 11,656.7 | $ | (194.7 | ) | $ | (3,066.1 | ) | $ | 11,091.0 |
See accompanying notes to consolidated financial statements on pages 98-166*.*
| 96 2019 Annual Report | Northern Trust Corporation |
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Net Income | $ | 1,492.2 | $ | 1,556.4 | $ | 1,199.0 | |||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | |||||||||
| Investment Security Losses, net | 1.4 | 1.0 | 1.6 | ||||||
| Amortization and Accretion of Securities and Unearned Income, net | 64.6 | 95.9 | 105.0 | ||||||
| Provision for Credit Losses | (14.5 | ) | (14.5 | ) | (28.0 | ) | |||
| Depreciation on Buildings and Equipment | 103.2 | 108.6 | 101.2 | ||||||
| Amortization of Computer Software | 339.1 | 334.9 | 309.1 | ||||||
| Amortization of Intangibles | 16.6 | 17.4 | 11.4 | ||||||
| Change in Accrued Income Taxes | (70.7 | ) | (130.0 | ) | 36.2 | ||||
| Pension Plan Contributions | (6.1 | ) | (74.5 | ) | (14.5 | ) | |||
| Deferred Income Tax Provision | 34.3 | 10.5 | (76.1 | ) | |||||
| Change in Receivables | (50.3 | ) | (197.0 | ) | (119.3 | ) | |||
| Change in Interest Payable | (23.6 | ) | 28.5 | 10.7 | |||||
| Change in Collateral With Derivative Counterparties, net | 1,154.0 | (699.6 | ) | 486.2 | |||||
| Other Operating Activities, net | (448.2 | ) | 729.9 | (302.1 | ) | ||||
| Net Cash Provided by Operating Activities | 2,592.0 | 1,767.5 | 1,720.4 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
| Net Change in Federal Funds Sold and Securities Purchased under Agreements to Resell | 486.3 | 105.7 | 678.9 | ||||||
| Change in Interest-Bearing Deposits with Banks | (614.6 | ) | 1,073.8 | (467.7 | ) | ||||
| Net Change in Federal Reserve and Other Central Bank Deposits | (3,683.2 | ) | 9,679.6 | (12,748.7 | ) | ||||
| Purchases of Debt Securities – Held to Maturity | (14,154.3 | ) | (21,463.1 | ) | (11,955.2 | ) | |||
| Proceeds from Maturity and Redemption of Debt Securities – Held to Maturity | 16,290.9 | 20,036.7 | 9,924.8 | ||||||
| Purchases of Debt Securities – Available for Sale | (12,811.0 | ) | (12,596.9 | ) | (9,780.0 | ) | |||
| Proceeds from Sale, Maturity and Redemption of Debt Securities – Available for Sale | 11,057.2 | 8,958.7 | 10,103.4 | ||||||
| Change in Loans and Leases | 1,087.9 | 66.1 | 1,451.0 | ||||||
| Purchases of Buildings and Equipment | (158.0 | ) | (97.6 | ) | (91.6 | ) | |||
| Purchases and Development of Computer Software | (441.8 | ) | (408.4 | ) | (381.2 | ) | |||
| Change in Client Security Settlement Receivables | 821.0 | (49.7 | ) | (592.6 | ) | ||||
| Acquisition of a Business, Net of Cash Received | (10.5 | ) | (104.2 | ) | (188.5 | ) | |||
| Bank-Owned Life Insurance Policy Premiums | (1,500.0 | ) | — | — | |||||
| Other Investing Activities, net | 225.1 | (873.6 | ) | 25.8 | |||||
| Net Cash (Used in) Provided by Investing Activities | (3,405.0 | ) | 4,327.1 | (14,021.6 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
| Change in Deposits | 4,263.6 | (6,163.2 | ) | 8,523.6 | |||||
| Change in Federal Funds Purchased | (2,041.3 | ) | 308.1 | 2,081.2 | |||||
| Change in Securities Sold under Agreements to Repurchase | 320.9 | (665.2 | ) | 360.5 | |||||
| Change in Short-Term Other Borrowings | (1,184.5 | ) | 1,860.9 | 967.7 | |||||
| Proceeds from Senior Notes | 498.0 | 497.9 | 350.0 | ||||||
| Repayments of Senior Notes | — | (314.3 | ) | (208.7 | ) | ||||
| Proceeds from Issuance of Preferred Stock - Series E | 392.5 | — | — | ||||||
| Treasury Stock Purchased | (1,100.2 | ) | (924.3 | ) | (523.1 | ) | |||
| Net Proceeds from Stock Options | 44.0 | 32.6 | 108.0 | ||||||
| Cash Dividends Paid on Common Stock | (529.7 | ) | (405.4 | ) | (356.8 | ) | |||
| Cash Dividends Paid on Preferred Stock | (46.4 | ) | (46.4 | ) | (49.8 | ) | |||
| Other Financing Activities, net | (1.0 | ) | 1.1 | 0.1 | |||||
| Net Cash Provided by (Used In) Financing Activities | 615.9 | (5,818.2 | ) | 11,252.7 | |||||
| Effect of Foreign Currency Exchange Rates on Cash | 74.7 | (212.9 | ) | 234.6 | |||||
| Change in Cash and Due from Banks | (122.4 | ) | 63.5 | (813.9 | ) | ||||
| Cash and Due from Banks at Beginning of Year | 4,581.6 | 4,518.1 | 5,332.0 | ||||||
| Cash and Due from Banks at End of Year | $ | 4,459.2 | $ | 4,581.6 | $ | 4,518.1 | |||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||
| Interest Paid | $ | 845.5 | $ | 670.2 | $ | 328.8 | |||
| Income Taxes Paid | 437.0 | 493.5 | 441.2 | ||||||
| Transfers from Loans to OREO | 3.5 | 11.4 | 8.2 | ||||||
| Transfers to Leases Held For Sale from Leases | 53.6 | — | — |
See accompanying notes to consolidated financial statements on pages 98-166*.*
| 2019 Annual Report | Northern Trust Corporation 97 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) and reporting practices prescribed for the banking industry. A description of the more significant accounting policies follows.
A. Basis of Presentation. The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its wholly-owned subsidiary, The Northern Trust Company (Bank), and various other wholly-owned subsidiaries of the Corporation and Bank. Throughout the notes to the consolidated financial statements, the term “Northern Trust” refers to the Corporation and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The consolidated statements of income include results of acquired subsidiaries from the dates of acquisition. Certain prior-year balances have been reclassified consistent with the current year’s presentation.
B. Nature of Operations. The Corporation is a bank holding company that has elected to be a financial holding company under the Bank Holding Company Act of 1956, as amended. The Bank is an Illinois banking corporation headquartered in Chicago and the Corporation’s principal subsidiary. The Corporation conducts business in the United States (U.S.) and internationally through various U.S. and non-U.S. subsidiaries, including the Bank.
Northern Trust generates the majority of its revenue from its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business.
C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: global custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region.
Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. The business also includes the Global Family Office, which provides customized services to meet the complex financial needs of individuals and family offices in the U.S. and throughout the world with assets typically exceeding $200 million. In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.
C. Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in the application of certain of our significant accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
D. Foreign Currency Remeasurement and Translation. Asset and liability accounts denominated in nonfunctional currencies are remeasured into functional currencies at period-end rates of exchange, except for certain balance sheet items including but not limited to buildings and equipment, goodwill and other intangible assets, which are remeasured at historical exchange rates. Results from remeasurement of asset and liability accounts are reported in other operating income as currency translation gains (losses), net. Income and expense accounts are remeasured at period-average rates of exchange.
Asset and liability accounts of entities with functional currencies that are not the U.S. dollar are translated at period-end rates of exchange. Income and expense accounts are translated at period-average rates of exchange. Translation adjustments, net of applicable taxes, are reported directly to accumulated other comprehensive income (AOCI), a component of stockholders’ equity.
E. Securities. Securities Available for Sale are reported at fair value, with unrealized gains and losses credited or charged, net of the tax effect, to AOCI. Realized gains and losses on securities available for sale are determined on a specific identification
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basis and are reported within other security gains (losses), net, in the consolidated statements of income. Interest income is recorded on the accrual basis, adjusted for the amortization of premium and accretion of discount.
Securities Held to Maturity consist of debt securities that management intends to, and Northern Trust has the ability to, hold until maturity. Such securities are reported at cost, adjusted for amortization of premium and accretion of discount. Interest income is recorded on the accrual basis adjusted for the amortization of premium and accretion of discount.
Securities Held for Trading are stated at fair value. Realized and unrealized gains and losses on securities held for trading are reported in the consolidated statements of income within security commissions and trading income.
Nonmarketable Securities primarily consist of Federal Reserve Bank of Chicago and Federal Home Loan Bank stock and community development investments, each of which are recorded in Other Assets on the consolidated balance sheets. Federal Reserve Bank of Chicago and Federal Home Loan Bank stock are reported at cost, which represents redemption value. Community development investments are typically reported at amortized cost. Those community development investments that are designed to generate a return primarily through realization of tax credits and other tax benefits, which are discussed in further detail in Note 30, “Variable Interest Entities,” are reported at amortized cost using the effective yield method or proportional amortization method and amortized over the lives of the related tax credits and other tax benefits.
Other-Than-Temporary Impairment (OTTI). A security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more-likely-than-not will be required, to sell the security before recovery of the security’s amortized cost basis. If OTTI exists, the charge to earnings is limited to the amount of credit loss if the investor does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in AOCI, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings.
F. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase. Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the repurchase.
G. Derivative Financial Instruments. Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients, as part of its trading activity for its own account, and as part of its risk management activities. These instruments generally include foreign exchange contracts, interest rate contracts, total return swap contracts and credit default swap contracts. All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance sheets at fair value within Other Assets and Other Liabilities. Derivative asset and liability positions with the same counterparty are reflected on a net basis on the consolidated balance sheets in cases where legally enforceable master netting arrangements or similar agreements exist. These derivative assets and liabilities are further reduced by cash collateral received from, and deposited with, derivative counterparties. The accounting for changes in the fair value of a derivative in the consolidated statements of income depends on whether or not the contract has been designated as a hedge and qualifies for hedge accounting under GAAP. Derivative financial instruments are recorded on the consolidated statements of cash flows within the line item, “other operating activities, net,” except for net investment hedges which are recorded within “other investing activities, net”.
Changes in the fair value of client-related and trading derivative instruments, which are not designated hedges under GAAP, are recognized currently in either foreign exchange trading income or security commissions and trading income. Changes in the fair value of derivative instruments entered into for risk management purposes but not designated as hedges are recognized currently in other operating income. Certain derivative instruments used by Northern Trust to manage risk are formally designated and qualify for hedge accounting as fair value, cash flow, or net investment hedges.
Derivatives designated as fair value hedges are used to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. Changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recognized currently in interest income or interest expense. For substantially all fair value hedges, Northern Trust applies the “shortcut” method of accounting, available under GAAP. As a result, changes recorded in the fair value of the hedged item are assumed to equal the offsetting gain or loss on the derivative. For fair value hedges that do not qualify for the “shortcut” method of accounting, Northern Trust utilizes regression analysis, a “long-haul” method of accounting, in assessing whether these hedging relationships are highly effective at inception and quarterly thereafter.
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Derivatives designated as cash flow hedges are used to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. Changes in the fair value of such derivatives are recognized in AOCI, a component of stockholders’ equity, and there is no change to the accounting for the hedged item. Balances in AOCI are reclassified to earnings when the hedged forecasted transaction impacts earnings, and are reflected in the same income statement line item. Northern Trust applies the “shortcut” method of accounting for cash flow hedges of certain available for sale investment securities. For cash flow hedges of certain other available for sale investment securities, foreign currency denominated investment securities, and forecasted foreign currency denominated revenue and expenditure transactions, Northern Trust closely matches all terms of the hedged item and hedging derivative at inception and on an ongoing basis. For cash flow hedges of available for sale investment securities, to the extent all terms are not perfectly matched, effectiveness is assessed using regression analysis. For cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions and investment securities, to the extent all terms are not perfectly matched, effectiveness is assessed using the dollar-offset method.
Foreign exchange contracts and qualifying non-derivative instruments designated as net investment hedges are used to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. Changes in the fair value of the hedging instrument are recognized in AOCI consistent with the related translation gains and losses of the hedged net investment. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis. Amounts recorded in AOCI are reclassified to earnings only upon the sale or liquidation of an investment in a non-U.S. branch or subsidiary.
Fair value, cash flow, and net investment hedges are designated and formally documented as such contemporaneous with the transaction. The formal documentation describes the hedge relationship and identifies the hedging instruments and hedged items. Included in the documentation is a discussion of the risk management objectives and strategies for undertaking such hedges, the nature of the risk being hedged, and a description of the method for assessing hedge effectiveness at inception and on an ongoing basis. For hedges that do not qualify for the “shortcut” or the critical terms match methods of accounting, a formal assessment is performed on a calendar quarter basis to verify that derivatives used in hedging transactions continue to be highly effective in offsetting the changes in fair value or cash flows of the hedged item. Hedge accounting is discontinued if a derivative ceases to be highly effective, matures, is terminated or sold, if a hedged forecasted transaction is no longer expected to occur, or if Northern Trust removes the derivative’s hedge designation. Subsequent gains and losses on these derivatives are included in foreign exchange trading income or security commissions and trading income. For discontinued cash flow hedges, the accumulated gain or loss on the derivative remains in AOCI and is reclassified to earnings in the period in which the previously hedged forecasted transaction impacts earnings or is no longer probable of occurring. For discontinued fair value hedges, the previously hedged asset or liability ceases to be adjusted for changes in its fair value. Previous adjustments to the hedged item are amortized over the remaining life of the hedged item.
H. Loans and Leases. Loans and leases are recognized assets that represent a contractual right to receive money either on demand or on fixed or determinable dates. Loans and leases are disaggregated for disclosure purposes by portfolio segment (segment) and by class. Northern Trust has defined its segments as commercial and personal. A class of loans and leases is a subset of a segment, the components of which have similar risk characteristics, measurement attributes, or risk monitoring methods. The classes within the commercial segment have been defined as commercial and institutional, commercial real estate, lease financing, net, non-U.S. and other. The classes within the personal segment have been defined as residential real estate, private client and other.
Loan Classification. Loans that are held for investment are reported at the principal amount outstanding, net of unearned income. Loans classified as held for sale are reported at the lower of cost or fair value. Undrawn commitments relating to loans that are not held for sale are recorded in Other Liabilities and are carried at the amount of unamortized fees with an allowance for credit loss liability recognized for any estimated probable losses.
Recognition of Income. Interest income on loans is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. Loans meeting such criteria are classified as nonperforming and interest income is recorded on a cash basis. Past due status is based on how long since the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans that are 29 days past due or less are reported as current. At the time a loan is determined to be nonperforming, interest accrued but not collected is reversed against interest income in the current period. Interest collected on nonperforming loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt. Management’s assessment of indicators of loan and lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent resumption of income recognition, do not meaningfully vary between loan and lease classes. Nonperforming loans are returned to performing status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to performing status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate
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primarily to expected payment performance. A loan is eligible to be returned to performing status when: (i) no principal or interest that is due is unpaid and repayment of the remaining contractual principal and interest is expected or (ii) the loan has otherwise become well-secured (possessing realizable value sufficient to discharge the debt, including accrued interest, in full) and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current status in the near future). A loan that has not been brought fully current may be restored to performing status provided there has been a sustained period of repayment performance (generally a minimum of six payment periods) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time. Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial condition and prospects of repayment under the revised terms, and there has been a sustained period of repayment performance (generally a minimum of six payment periods) under the revised terms.
Impaired Loans. A loan is considered to be impaired when, based on current information and events, management determines that it is probable that Northern Trust will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are identified through ongoing credit management and risk rating processes, including the formal review of past due and watch list credits. Payment performance and delinquency status are critical factors in identifying impairment for all loans and leases, particularly those within the residential real estate, private client and personal-other classes. Other key factors considered in identifying impairment of loans and leases within the commercial and institutional, lease financing, net, non-U.S., and commercial-other classes relate to the borrower’s ability to perform under the terms of the obligation as measured through the assessment of future cash flows, including consideration of collateral value, market value, and other factors. A loan is also considered to be impaired if its terms have been modified as a concession by Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties, referred to as a troubled debt restructuring (TDR). All TDRs are reported as impaired loans in the calendar year of their restructuring. In subsequent years, a TDR may cease being reported as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six payment periods. A loan that has been modified at a below market rate will return to performing status if it satisfies the six-payment-period performance requirement; however, it will remain reported as impaired. Impairment is measured based upon the present value of expected future cash flows, discounted at the loan's original effective interest rate, the fair value of the collateral if the loan is collateral dependent, or the loan's observable market value. If the loan valuation is less than the recorded value of the loan, based on the certainty of loss, either a specific allowance is established, or a charge-off is recorded, for the difference. Smaller balance (individually less than $1 million) homogeneous loans are collectively evaluated for impairment and excluded from impaired loan disclosures as allowed under applicable accounting standards. Northern Trust’s accounting policies for material impaired loans is consistent across all classes of loans and leases.
Premium, Discounts, Origination Costs and Fees. Premiums and discounts on loans are recognized as an adjustment of yield using the interest method based on the contractual terms of the loan. Certain direct origination costs and fees are netted, deferred and amortized over the life of the related loan as an adjustment to the loan’s yield.
Direct Financing and Leveraged Leases. Unearned lease income from direct financing and leveraged leases is recognized using the interest method. This method provides a constant rate of return on the unrecovered investment over the life of the lease. The rate of return and the allocation of income over the lease term are recalculated from the inception of the lease if during the lease term assumptions regarding the amount or timing of estimated cash flows change. Lease residual values are established at the inception of the lease based on in-house valuations and market analyses provided by outside parties. Lease residual values are reviewed at least annually for OTTI. A decline in the estimated residual value of a leased asset determined to be other-than-temporary would be recorded in the period in which the decline is identified as a reduction of interest income.
I. Allowance for Credit Losses. The allowance for credit losses represents management’s estimate of probable losses which have occurred as of the date of the consolidated financial statements. The loan and lease portfolio and other lending-related credit exposures are regularly reviewed to evaluate the level of the allowance for credit losses. In determining an appropriate allowance level, Northern Trust evaluates the allowance necessary for impaired loans and lending-related commitments and also estimates losses inherent in other lending-related credit exposures. The allowance for credit losses consists of the following components:
Specific Allowance. The specific allowance is determined through an individual evaluation of loans and lending-related commitments considered impaired that is based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay. For impaired loans where the amount of specific allowance, if any, is determined based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and utilized by management. These appraisals are generally less than twelve months old and are subject to adjustments to reflect management’s judgment as to the realizable value of the collateral.
Inherent Allowance. The inherent allowance estimation methodology is based on internally developed loss data specific to the Northern Trust loan and lease portfolio. The estimation methodology and the related qualitative adjustment framework
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segregate the loan and lease portfolio into homogeneous segments. For each segment, the probability of default and the loss given default are applied to the total exposure at default to determine a quantitative inherent allowance. The quantitative inherent allowance is then reviewed within the qualitative adjustment framework, where management applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology and environmental factors that are not fully contemplated in the quantitative methodology to compute an adjustment to the quantitative inherent allowance for each segment of the loan portfolio.
The results of the inherent allowance estimation methodology are reviewed quarterly by Northern Trust’s Loan Loss Reserve Committee, which includes representatives from Credit Risk Management, reporting segment management, and Corporate Finance.
Loans, leases, and other extensions of credit deemed uncollectible are charged to the allowance for credit losses. Subsequent recoveries, if any, are credited to the allowance. Northern Trust’s policies relative to the charging-off of uncollectible loans and leases are consistent across both loan and lease segments. Determinations as to whether loan balances for which the collectability is in question are charged-off or a specific reserve is established are based on management’s assessment as to the level of certainty regarding the amount of loss. The provision for credit losses, which is charged to income, is the amount necessary to adjust the allowance for credit losses to the level determined to be appropriate through the above processes. Actual losses may vary from current estimates and the amount of the provision for credit losses may be either greater or less than actual net charge-offs.
Northern Trust analyzes its exposure to credit losses from both on-balance-sheet and off-balance-sheet activity using a consistent methodology.
For purposes of estimating the allowance for credit losses for undrawn loan commitments and standby letters of credit, the exposure at default includes an estimated drawdown of unused credit based on a credit conversion factor. The proportionate amount of the quantitative methodology calculation after any required adjustment in the qualitative framework results in the required allowance for undrawn loan commitments and standby letters of credit as of the reporting date.
The portion of the allowance assigned to loans and leases is reported as a contra asset, directly following loans and leases in the consolidated balance sheets. The portion of the allowance assigned to undrawn loan commitments and standby letters of credit is reported in Other Liabilities in the consolidated balance sheets.
J. Standby Letters of Credit. Fees on standby letters of credit are recognized in other operating income using the straight-line method over the lives of the underlying agreements. Northern Trust’s recorded other liability for standby letters of credit, reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments.
K. Buildings and Equipment. Buildings and equipment owned are carried at original cost less accumulated depreciation. The charge for depreciation is computed using the straight-line method based on the following range of lives: buildings – up to 30 years; equipment – 3 to 10 years; and leasehold improvements – the shorter of the lease term or 15 years. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the lease period.
L. Other Real Estate Owned (OREO)****. OREO is comprised of commercial and residential real estate properties acquired in partial or total satisfaction of loans. OREO assets are carried at the lower of cost or fair value less estimated costs to sell and are recorded in Other Assets on the consolidated balance sheets. Fair value is typically based on third-party appraisals. Appraisals of OREO properties are updated on an annual basis and are subject to adjustments to reflect management’s judgment as to the realizable value of the properties. Losses identified during the 90-day period after the acquisition of such properties are charged against the allowance for credit losses assigned to loans and leases. Subsequent write-downs that may be required to the carrying value of these assets and gains or losses realized from asset sales are recorded within other operating expense.
M. Goodwill and Other Intangible Assets. Goodwill is not subject to amortization. Separately identifiable acquired intangible assets with finite lives are amortized over their estimated useful lives, primarily on a straight-line basis. Purchased software, software licenses, and allowable internal costs, including compensation relating to software developed for internal use, are capitalized. Software is amortized using the straight-line method over the estimated useful lives of the assets, generally ranging from 3 to 10 years. Fees paid for the use of software licenses that are not hosted by Northern Trust are expensed as incurred.
Goodwill and other intangible assets are reviewed for impairment on an annual basis or more frequently if events or changes in circumstances indicate the carrying amounts may not be recoverable.
N. Trust, Investment and Other Servicing Fees. Trust, investment and other servicing fees are recorded on an accrual basis, over the period in which the service is provided. Fees are primarily a function of the market value of assets custodied, managed and serviced, transaction volumes, and securities lending volume and spreads, as set forth in the underlying client
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agreement. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes.
O. Client Security Settlement Receivables. These receivables result from custody client withdrawals from short-term investment funds that settle on the following business day as well as custody client security sales executed under contractual settlement date accounting that have not yet settled. Northern Trust advances cash to the client on the date of either client withdrawal or trade execution and awaits collection from either the short-term investment funds or via the settled trade.
P. Income Taxes. Northern Trust follows an asset and liability approach to account for income taxes. The objective is to recognize the amount of taxes payable or refundable for the current year, and to recognize deferred tax assets and liabilities resulting from temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates.
Tax positions taken or expected to be taken on a tax return are evaluated based on their likelihood of being sustained upon examination by tax authorities. Only tax positions that are considered more-likely-than-not to be sustained are recorded in the consolidated financial statements. A valuation allowance is established for deferred tax assets if it is more-likely-than-not that all or a portion will not be realized. Northern Trust recognizes any interest and penalties related to unrecognized tax benefits in the provision for income taxes.
Q. Cash Flow Statements. Cash and cash equivalents have been defined as “Cash and Due from Banks”.
R. Pension and Other Postretirement Benefits. Northern Trust records the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheets. Funded pension and postretirement benefits are reported in Other Assets and unfunded pension and postretirement benefits are reported in Other Liabilities. Plan assets and benefit obligations are measured annually at December 31. Plan assets are determined based on fair value generally representing observable market prices. The projected benefit obligations are determined based on the present value of projected benefit distributions at an assumed discount rate. Pension costs are recognized ratably over the estimated working lifetime of eligible participants.
S. Share-Based Compensation Plans. Northern Trust recognizes as compensation expense the grant-date fair value of stock and stock unit awards and other share-based compensation granted to employees within the consolidated statements of income. The fair values of stock and stock unit awards, including performance stock unit awards and director awards, are based on the closing price of the Corporation’s stock on the date of grant adjusted for certain awards that do not accrue dividends while vesting. The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The model utilizes weighted-average assumptions regarding the period of time that options granted are expected to be outstanding (expected term) based primarily on the historical exercise behavior attributable to previous option grants, the estimated yield from dividends paid on the Corporation’s stock over the expected term of the options, the historical volatility of Northern Trust’s stock price and the implied volatility of traded options on Northern Trust stock, and a risk free interest rate based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.
Compensation expense for share-based award grants with terms that provide for a graded vesting schedule, whereby portions of the award vest in increments over the requisite service period, are recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense for performance stock unit awards are recognized on a straight-line basis over the requisite service period of the award based on expected achievement of the performance condition. Adjustments are made for employees that meet certain eligibility criteria at the grant date or during the requisite service period.
Northern Trust does not include an estimate of future forfeitures in its recognition of share-based compensation expense. Share-based compensation expense is adjusted based on forfeitures as they occur. Dividend equivalents are paid on a current basis for restricted stock units granted prior to February 21, 2017 that are not yet vested. Dividend equivalents are accrued for performance stock unit awards, most restricted stock units granted on or after February 21, 2017 and director awards not yet vested, and are paid upon vesting. Certain restricted stock units granted on or after February 20, 2018 are not entitled to dividend equivalents during the vesting period. Cash flows resulting from the realization of excess tax benefits are classified as operating cash flows.
T. Net Income Per Common Share. Basic net income per common share is computed by dividing net income/loss applicable to common stock by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income applicable to common stock and potential common shares by the aggregate of the weighted average number of common shares outstanding during the period and common share equivalents calculated for stock options outstanding using the treasury stock method. In a period of a net loss, diluted net income per common share is calculated in the same manner as basic net income per common share.
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Northern Trust has issued certain restricted stock unit awards, which are unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. These units are considered participating securities. Accordingly, Northern Trust calculates net income applicable to common stock using the two-class method, whereby net income is allocated between common stock and participating securities.
Note 2 – Recent Accounting Pronouncements
On January 1, 2019, Northern Trust adopted ASU No. 2016-02, “Leases (Topic 842)" (ASU 2016-02). ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet, with certain specified scope exceptions. Specifically within the lessee model under ASU 2016-02, a lessee is required to recognize on the balance sheet a liability to make future lease payments, known as the lease liability, and a right-of-use asset (ROU asset) representing its right to use the underlying asset over the lease term. Upon adoption, Northern Trust elected the package of practical expedients available under ASU 2016-02, which allowed Northern Trust to forego a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. As a result of adopting ASU 2016-02, Northern Trust recognized operating lease liabilities and ROU assets of approximately $530 million and $480 million, respectively. Northern Trust did not restate comparative periods for the effects of applying ASU 2016-02. There was no significant impact to Northern Trust’s consolidated results of operations. Please refer to Note 10, “Lease Commitments” for further information.
On January 1, 2019, Northern Trust adopted ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Securities” (ASU 2017-08). ASU 2017-08 amends the amortization period for certain callable debt securities held at a premium and shortens the amortization period for the premium to the earliest call date. Upon adoption of ASU 2017-08, there was no significant impact to Northern Trust’s consolidated financial condition or results of operations.
On January 1, 2019, Northern Trust adopted ASU No. 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (ASU 2018-16). ASU 2018-16 permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. Upon adoption of ASU 2018-16, there was no significant impact to Northern Trust’s consolidated financial condition or results of operations.
Note 3 – Fair Value Measurements
Fair value under GAAP is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date.
Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred. No transfers between fair value levels occurred during the years ended December 31, 2019, or 2018.
Level 1 – Quoted, active market prices for identical assets or liabilities. Northern Trust’s Level 1 assets are comprised of available for sale investments in U.S. treasury securities.
Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. Northern Trust’s Level 2 assets include available for sale and trading account debt securities, the fair values of which are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and third-party prices. If a security price obtained from a pricing vendor is determined to exceed pre-determined tolerance levels that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated, an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of December 31, 2019, Northern Trust’s available for sale debt securities portfolio included 1,704 Level 2 securities with an aggregate market value of $34.3 billion. All 1,704 debt securities were valued by external pricing vendors. As of December 31, 2018, Northern Trust’s available for sale debt securities portfolio included 1,479 Level 2 debt securities with an aggregate market value of $31.7 billion. All 1,479 debt securities were valued by external pricing vendors. Trading
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account debt securities, which totaled $0.3 million as of December 31, 2019 and 2018, were all valued using external pricing vendors.
Northern Trust has established processes and procedures to assess the suitability of valuation methodologies used by external pricing vendors, including reviews of valuation techniques and assumptions used for selected securities. On a daily basis, periodic quality control reviews of prices received from vendors are conducted which include comparisons to prices on similar security types received from multiple pricing vendors and to the previous day’s reported prices for each security. Predetermined tolerance level exceptions are researched and may result in additional validation through available market information or the use of an alternate pricing vendor. Quarterly, Northern Trust reviews documentation from third-party pricing vendors regarding the valuation processes and assumptions used in their valuations and assesses whether the fair value levels assigned by Northern Trust to each security classification are appropriate. Annually, valuation inputs used within third-party pricing vendor valuations are reviewed for propriety on a sample basis through a comparison of inputs used to comparable market data, including security classifications that are less actively traded and security classifications comprising significant portions of the portfolio.
Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting arrangements or similar agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been considered material.
Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace.
Northern Trust’s Level 3 liabilities consist of swaps that Northern Trust entered into with the purchaser of 1.1 million and 1.0 million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern Trust and sold in June 2016 and 2015, respectively. Pursuant to the swaps, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-dilutive adjustments to the ratio. The swap also requires periodic payments from Northern Trust to the counterparty calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swap is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. See “Visa Class B Common Shares” under Note 26, “Contingent Liabilities,” for further information.
Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.
Management of various businesses and departments of Northern Trust (including Corporate Market Risk, Credit Risk Management, Corporate Finance, C&IS and Wealth Management) reviews valuation methods and models for Level 3 assets and liabilities. Fair value measurements are performed upon acquisitions of an asset or liability. Management of the appropriate business or department reviews assumed inputs, especially when unobservable in the marketplace, in order to substantiate their use in each fair value measurement. When appropriate, management reviews forecasts used in the valuation process in light of other relevant financial projections to understand any variances between current and previous fair value measurements. In certain circumstances, third party information is used to support the fair value measurements. If certain third party information seems inconsistent with consensus views, a review of the information is performed by management of the respective business or department to determine the appropriate fair value of the asset or liability.
The following table presents the fair values of Northern Trust’s Level 3 liabilities as of December 31, 2019 and 2018, as well as the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for such liabilities as of such dates.
| 2019 Annual Report | Northern Trust Corporation 105 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 60: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
| DECEMBER 31, 2019 | |||||||||
| FINANCIAL INSTRUMENT | FAIR VALUE | VALUATION TECHNIQUE | UNOBSERVABLE INPUT | INPUT VALUE | |||||
| Swaps Related to Sale of Certain Visa Class B Common Shares | $ | 33.4 | million | Discounted Cash Flow | Conversion Rate | 1.62x | |||
| Visa Class A Appreciation | 8.54% | ||||||||
| RANGE OF INPUTS | |||||||||
| Expected Duration | 1.0 | – | 3.0 years |
| DECEMBER 31, 2018 | |||||||||
| FINANCIAL INSTRUMENT | FAIR VALUE | VALUATION TECHNIQUE | UNOBSERVABLE INPUT | RANGE OF INPUTS | |||||
| Swaps Related to Sale of Certain Visa Class B Common Shares | $ | 32.8 | million | Discounted Cash Flow | Conversion Rate | 1.62x | – | 1.64x | |
| Visa Class A Appreciation | 7.0 | % | – | 11.0% | |||||
| Expected Duration | 1.5 | – | 4.0 years |
| 106 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018, segregated by fair value hierarchy level.
TABLE 61: RECURRING BASIS HIERARCHY LEVELING
| DECEMBER 31, 2019 | ||||||||||||||||
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | NETTING | ASSETS/ LIABILITIES AT FAIR VALUE | |||||||||||
| Debt Securities | ||||||||||||||||
| Available for Sale | ||||||||||||||||
| U.S. Government | $ | 4,549.1 | $ | — | $ | — | $ | — | $ | 4,549.1 | ||||||
| Obligations of States and Political Subdivisions | — | 1,615.3 | — | — | 1,615.3 | |||||||||||
| Government Sponsored Agency | — | 23,271.2 | — | — | 23,271.2 | |||||||||||
| Non-U.S. Government | — | 3.3 | — | — | 3.3 | |||||||||||
| Corporate Debt | — | 2,402.7 | — | — | 2,402.7 | |||||||||||
| Covered Bonds | — | 769.9 | — | — | 769.9 | |||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | — | 2,127.6 | — | — | 2,127.6 | |||||||||||
| Other Asset-Backed | — | 3,330.5 | — | — | 3,330.5 | |||||||||||
| Commercial Mortgage-Backed | — | 797.7 | — | — | 797.7 | |||||||||||
| Other | — | 9.0 | — | — | 9.0 | |||||||||||
| Total Available for Sale | 4,549.1 | 34,327.2 | — | — | 38,876.3 | |||||||||||
| Trading Account | — | 0.3 | — | — | 0.3 | |||||||||||
| Total Available for Sale and Trading Debt Securities | 4,549.1 | 34,327.5 | — | — | 38,876.6 | |||||||||||
| Other Assets | ||||||||||||||||
| Derivative Assets | ||||||||||||||||
| Foreign Exchange Contracts | — | 3,234.8 | — | (2,334.1 | ) | 900.7 | ||||||||||
| Interest Rate Contracts | — | 152.9 | — | (3.9 | ) | 149.0 | ||||||||||
| Total Derivative Assets | — | 3,387.7 | — | (2,338.0 | ) | 1,049.7 | ||||||||||
| Other Liabilities | ||||||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Foreign Exchange Contracts | — | 3,182.2 | — | (1,548.6 | ) | 1,633.6 | ||||||||||
| Interest Rate Contracts | — | 97.4 | — | (57.3 | ) | 40.1 | ||||||||||
| Other Financial Derivatives (1) | — | — | 33.4 | (12.5 | ) | 20.9 | ||||||||||
| Total Derivative Liabilities | $ | — | $ | 3,279.6 | $ | 33.4 | $ | (1,618.4 | ) | $ | 1,694.6 |
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2019*, derivative assets and liabilities shown above also include reductions of* $1,136.8 million and $417.2 million*, respectively, as a result of cash collateral received from and deposited with derivative counterparties.*
(1) This line consists of swaps related to the sale of certain Visa Class B common shares.
| 2019 Annual Report | Northern Trust Corporation 107 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| DECEMBER 31, 2018 | ||||||||||||||||
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | NETTING | ASSETS/ LIABILITIES AT FAIR VALUE | |||||||||||
| Debt Securities | ||||||||||||||||
| Available for Sale | ||||||||||||||||
| U.S. Government | $ | 5,185.3 | $ | — | $ | — | $ | — | $ | 5,185.3 | ||||||
| Obligations of States and Political Subdivisions | — | 655.9 | — | — | 655.9 | |||||||||||
| Government Sponsored Agency | — | 22,424.6 | — | — | 22,424.6 | |||||||||||
| Non-U.S. Government | — | 142.2 | — | — | 142.2 | |||||||||||
| Corporate Debt | — | 2,294.7 | — | — | 2,294.7 | |||||||||||
| Covered Bonds | — | 829.3 | — | — | 829.3 | |||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | — | 2,096.2 | — | — | 2,096.2 | |||||||||||
| Other Asset-Backed | — | 2,657.7 | — | — | 2,657.7 | |||||||||||
| Commercial Mortgage Backed | — | 587.2 | — | — | 587.2 | |||||||||||
| Other | — | 15.7 | — | — | 15.7 | |||||||||||
| Total Available for Sale | 5,185.3 | 31,703.5 | — | — | 36,888.8 | |||||||||||
| Trading Account | — | 0.3 | — | — | 0.3 | |||||||||||
| Total Available for Sale and Trading Debt Securities | 5,185.3 | 31,703.8 | — | — | 36,889.1 | |||||||||||
| Other Assets | ||||||||||||||||
| Derivative Assets | ||||||||||||||||
| Foreign Exchange Contracts | — | 2,466.1 | — | (1,308.8 | ) | 1,157.3 | ||||||||||
| Interest Rate Contracts | — | 96.1 | — | (47.0 | ) | 49.1 | ||||||||||
| Other Financial Derivative (1) | — | 1.3 | — | (1.3 | ) | — | ||||||||||
| Total Derivatives Assets | — | 2,563.5 | — | (1,357.1 | ) | 1,206.4 | ||||||||||
| Other Liabilities | ||||||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Foreign Exchange Contracts | — | 2,262.5 | — | (1,751.7 | ) | 510.8 | ||||||||||
| Interest Rate Contracts | — | 93.1 | — | (43.4 | ) | 49.7 | ||||||||||
| Other Financial Derivative (2) | — | — | 32.8 | (1.2 | ) | 31.6 | ||||||||||
| Total Derivative Liabilities | $ | — | $ | 2,355.6 | $ | 32.8 | $ | (1,796.3 | ) | $ | 592.1 |
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2018*, derivative assets and liabilities shown above also include reductions of* $134.5 million and $573.7 million*, respectively, as a result of cash collateral received from and deposited with derivative counterparties.*
(1) This line consists of a total return swap contract.
(2) This line consists of swaps related to the sale of certain Visa Class B common shares.
The following table presents the changes in Level 3 liabilities for the years ended December 31, 2019 and 2018.
TABLE 62: CHANGES IN LEVEL 3 LIABILITIES
| LEVEL 3 LIABILITIES | SWAPS RELATED TO SALE OF CERTAIN VISA CLASS B COMMON SHARES | |||||
| (In Millions) | 2019 | 2018 | ||||
| Fair Value at January 1 | $ | 32.8 | $ | 29.7 | ||
| Total (Gains) Losses: | ||||||
| Included in Earnings (1) | 17.1 | 19.8 | ||||
| Purchases, Issues, Sales, and Settlements | ||||||
| Settlements | (16.5 | ) | (16.7 | ) | ||
| Fair Value at December 31 | $ | 33.4 | $ | 32.8 | ||
| Unrealized (Gains) Losses Included in Earnings Related to Financial Instruments Held at December 31 (1) | $ | 12.3 | $ | 13.3 |
(1) Gains (losses) are recorded in other operating income within the consolidated statements of income.
| 108 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018, there were no liabilities transferred into or out of Level 3.
Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to separately disclose these subsequent fair value measurements and to classify them under the fair value hierarchy.
Assets measured at fair value on a nonrecurring basis at December 31, 2019 and 2018, all of which were categorized as Level 3 under the fair value hierarchy, were comprised of impaired loans whose values were based on real estate and other available collateral, and of OREO properties. Fair values of real estate loan collateral were estimated using a market approach typically supported by third-party valuations and property-specific fees and taxes, and were subject to adjustments to reflect management’s judgment as to realizable value. Other loan collateral, which typically consists of accounts receivable, inventory and equipment, is valued using a market approach adjusted for asset specific characteristics and in limited instances third-party valuations are used.
Collateral-based impaired loans that have been adjusted to fair value totaled $8.0 million at December 31, 2019. Collateral-based impaired loans and OREO assets that have been adjusted to fair value totaled $24.9 million and $0.4 million, respectively, at December 31, 2018. Assets measured at fair value on a nonrecurring basis reflect management’s judgment as to realizable value.
The following table presents the fair values of Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of December 31, 2019 and 2018, as well as the valuation technique, significant unobservable inputs, and quantitative information used to develop the significant unobservable inputs for such assets as of such dates.
TABLE 63: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS
| DECEMBER 31, 2019 | ||||||
| FINANCIAL INSTRUMENT | FAIR VALUE | VALUATION TECHNIQUE | UNOBSERVABLE INPUT | RANGE OF DISCOUNTS APPLIED | ||
| Loans | $8.0 million | Market Approach | Discount to reflect realizable value | 15.0% | – | 30.0% |
| DECEMBER 31, 2018 | ||||||
| FINANCIAL INSTRUMENT | FAIR VALUE | VALUATION TECHNIQUE | UNOBSERVABLE INPUT | RANGE OF DISCOUNTS APPLIED | ||
| Loans | $24.9 million | Market Approach | Discount to reflect realizable value | 15.0% | – | 30.0% |
| OREO | $0.4 million | Market Approach | Discount to reflect realizable value | 15.0% | – | 30.0% |
| 2019 Annual Report | Northern Trust Corporation 109 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the fair values of all financial instruments.
TABLE 64: FAIR VALUE OF FINANCIAL INSTRUMENTS
| DECEMBER 31, 2019 | |||||||||||||||
| FAIR VALUE | |||||||||||||||
| (In Millions) | BOOK VALUE | TOTAL FAIR VALUE | LEVEL 1 | LEVEL 2 | LEVEL 3 | ||||||||||
| ASSETS | |||||||||||||||
| Cash and Due from Banks | $ | 4,459.2 | $ | 4,459.2 | $ | 4,459.2 | $ | — | $ | — | |||||
| Federal Reserve and Other Central Bank Deposits | 33,886.0 | 33,886.0 | — | 33,886.0 | — | ||||||||||
| Interest-Bearing Deposits with Banks | 4,877.1 | 4,877.1 | — | 4,877.1 | — | ||||||||||
| Federal Funds Sold and Securities Purchased under Agreements to Resell | 712.8 | 712.8 | — | 712.8 | — | ||||||||||
| Debt Securities | |||||||||||||||
| Available for Sale(1) | 38,876.3 | 38,876.3 | 4,549.1 | 34,327.2 | — | ||||||||||
| Held to Maturity | 12,284.5 | 12,249.3 | 138.8 | 12,110.5 | — | ||||||||||
| Trading Account | 0.3 | 0.3 | — | 0.3 | — | ||||||||||
| Loans (excluding Leases) | |||||||||||||||
| Held for Investment | 31,239.5 | 31,517.8 | — | — | 31,517.8 | ||||||||||
| Client Security Settlement Receivables | 845.7 | 845.7 | — | 845.7 | — | ||||||||||
| Other Assets | |||||||||||||||
| Federal Reserve and Federal Home Loan Bank Stock | 301.2 | 301.2 | — | 301.2 | — | ||||||||||
| Community Development Investments | 749.3 | 749.3 | — | 749.3 | — | ||||||||||
| Employee Benefit and Deferred Compensation | 199.5 | 207.6 | 131.0 | 76.6 | — | ||||||||||
| LIABILITIES | |||||||||||||||
| Deposits | |||||||||||||||
| Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing | $ | 47,733.6 | $ | 47,733.6 | $ | 47,733.6 | $ | — | $ | — | |||||
| Savings Certificates and Other Time | 986.7 | 994.2 | — | 994.2 | — | ||||||||||
| Non U.S. Offices Interest-Bearing | 60,400.3 | 60,400.3 | — | 60,400.3 | — | ||||||||||
| Federal Funds Purchased | 552.9 | 552.9 | — | 552.9 | — | ||||||||||
| Securities Sold Under Agreements to Repurchase | 489.7 | 489.7 | — | 489.7 | — | ||||||||||
| Other Borrowings | 6,744.8 | 6,745.9 | — | 6,745.9 | — | ||||||||||
| Senior Notes | 2,573.0 | 2,593.0 | — | 2,593.0 | — | ||||||||||
| Long-Term Debt | |||||||||||||||
| Subordinated Debt | 1,148.1 | 1,169.5 | — | 1,169.5 | — | ||||||||||
| Floating Rate Capital Debt | 277.7 | 262.1 | — | 262.1 | — | ||||||||||
| Other Liabilities | |||||||||||||||
| Standby Letters of Credit | 25.5 | 25.5 | — | — | 25.5 | ||||||||||
| Loan Commitments | 32.3 | 32.3 | — | — | 32.3 | ||||||||||
| DERIVATIVE INSTRUMENTS | |||||||||||||||
| Asset/Liability Management | |||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||
| Assets | $ | 83.1 | $ | 83.1 | $ | — | $ | 83.1 | $ | — | |||||
| Liabilities | 24.1 | 24.1 | — | 24.1 | — | ||||||||||
| Interest Rate Contracts | |||||||||||||||
| Assets | 20.5 | 20.5 | — | 20.5 | — | ||||||||||
| Liabilities | 21.1 | 21.1 | — | 21.1 | — | ||||||||||
| Other Financial Derivatives | |||||||||||||||
| Liabilities(2) | 33.4 | 33.4 | — | — | 33.4 | ||||||||||
| Client-Related and Trading | |||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||
| Assets | 3,151.7 | 3,151.7 | — | 3,151.7 | — | ||||||||||
| Liabilities | 3,158.1 | 3,158.1 | — | 3,158.1 | — | ||||||||||
| Interest Rate Contracts | |||||||||||||||
| Assets | 132.4 | 132.4 | — | 132.4 | — | ||||||||||
| Liabilities | 76.3 | 76.3 | — | 76.3 | — |
(1) Refer to the table located on page 107 for the disaggregation of available for sale debt securities.
(2) This line consists of swaps related to the sale of certain Visa Class B common shares.
| 110 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| DECEMBER 31, 2018 | |||||||||||||||
| FAIR VALUE | |||||||||||||||
| (In Millions) | BOOK VALUE | TOTAL FAIR VALUE | LEVEL 1 | LEVEL 2 | LEVEL 3 | ||||||||||
| ASSETS | |||||||||||||||
| Cash and Due from Banks | $ | 4,581.6 | $ | 4,581.6 | $ | 4,581.6 | $ | — | $ | — | |||||
| Federal Reserve and Other Central Bank Deposits | 30,080.2 | 30,080.2 | — | 30,080.2 | — | ||||||||||
| Interest-Bearing Deposits with Banks | 4,264.2 | 4,264.2 | — | 4,264.2 | — | ||||||||||
| Federal Funds Sold and Securities Purchased under Agreements to Resell | 1,165.2 | 1,165.2 | — | 1,165.2 | — | ||||||||||
| Debt Securities | |||||||||||||||
| Available for Sale(1) | 36,888.8 | 36,888.8 | 5,185.3 | 31,703.5 | — | ||||||||||
| Held to Maturity | 14,354.0 | 14,267.0 | 101.6 | 14,165.4 | — | ||||||||||
| Trading Account | 0.3 | 0.3 | — | 0.3 | — | ||||||||||
| Loans (excluding Leases) | |||||||||||||||
| Held for Investment | 32,287.0 | 32,339.2 | — | — | 32,339.2 | ||||||||||
| Client Security Settlement Receivables | 1,646.1 | 1,646.1 | — | 1,646.1 | — | ||||||||||
| Other Assets | |||||||||||||||
| Federal Reserve and Federal Home Loan Bank Stock | 300.3 | 300.3 | — | 300.3 | — | ||||||||||
| Community Development Investments | 606.6 | 606.6 | — | 606.6 | — | ||||||||||
| Employee Benefit and Deferred Compensation | 202.3 | 194.5 | 125.0 | 69.5 | — | ||||||||||
| LIABILITIES | |||||||||||||||
| Deposits | |||||||||||||||
| Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing | $ | 37,340.1 | $ | 37,340.1 | $ | 37,340.1 | $ | — | $ | — | |||||
| Savings Certificates and Other Time | 688.7 | 691.8 | — | 691.8 | — | ||||||||||
| Non U.S. Offices Interest-Bearing | 66,468.0 | 66,468.0 | — | 66,468.0 | — | ||||||||||
| Federal Funds Purchased | 2,594.2 | 2,594.2 | — | 2,594.2 | — | ||||||||||
| Securities Sold Under Agreements to Repurchase | 168.3 | 168.3 | — | 168.3 | — | ||||||||||
| Other Borrowings | 7,901.7 | 7,904.1 | — | 7,904.1 | — | ||||||||||
| Senior Notes | 2,011.3 | 1,994.4 | — | 1,994.4 | — | ||||||||||
| Long-Term Debt | |||||||||||||||
| Subordinated Debt | 1,112.4 | 1,089.7 | — | 1,089.7 | — | ||||||||||
| Floating Rate Capital Debt | 277.6 | 253.5 | — | 253.5 | — | ||||||||||
| Other Liabilities | |||||||||||||||
| Standby Letters of Credit | 30.8 | 30.8 | — | — | 30.8 | ||||||||||
| Loan Commitments | 34.3 | 34.3 | — | — | 34.3 | ||||||||||
| DERIVATIVE INSTRUMENTS | |||||||||||||||
| Asset/Liability Management | |||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||
| Assets | $ | 306.7 | $ | 306.7 | $ | — | $ | 306.7 | $ | — | |||||
| Liabilities | 72.5 | 72.5 | — | 72.5 | — | ||||||||||
| Interest Rate Contracts | |||||||||||||||
| Assets | 30.0 | 30.0 | — | 30.0 | — | ||||||||||
| Liabilities | 24.5 | 24.5 | — | 24.5 | — | ||||||||||
| Other Financial Derivatives | |||||||||||||||
| Assets(2) | 1.3 | 1.3 | — | 1.3 | — | ||||||||||
| Liabilities(3) | 32.8 | 32.8 | — | — | 32.8 | ||||||||||
| Client-Related and Trading | |||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||
| Assets | 2,159.4 | 2,159.4 | — | 2,159.4 | — | ||||||||||
| Liabilities | 2,190.0 | 2,190.0 | — | 2,190.0 | — | ||||||||||
| Interest Rate Contracts | |||||||||||||||
| Assets | 66.1 | 66.1 | — | 66.1 | — | ||||||||||
| Liabilities | 68.6 | 68.6 | — | 68.6 | — |
(1) Refer to the table located on page 108 for the disaggregation of available for sale debt securities.
(2) This line consists of a total return swap contract.
(3) This line consists of swaps related to the sale of certain Visa Class B common shares.
| 2019 Annual Report | Northern Trust Corporation 111 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Securities
Debt Securities Available for Sale. The following tables provide the amortized cost, fair values, and remaining maturities of debt securities available for sale.
TABLE 65: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF DEBT SECURITIES AVAILABLE FOR SALE
| DECEMBER 31, 2019 | ||||||||||||
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE | ||||||||
| U.S. Government | $ | 4,527.5 | $ | 26.7 | $ | 5.1 | $ | 4,549.1 | ||||
| Obligations of States and Political Subdivisions | 1,604.0 | 24.6 | 13.3 | 1,615.3 | ||||||||
| Government Sponsored Agency | 23,247.5 | 101.8 | 78.1 | 23,271.2 | ||||||||
| Non-U.S. Government | 3.3 | — | — | 3.3 | ||||||||
| Corporate Debt | 2,378.9 | 27.8 | 4.0 | 2,402.7 | ||||||||
| Covered Bonds | 766.3 | 4.4 | 0.8 | 769.9 | ||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 2,091.3 | 37.4 | 1.1 | 2,127.6 | ||||||||
| Other Asset-Backed | 3,324.5 | 11.3 | 5.3 | 3,330.5 | ||||||||
| Commercial Mortgage-Backed | 769.9 | 28.7 | 0.9 | 797.7 | ||||||||
| Other | 9.0 | — | — | 9.0 | ||||||||
| Total | $ | 38,722.2 | $ | 262.7 | $ | 108.6 | $ | 38,876.3 |
| DECEMBER 31, 2018 | ||||||||||||
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE | ||||||||
| U.S. Government | $ | 5,203.1 | $ | 21.8 | $ | 39.6 | $ | 5,185.3 | ||||
| Obligations of States and Political Subdivisions | 657.6 | 2.0 | 3.7 | 655.9 | ||||||||
| Government Sponsored Agency | 22,522.7 | 52.4 | 150.5 | 22,424.6 | ||||||||
| Non-U.S. Government | 143.3 | — | 1.1 | 142.2 | ||||||||
| Corporate Debt | 2,312.6 | 3.2 | 21.1 | 2,294.7 | ||||||||
| Covered Bonds | 832.7 | 1.4 | 4.8 | 829.3 | ||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 2,087.8 | 11.9 | 3.5 | 2,096.2 | ||||||||
| Other Asset-Backed | 2,678.9 | 1.7 | 22.9 | 2,657.7 | ||||||||
| Commercial Mortgage-Backed | 587.4 | 4.0 | 4.2 | 587.2 | ||||||||
| Other | 15.7 | — | — | 15.7 | ||||||||
| Total | $ | 37,041.8 | $ | 98.4 | $ | 251.4 | $ | 36,888.8 |
| 112 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 66: REMAINING MATURITY OF DEBT SECURITIES AVAILABLE FOR SALE
| DECEMBER 31, 2019 | ONE YEAR OR LESS | ONE TO FIVE YEARS | FIVE TO TEN YEARS | OVER TEN YEARS | TOTAL | |||||||||||||||||||||||||
| (In Millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
| U.S. Government | $ | 1,899.0 | $ | 1,898.4 | $ | 2,075.9 | $ | 2,098.3 | $ | 552.6 | $ | 552.4 | $ | — | $ | — | $ | 4,527.5 | $ | 4,549.1 | ||||||||||
| Obligations of States and Political Subdivisions | 80.0 | 80.1 | 83.0 | 85.4 | 1,441.0 | 1,449.8 | — | — | 1,604.0 | 1,615.3 | ||||||||||||||||||||
| Government Sponsored Agency | 4,994.1 | 5,005.0 | 9,714.1 | 9,728.8 | 5,870.0 | 5,869.4 | 2,669.3 | 2,668.0 | 23,247.5 | 23,271.2 | ||||||||||||||||||||
| Non-U.S. Government | — | — | 3.3 | 3.3 | — | — | — | — | 3.3 | 3.3 | ||||||||||||||||||||
| Corporate Debt | 341.8 | 341.7 | 1,981.5 | 2,005.5 | 55.6 | 55.5 | — | — | 2,378.9 | 2,402.7 | ||||||||||||||||||||
| Covered Bonds | 281.0 | 281.6 | 485.3 | 488.3 | — | — | — | — | 766.3 | 769.9 | ||||||||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 333.9 | 334.6 | 1,707.4 | 1,743.1 | 50.0 | 49.9 | — | — | 2,091.3 | 2,127.6 | ||||||||||||||||||||
| Other Asset-Backed | 885.1 | 885.3 | 1,977.3 | 1,984.8 | 452.8 | 451.1 | 9.3 | 9.3 | 3,324.5 | 3,330.5 | ||||||||||||||||||||
| Commercial Mortgage-Backed | 46.6 | 46.4 | 167.9 | 174.2 | 555.4 | 577.1 | — | — | 769.9 | 797.7 | ||||||||||||||||||||
| Other | 9.0 | 9.0 | — | — | — | — | — | — | 9.0 | 9.0 | ||||||||||||||||||||
| Total | $ | 8,870.5 | $ | 8,882.1 | $ | 18,195.7 | $ | 18,311.7 | $ | 8,977.4 | $ | 9,005.2 | $ | 2,678.6 | $ | 2,677.3 | $ | 38,722.2 | $ | 38,876.3 |
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
Debt Securities Held to Maturity. The following tables provide the amortized cost, fair values and remaining maturities of debt securities held to maturity.
TABLE 67: RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF DEBT SECURITIES HELD TO MATURITY
| DECEMBER 31, 2019 | ||||||||||||
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE | ||||||||
| U.S. Government | $ | 138.8 | $ | — | $ | — | $ | 138.8 | ||||
| Obligations of States and Political Subdivisions | 10.1 | 0.2 | — | 10.3 | ||||||||
| Government Sponsored Agency | 4.1 | 0.2 | — | 4.3 | ||||||||
| Non-U.S. Government | 4,076.0 | 5.3 | 2.5 | 4,078.8 | ||||||||
| Corporate Debt | 405.1 | 1.4 | 0.3 | 406.2 | ||||||||
| Covered Bonds | 3,006.7 | 16.1 | 2.4 | 3,020.4 | ||||||||
| Certificates of Deposit | 262.9 | — | — | 262.9 | ||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 3,285.4 | 21.7 | 2.1 | 3,305.0 | ||||||||
| Other Asset-Backed | 804.3 | 0.7 | 0.3 | 804.7 | ||||||||
| Other | 291.1 | 0.1 | 73.3 | 217.9 | ||||||||
| Total | $ | 12,284.5 | $ | 45.7 | $ | 80.9 | $ | 12,249.3 |
| DECEMBER 31, 2018 | ||||||||||||
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE | ||||||||
| U.S. Government | $ | 101.6 | $ | — | $ | — | $ | 101.6 | ||||
| Obligations of States and Political Subdivisions | 18.9 | 0.6 | — | 19.5 | ||||||||
| Government Sponsored Agency | 4.5 | 0.2 | — | 4.7 | ||||||||
| Non-U.S. Government | 6,488.2 | 2.1 | 8.7 | 6,481.6 | ||||||||
| Corporate Debt | 472.9 | 0.4 | 1.8 | 471.5 | ||||||||
| Covered Bonds | 2,877.6 | 9.6 | 9.3 | 2,877.9 | ||||||||
| Certificates of Deposit | 45.1 | — | — | 45.1 | ||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 2,966.8 | 5.8 | 12.3 | 2,960.3 | ||||||||
| Other Asset-Backed | 1,146.4 | — | 4.0 | 1,142.4 | ||||||||
| Other | 232.0 | — | 69.6 | 162.4 | ||||||||
| Total | $ | 14,354.0 | $ | 18.7 | $ | 105.7 | $ | 14,267.0 |
| 2019 Annual Report | Northern Trust Corporation 113 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 68: REMAINING MATURITY OF DEBT SECURITIES HELD TO MATURITY
| December 31, 2019 | ONE YEAR OR LESS | ONE TO FIVE YEARS | FIVE TO TEN YEARS | OVER TEN YEARS | TOTAL | |||||||||||||||||||||||||
| (In Millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
| U.S. Government | $ | 138.8 | $ | 138.8 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 138.8 | $ | 138.8 | ||||||||||
| Obligations of States and Political Subdivisions | 8.1 | 8.2 | 2.0 | 2.1 | — | — | — | — | 10.1 | 10.3 | ||||||||||||||||||||
| Government Sponsored Agency | 0.6 | 0.6 | 1.7 | 1.8 | 1.2 | 1.2 | 0.6 | 0.7 | 4.1 | 4.3 | ||||||||||||||||||||
| Non-U.S. Government | 2,757.9 | 2,757.8 | 1,318.1 | 1,321.0 | — | — | — | — | 4,076.0 | 4,078.8 | ||||||||||||||||||||
| Corporate Debt | 45.9 | 46.2 | 359.2 | 360.0 | — | — | — | — | 405.1 | 406.2 | ||||||||||||||||||||
| Covered Bonds | 599.8 | 601.6 | 2,406.9 | 2,418.8 | — | — | — | — | 3,006.7 | 3,020.4 | ||||||||||||||||||||
| Certificates of Deposit | 262.9 | 262.9 | — | — | — | — | — | — | 262.9 | 262.9 | ||||||||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 577.8 | 577.8 | 2,691.5 | 2,711.4 | 16.1 | 15.8 | — | — | 3,285.4 | 3,305.0 | ||||||||||||||||||||
| Other Asset-Backed | 151.9 | 152.0 | 398.3 | 398.7 | 254.1 | 254.0 | — | — | 804.3 | 804.7 | ||||||||||||||||||||
| Other | 10.6 | 10.5 | 132.0 | 119.3 | 45.9 | 39.7 | 102.6 | 48.4 | 291.1 | 217.9 | ||||||||||||||||||||
| Total | $ | 4,554.3 | $ | 4,556.4 | $ | 7,309.7 | $ | 7,333.1 | $ | 317.3 | $ | 310.7 | $ | 103.2 | $ | 49.1 | $ | 12,284.5 | $ | 12,249.3 |
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
Debt securities held to maturity consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the twelve months ended December 31, 2019 and 2018, approximately $160.8 million and $287.9 million respectively of securities reflected in Other Asset-Backed, Covered Bonds, Sub-Sovereign, Supranational and Non-U.S. Agency Bonds, and Corporate Debt were transferred from available for sale to held to maturity.
Investment Security Gains and Losses. Proceeds of $1.2 billion, $307.3 million, and $2.2 billion in 2019, 2018, and 2017, respectively, from the sale of debt securities resulted in the following gains and losses shown below.
TABLE 69: INVESTMENT SECURITY GAINS AND LOSSES
| DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Gross Realized Debt Securities Gains | $ | 2.4 | $ | 1.5 | $ | 0.2 | |||
| Gross Realized Debt Securities Losses | (3.5 | ) | (2.0 | ) | (1.6 | ) | |||
| Changes in Other-Than-Temporary Impairment Losses(1) | (0.3 | ) | (0.5 | ) | (0.2 | ) | |||
| Net Investment Security (Losses)/Gains | $ | (1.4 | ) | $ | (1.0 | ) | $ | (1.6 | ) |
(1) Other-than-temporary Impairment Losses relate to certain Community Reinvestment Act (CRA) eligible held to maturity debt securities
| 114 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Securities with Unrealized Losses. The following table provides information regarding debt securities that had been in a continuous unrealized loss position for less than 12 months and for 12 months or longer as of December 31, 2019 and 2018.
TABLE 70: DEBT SECURITIES WITH UNREALIZED LOSSES
| AS OF DECEMBER 31, 2019 | LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL | |||||||||||||||
| (In Millions) | FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | ||||||||||||
| U.S. Government | $ | 252.2 | $ | 2.7 | $ | 899.8 | $ | 2.4 | $ | 1,152.0 | $ | 5.1 | ||||||
| Obligations of States and Political Subdivisions | 902.5 | 13.3 | — | — | 902.5 | 13.3 | ||||||||||||
| Government Sponsored Agency | 5,405.0 | 35.6 | 7,818.4 | 42.5 | 13,223.4 | 78.1 | ||||||||||||
| Non-U.S. Government | 3,620.2 | 2.5 | — | — | 3,620.2 | 2.5 | ||||||||||||
| Corporate Debt | 410.4 | 1.3 | 492.8 | 3.0 | 903.2 | 4.3 | ||||||||||||
| Covered Bonds | 646.8 | 3.2 | — | — | 646.8 | 3.2 | ||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 1,302.0 | 3.1 | 155.2 | 0.1 | 1,457.2 | 3.2 | ||||||||||||
| Other Asset-Backed | 706.9 | 2.1 | 1,164.9 | 3.5 | 1,871.8 | 5.6 | ||||||||||||
| Commercial Mortgage-Backed | 62.8 | 0.7 | 59.3 | 0.2 | 122.1 | 0.9 | ||||||||||||
| Other | 54.1 | 26.7 | 164.0 | 46.6 | 218.1 | 73.3 | ||||||||||||
| Total | $ | 13,362.9 | $ | 91.2 | $ | 10,754.4 | $ | 98.3 | $ | 24,117.3 | $ | 189.5 |
| AS OF DECEMBER 31, 2018 | LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL | |||||||||||||||
| (In Millions) | FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | ||||||||||||
| U.S. Government | $ | — | $ | — | $ | 2,862.0 | $ | 39.6 | $ | 2,862.0 | $ | 39.6 | ||||||
| Obligations of States and Political Subdivisions | 169.6 | 2.4 | 279.6 | 1.3 | 449.2 | 3.7 | ||||||||||||
| Government Sponsored Agency | 8,368.8 | 33.5 | 6,822.4 | 117.0 | 15,191.2 | 150.5 | ||||||||||||
| Non-U.S. Government | 5,065.2 | 0.8 | 1,274.0 | 9.0 | 6,339.2 | 9.8 | ||||||||||||
| Corporate Debt | 712.7 | 4.1 | 1,097.4 | 18.8 | 1,810.1 | 22.9 | ||||||||||||
| Covered Bonds | 646.4 | 3.7 | 696.9 | 10.4 | 1,343.3 | 14.1 | ||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 1,105.0 | 4.6 | 1,189.2 | 11.2 | 2,294.2 | 15.8 | ||||||||||||
| Other Asset-Backed | 2,507.8 | 15.9 | 954.9 | 11.0 | 3,462.7 | 26.9 | ||||||||||||
| Commercial Mortgage-Backed | 22.8 | 0.1 | 274.4 | 4.1 | 297.2 | 4.2 | ||||||||||||
| Other | 50.5 | 18.8 | 112.6 | 50.8 | 163.1 | 69.6 | ||||||||||||
| Total | $ | 18,648.8 | $ | 83.9 | $ | 15,563.4 | $ | 273.2 | $ | 34,212.2 | $ | 357.1 |
As of December 31, 2019, 1,289 debt securities with a combined fair value of $24.1 billion were in an unrealized loss position, with their unrealized losses totaling $189.5 million. Unrealized losses of $78.1 million and $13.3 million related to government sponsored agency and obligations of states and political subdivisions, respectively, are primarily attributable to changes in market rates since their purchase.
The majority of the $73.3 million of unrealized losses in debt securities classified as “other” at December 31, 2019 related to debt securities primarily purchased at a premium or par by Northern Trust to fulfill its obligations under the CRA. Unrealized losses on these CRA-related securities are attributable to yields that are below market rates for the purpose of supporting institutions and programs that benefit low- to moderate-income communities within Northern Trust’s market area. The remaining unrealized losses on Northern Trust’s securities portfolio as of December 31, 2019 were attributable to changes in overall market interest rates, increased credit spreads, or reduced market liquidity. As of December 31, 2019, Northern Trust did not intend to sell any investment in an unrealized loss position and it was more likely than not that Northern Trust would not be required to sell any such investment before the recovery of its amortized cost basis, which may be maturity.
Security impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible OTTI. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is other-than-temporary include, but are not limited to, the length of time the security has been impaired; the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; Northern Trust’s intent regarding
| 2019 Annual Report | Northern Trust Corporation 115 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the sale of the security as of the balance sheet date; and the likelihood that it will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if OTTI has occurred.
While all securities are considered, the process for identifying credit impairment within CRA-eligible mortgage-backed securities, a security type for which Northern Trust has recognized OTTI in 2019 and 2018, incorporates an expected loss approach using discounted cash flows on the underlying collateral pools. To evaluate whether an unrealized loss on a CRA-eligible mortgage-backed security is other-than-temporary, a calculation of the security’s present value is made using current pool data, the current delinquency pipeline, default rates and loan loss severities based on the historical performance of the mortgage pools, and Northern Trust’s outlook for the housing market and the overall economy. If the present value of the collateral pools were found to be less than the current amortized cost of the security, a credit-related OTTI loss would be recorded in earnings equal to the difference between the two amounts.
Impairments of CRA-eligible mortgage-backed securities are influenced by a number of factors, including but not limited to, U.S. economic and housing market performance, pool credit enhancement level, year of origination, and estimated credit quality of the collateral. The factors used in estimating losses related to CRA-eligible mortgage-backed securities vary by year of loan origination and collateral quality.
There were $0.3 million and $0.5 million of OTTI losses recognized in 2019 and 2018, respectively. There were $0.2 million OTTI losses recognized during the year ended December 31, 2017.
Credit Losses on Debt Securities. The table below provides information regarding total other-than-temporarily impaired debt securities, including noncredit-related amounts recognized in other comprehensive income and net impairment losses recognized in earnings, for the years ended December 31, 2019, 2018, and 2017.
TABLE 71: NET IMPAIRMENT LOSSES RECOGNIZED IN EARNINGS
| DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Changes in Other-Than-Temporary Impairment Losses(1) | $ | (0.3 | ) | $ | (0.5 | ) | $ | (0.2 | ) |
| Noncredit-related Losses Recorded in / (Reclassified from) OCI(2) | — | — | — | ||||||
| Net Impairment Losses Recognized in Earnings | $ | (0.3 | ) | $ | (0.5 | ) | $ | (0.2 | ) |
(1) For initial other-than-temporary impairments in the respective period, the balance includes the excess of the amortized cost over the fair value of the impaired securities. For subsequent impairments of the same security, the balance includes any additional changes in fair value of the security subsequent to its most recently recorded OTTI.
(2) For initial other-than-temporary impairments in the respective period, the balance includes the portion of the excess of amortized cost over the fair value of the impaired securities that was recorded in OCI. For subsequent impairments of the same security, the balance includes additional changes in OCI for that security subsequent to its most recently recorded OTTI.
Provided in the table below are the cumulative credit-related losses recognized in earnings on debt securities other-than-temporarily impaired.
TABLE 72: CUMULATIVE CREDIT-RELATED LOSSES ON DEBT SECURITIES HELD
| YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Cumulative Credit-Related Losses on Debt Securities Held – Beginning of Year | $ | 4.1 | $ | 3.6 | $ | 3.4 | |||
| Plus: Losses on Newly Identified Impairments | 0.2 | 0.4 | 0.1 | ||||||
| Additional Losses on Previously Identified Impairments | 0.1 | 0.1 | 0.1 | ||||||
| Less: Current and Prior Period Losses on Debt Securities Sold or Matured During the Year | — | — | — | ||||||
| Cumulative Credit-Related Losses on Debt Securities Held – End of Year | $ | 4.4 | $ | 4.1 | $ | 3.6 |
Note 5 – Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the repurchase.
| 116 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize information related to securities purchased under agreements to resell and securities sold under agreements to repurchase.
TABLE 73: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
| ($ In Millions) | 2019 | 2018 | ||||
| Balance at December 31 | $ | 707.8 | $ | 1,031.2 | ||
| Average Balance During the Year | 835.0 | 1,478.3 | ||||
| Average Interest Rate Earned During the Year | 2.10 | % | 2.22 | % | ||
| Maximum Month-End Balance During the Year | $ | 1,290.0 | $ | 1,942.0 |
TABLE 74: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
| ($ In Millions) | 2019 | 2018 | ||||
| Balance at December 31 | $ | 489.7 | $ | 168.3 | ||
| Average Balance During the Year | 339.0 | 525.2 | ||||
| Average Interest Rate Paid During the Year | 1.89 | % | 1.48 | % | ||
| Maximum Month-End Balance During the Year | $ | 489.7 | $ | 981.3 |
TABLE 75: REPURCHASE AGREEMENTS ACCOUNTED FOR AS SECURED BORROWINGS
| Remaining Contractual Maturity of the Agreements | ||||||
| ($ In Millions) | Overnight and Continuous | |||||
| Repurchase Agreements | December 31, 2019 | December 31, 2018 | ||||
| U.S. Treasury and Agency Securities | $ | 489.7 | $ | 168.3 | ||
| Total Borrowings | 489.7 | 168.3 | ||||
| Gross Amount of Recognized Liabilities for Repurchase Agreements in Note 28 | 489.7 | 168.3 | ||||
| Amounts related to agreements not included in Note 28 | — | — |
Note 6 – Loans and Leases
Amounts outstanding for loans and leases, by segment and class, are shown below.
TABLE 76: LOANS AND LEASES
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Commercial | ||||||
| Commercial and Institutional | $ | 8,915.6 | $ | 8,728.1 | ||
| Commercial Real Estate | 3,378.0 | 3,228.8 | ||||
| Non-U.S. | 1,751.0 | 2,701.6 | ||||
| Lease Financing, net | 65.6 | 90.7 | ||||
| Other | 164.0 | 426.0 | ||||
| Total Commercial | 14,274.2 | 15,175.2 | ||||
| Personal | ||||||
| Private Client | 11,068.7 | 10,733.3 | ||||
| Residential Real Estate | 5,999.6 | 6,514.0 | ||||
| Other | 67.1 | 67.5 | ||||
| Total Personal | 17,135.4 | 17,314.8 | ||||
| Total Loans and Leases | $ | 31,409.6 | $ | 32,490.0 | ||
| Allowance for Credit Losses Assigned to Loans and Leases | (104.5 | ) | (112.6 | ) | ||
| Net Loans and Leases | $ | 31,305.1 | $ | 32,377.4 |
Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan to collateral value ratio of no more than 65% to 80% at inception. Northern Trust’s equity credit line products generally have
| 2019 Annual Report | Northern Trust Corporation 117 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest-only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding balance to an amortizing payment loan. As of December 31, 2019 and 2018, equity credit lines totaled $448.5 million and $655.5 million, respectively, and equity credit lines for which first liens were held by Northern Trust represented 97% and 95%, respectively, of the total equity credit lines as of those dates.
Included within the non-U.S., commercial-other, and personal-other classes are short duration advances, primarily related to the processing of custodied client investments, totaling $1.1 billion and $2.2 billion at December 31, 2019 and 2018, respectively. Demand deposit overdrafts reclassified as loan balances totaled $90.4 million and $152.5 million at December 31, 2019 and 2018, respectively. As of December 31, 2019, there were no loans and $53.6 million of leases classified as held for sale related to the decision to sell substantially all of the lease portfolio. As of December 31, 2018, there were no loans or leases classified as held for sale.
The components of the net investment in direct finance and leveraged leases are as follows:
TABLE 77: DIRECT FINANCE AND LEVERAGED LEASES
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Direct Finance Leases | ||||||
| Lease Receivable | $ | 1.5 | $ | 9.8 | ||
| Residual Value | 21.3 | 23.8 | ||||
| Initial Direct Costs | 0.2 | 0.3 | ||||
| Unearned Income | — | — | ||||
| Investment in Direct Finance Leases | 23.0 | 33.9 | ||||
| Leveraged Leases | ||||||
| Net Rental Receivable | 19.1 | 33.9 | ||||
| Residual Value | 33.1 | 33.3 | ||||
| Unearned Income | (9.6 | ) | (10.4 | ) | ||
| Investment in Leveraged Leases | 42.6 | 56.8 | ||||
| Lease Financing, net | $ | 65.6 | $ | 90.7 |
The following schedule reflects the future minimum lease payments to be received over the next five years under direct finance leases.
TABLE 78: FUTURE MINIMUM LEASE PAYMENTS
| (In Millions) | FUTURE MINIMUM LEASE PAYMENTS | ||
| 2020 | $ | 3.7 | |
| 2021 | 2.1 | ||
| 2022 | — | ||
| 2023 | — | ||
| 2024 | — |
Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels.
As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting and management reporting.
| 118 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s borrower rating models, by loan and lease class.
| • | Commercial and Institutional: leverage, profit margin, liquidity, asset size and capital levels; |
| • | Commercial Real Estate: debt service coverage, loan-to-value ratio, leasing status and guarantor support; |
| • | Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels; |
| • | Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels; |
| • | Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio; |
| • | Private Client: cash flow-to-debt and net worth ratios, leverage and liquidity; and |
| • | Personal-Other: cash flow-to-debt and net worth ratios. |
While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required. Risk ratings are generally validated at least annually.
Loan and lease segment and class balances at December 31, 2019 and 2018 are provided below, segregated by borrower ratings into “1 to 3”, “4 to 5”, and “6 to 9” (watch list), categories.
TABLE 79: BORROWER RATINGS
| DECEMBER 31, 2019 | DECEMBER 31, 2018 | |||||||||||||||||||||||
| (In Millions) | 1 TO 3 CATEGORY | 4 TO 5 CATEGORY | 6 TO 9 CATEGORY (WATCH LIST) | TOTAL | 1 TO 3 CATEGORY | 4 TO 5 CATEGORY | 6 TO 9 CATEGORY (WATCH LIST) | TOTAL | ||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Commercial and Institutional | $ | 5,890.8 | $ | 2,912.9 | $ | 111.9 | $ | 8,915.6 | $ | 5,477.4 | $ | 3,159.8 | $ | 90.9 | $ | 8,728.1 | ||||||||
| Commercial Real Estate | 1,126.8 | 2,237.3 | 13.9 | 3,378.0 | 1,209.6 | 1,992.2 | 27.0 | 3,228.8 | ||||||||||||||||
| Non-U.S. | 717.0 | 883.2 | 150.8 | 1,751.0 | 1,625.3 | 1,075.3 | 1.0 | 2,701.6 | ||||||||||||||||
| Lease Financing, net | 53.6 | 12.0 | — | 65.6 | 78.3 | 12.4 | — | 90.7 | ||||||||||||||||
| Other | 69.5 | 94.5 | — | 164.0 | 203.3 | 222.7 | — | 426.0 | ||||||||||||||||
| Total Commercial | 7,857.7 | 6,139.9 | 276.6 | 14,274.2 | 8,593.9 | 6,462.4 | 118.9 | 15,175.2 | ||||||||||||||||
| Personal | ||||||||||||||||||||||||
| Private Client | 5,455.3 | 5,573.0 | 40.4 | 11,068.7 | 6,321.1 | 4,403.2 | 9.0 | 10,733.3 | ||||||||||||||||
| Residential Real Estate | 2,638.1 | 3,185.4 | 176.1 | 5,999.6 | 2,745.0 | 3,502.3 | 266.7 | 6,514.0 | ||||||||||||||||
| Other | 28.5 | 38.6 | — | 67.1 | 32.2 | 35.3 | — | 67.5 | ||||||||||||||||
| Total Personal | 8,121.9 | 8,797.0 | 216.5 | 17,135.4 | 9,098.3 | 7,940.8 | 275.7 | 17,314.8 | ||||||||||||||||
| Total Loans and Leases | $ | 15,979.6 | $ | 14,936.9 | $ | 493.1 | $ | 31,409.6 | $ | 17,692.2 | $ | 14,403.2 | $ | 394.6 | $ | 32,490.0 |
Loans and leases in the “1 to 3” category are expected to exhibit minimal to modest probabilities of default and are characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and capital levels. Borrowers assigned these ratings are anticipated to experience very little to moderate financial pressure in adverse down cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a minimal to modest likelihood of loss.
Loans and leases in the “4 to 5” category are expected to exhibit moderate to acceptable probabilities of default and are characterized by borrowers with less financial flexibility than those in the “1 to 3” category. Cash flows and capital levels are generally sufficient to allow for borrowers to meet current requirements, but have fewer financial resources to manage through economic downturns. As a result of these characteristics, borrowers within this category exhibit a moderate likelihood of loss.
Loans and leases in the watch list category have elevated credit risk profiles that are monitored through internal watch lists, and consist of credits with borrower ratings of “6 to 9”. These credits, which include all nonperforming credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default. Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital
| 2019 Annual Report | Northern Trust Corporation 119 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable likelihood of loss.
The following table provides balances and delinquency status of performing and nonperforming loans and leases by segment and class, as well as the other real estate owned and total nonperforming asset balances, as of December 31, 2019 and 2018.
TABLE 80: DELINQUENCY STATUS
| (In Millions) | CURRENT | 30 – 59 DAYS PAST DUE | 60 – 89 DAYS PAST DUE | 90 DAYS OR MORE PAST DUE | TOTAL PERFORMING | NONPERFORMING | TOTAL LOANS AND LEASES | ||||||||||||||
| December 31, 2019 | |||||||||||||||||||||
| Commercial | |||||||||||||||||||||
| Commercial and Institutional | $ | 8,892.7 | $ | 4.1 | $ | 10.0 | $ | 1.2 | $ | 8,908.0 | $ | 7.6 | $ | 8,915.6 | |||||||
| Commercial Real Estate | 3,363.3 | 2.4 | 4.0 | 4.7 | 3,374.4 | 3.6 | 3,378.0 | ||||||||||||||
| Non-U.S. | 1,750.3 | 0.2 | — | — | 1,750.5 | 0.5 | 1,751.0 | ||||||||||||||
| Lease Financing, net | 65.6 | — | — | — | 65.6 | — | 65.6 | ||||||||||||||
| Other | 164.0 | — | — | — | 164.0 | — | 164.0 | ||||||||||||||
| Total Commercial | 14,235.9 | 6.7 | 14.0 | 5.9 | 14,262.5 | 11.7 | 14,274.2 | ||||||||||||||
| Personal | |||||||||||||||||||||
| Private Client | 11,025.3 | 33.1 | 9.5 | 0.3 | 11,068.2 | 0.5 | 11,068.7 | ||||||||||||||
| Residential Real Estate | 5,902.3 | 19.8 | 4.9 | 1.2 | 5,928.2 | 71.4 | 5,999.6 | ||||||||||||||
| Other | 67.1 | — | — | — | 67.1 | — | 67.1 | ||||||||||||||
| Total Personal | 16,994.7 | 52.9 | 14.4 | 1.5 | 17,063.5 | 71.9 | 17,135.4 | ||||||||||||||
| Total Loans and Leases | $ | 31,230.6 | $ | 59.6 | $ | 28.4 | $ | 7.4 | $ | 31,326.0 | $ | 83.6 | $ | 31,409.6 | |||||||
| Other Real Estate Owned | $ | 3.2 | |||||||||||||||||||
| Total Nonperforming Assets | $ | 86.8 |
| (In Millions) | CURRENT | 30 – 59 DAYS PAST DUE | 60 – 89 DAYS PAST DUE | 90 DAYS OR MORE PAST DUE | TOTAL PERFORMING | NONPERFORMING | TOTAL LOANS AND LEASES | ||||||||||||||
| December 31, 2018 | |||||||||||||||||||||
| Commercial | |||||||||||||||||||||
| Commercial and Institutional | $ | 8,678.2 | $ | 37.4 | $ | 4.5 | $ | 1.2 | $ | 8,721.3 | $ | 6.8 | $ | 8,728.1 | |||||||
| Commercial Real Estate | 3,191.5 | 8.4 | 15.6 | 6.4 | 3,221.9 | 6.9 | 3,228.8 | ||||||||||||||
| Non-U.S. | 2,701.2 | — | — | — | 2,701.2 | 0.4 | 2,701.6 | ||||||||||||||
| Lease Financing, net | 90.7 | — | — | — | 90.7 | — | 90.7 | ||||||||||||||
| Other | 426.0 | — | — | — | 426.0 | — | 426.0 | ||||||||||||||
| Total Commercial | 15,087.6 | 45.8 | 20.1 | 7.6 | 15,161.1 | 14.1 | 15,175.2 | ||||||||||||||
| Personal | |||||||||||||||||||||
| Private Client | 10,681.1 | 39.5 | 12.5 | — | 10,733.1 | 0.2 | 10,733.3 | ||||||||||||||
| Residential Real Estate | 6,376.8 | 27.2 | 6.2 | 8.8 | 6,419.0 | 95.0 | 6,514.0 | ||||||||||||||
| Other | 67.5 | — | — | — | 67.5 | — | 67.5 | ||||||||||||||
| Total Personal | 17,125.4 | 66.7 | 18.7 | 8.8 | 17,219.6 | 95.2 | 17,314.8 | ||||||||||||||
| Total Loans and Leases | $ | 32,213.0 | $ | 112.5 | $ | 38.8 | $ | 16.4 | $ | 32,380.7 | $ | 109.3 | $ | 32,490.0 | |||||||
| Other Real Estate Owned | $ | 8.4 | |||||||||||||||||||
| Total Nonperforming Assets | $ | 117.7 |
| 120 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information related to impaired loans by segment and class.
TABLE 81: IMPAIRED LOANS
| AS OF DECEMBER 31, 2019 | AS OF DECEMBER 31, 2018 | |||||||||||||||||
| (In Millions) | RECORDED INVESTMENT | UNPAID PRINCIPAL BALANCE | SPECIFIC ALLOWANCE | RECORDED INVESTMENT | UNPAID PRINCIPAL BALANCE | SPECIFIC ALLOWANCE | ||||||||||||
| With no related specific allowance | ||||||||||||||||||
| Commercial and Institutional | $ | — | $ | 0.1 | $ | — | $ | 0.2 | $ | 0.4 | $ | — | ||||||
| Commercial Real Estate | 2.4 | 4.4 | — | 5.8 | 7.6 | — | ||||||||||||
| Residential Real Estate | 75.6 | 102.5 | — | 76.7 | 104.7 | — | ||||||||||||
| Private Client | 1.2 | 1.2 | — | 1.7 | 1.7 | — | ||||||||||||
| With a related specific allowance | ||||||||||||||||||
| Commercial and Institutional | 6.8 | 8.9 | 2.3 | 6.4 | 7.3 | 3.0 | ||||||||||||
| Commercial Real Estate | 1.2 | 1.5 | 1.1 | 2.6 | 2.8 | 1.1 | ||||||||||||
| Residential Real Estate | 5.0 | 5.1 | 1.6 | 22.8 | 26.1 | 3.1 | ||||||||||||
| Total | ||||||||||||||||||
| Commercial | 10.4 | 14.9 | 3.4 | 15.0 | 18.1 | 4.1 | ||||||||||||
| Personal | 81.8 | 108.8 | 1.6 | 101.2 | 132.5 | 3.1 | ||||||||||||
| Total | $ | 92.2 | $ | 123.7 | $ | 5.0 | $ | 116.2 | $ | 150.6 | $ | 7.2 |
| YEAR ENDED DECEMBER 31, 2019 | YEAR ENDED DECEMBER 31, 2018 | |||||||||||
| (In Millions) | AVERAGE RECORDED INVESTMENT | INTEREST INCOME RECOGNIZED | AVERAGE RECORDED INVESTMENT | INTEREST INCOME RECOGNIZED | ||||||||
| With no related specific allowance | ||||||||||||
| Commercial and Institutional | $ | 0.5 | $ | — | $ | 6.8 | $ | — | ||||
| Commercial Real Estate | 3.5 | 0.3 | 6.4 | 0.2 | ||||||||
| Residential Real Estate | 88.5 | 1.8 | 94.9 | 1.9 | ||||||||
| Private Client | 1.7 | 0.1 | 0.6 | 0.1 | ||||||||
| With a related specific allowance | ||||||||||||
| Commercial and Institutional | 7.9 | — | 4.6 | — | ||||||||
| Commercial Real Estate | 1.4 | — | 2.1 | — | ||||||||
| Residential Real Estate | 16.7 | — | 9.2 | — | ||||||||
| Total | ||||||||||||
| Commercial | 13.3 | 0.3 | 19.9 | 0.2 | ||||||||
| Personal | 106.9 | 1.9 | 104.7 | 2.0 | ||||||||
| Total | $ | 120.2 | $ | 2.2 | $ | 124.6 | $ | 2.2 |
Note: Average recorded investments in impaired loans are calculated as the average of the month-end impaired loan balances for the period.
Interest income that would have been recorded on nonperforming loans in accordance with their original terms totaled approximately $7.3 million in 2019, $8.0 million in 2018, and $9.1 million in 2017.
There were $9.1 million and $12.6 million of aggregate undrawn loan commitments and standby letters of credit at December 31, 2019 and 2018, respectively, issued to borrowers whose loans were classified as nonperforming or impaired.
Troubled Debt Restructurings (TDRs). Included within impaired loans were $54.9 million and $64.6 million of nonperforming TDRs and $27.7 million and $35.2 million of performing TDRs as of December 31, 2019 and 2018, respectively.
| 2019 Annual Report | Northern Trust Corporation 121 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides, by segment and class, the number of TDR modifications of loans and leases during the years ended December 31, 2019, and 2018, and the recorded investments and unpaid principal balances as of December 31, 2019 and 2018.
TABLE 82: TROUBLED DEBT RESTRUCTURINGS
| ($ In Millions) | NUMBER OF LOANS AND LEASES | RECORDED INVESTMENT | UNPAID PRINCIPAL BALANCE | |||||
| December 31, 2019 | ||||||||
| Commercial | ||||||||
| Commercial and Institutional | 1 | $ | 7.5 | $ | 8.8 | |||
| Commercial Real Estate | 2 | — | — | |||||
| Total Commercial | 3 | 7.5 | 8.8 | |||||
| Personal | ||||||||
| Residential Real Estate | 45 | 37.4 | 38.8 | |||||
| Private Client | — | — | — | |||||
| Total Personal | 45 | 37.4 | 38.8 | |||||
| Total Loans and Leases | 48 | $ | 44.9 | $ | 47.6 |
Note: Period-end balances reflect all paydowns and charge-offs during the year.
| ($ In Millions) | NUMBER OF LOANS AND LEASES | RECORDED INVESTMENT | UNPAID PRINCIPAL BALANCE | |||||
| December 31, 2018 | ||||||||
| Commercial | ||||||||
| Commercial and Institutional | 1 | $ | 0.3 | $ | 0.5 | |||
| Commercial Real Estate | 2 | 2.8 | 2.8 | |||||
| Total Commercial | 3 | 3.1 | 3.3 | |||||
| Personal | ||||||||
| Residential Real Estate | 48 | 27.7 | 30.8 | |||||
| Private Client | 1 | — | 0.1 | |||||
| Total Personal | 49 | 27.7 | 30.9 | |||||
| Total Loans and Leases | 52 | $ | 30.8 | $ | 34.2 |
Note: Period-end balances reflect all paydowns and charge-offs during the year.
TDR modifications primarily involve extensions of term, deferrals of principal, interest rate concessions, and other modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-troubled situations.
During the year ended December 31, 2019, the TDR modifications of loans within residential real estate were primarily other modifications, extensions of term, deferrals of principal, and interest rate concessions. During the year ended December 31, 2019, TDR modifications of loans within commercial and institutional, commercial real estate, and private client classes were other modifications, extensions of term, and deferrals of principal. During the year ended December 31, 2018, the TDR modifications of loans within residential real estate loans were primarily extensions of term, deferrals of principal, other modifications, and interest rate concessions; modifications within commercial and institutional, commercial real estate, and private client classes were primarily extensions of term, deferrals of principal, and other modifications.
There were five loans or leases TDR modifications during the previous twelve-month period which subsequently became nonperforming during the year ended December 31, 2019. The total recorded investment for these loans was approximately $5.8 million and the unpaid principal balance for these loans was approximately $6.1 million.
There were four loans or leases TDR modifications during the previous twelve-month period which subsequently became nonperforming during the year ended December 31, 2018. The total recorded investment for these loans was approximately $2.1 million and the unpaid principal balance for these loans was approximately $2.4 million.
All loans and leases with TDR modifications are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses.
| 122 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Northern Trust may obtain physical possession of real estate via foreclosure. As of December 31, 2019 and 2018, Northern Trust held foreclosed real estate properties with a carrying value of $3.2 million and $8.4 million, respectively, as a result of obtaining physical possession. In addition, as of December 31, 2019 and 2018, Northern Trust had loans with a carrying value of $18.1 million and $10.9 million, respectively, for which formal foreclosure proceedings were in process.
Note 7 – Allowance for Credit Losses
The allowance for credit losses, which represents management’s estimate of probable losses related to specific borrower relationships and inherent in the various loan and lease portfolios, undrawn commitments, and standby letters of credit, is determined by management through a disciplined credit review process. Northern Trust’s accounting policies related to the estimation of the allowance for credit losses and the charging off of loans, leases and other extensions of credit deemed uncollectible are consistent across both loan and lease segments.
Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance for credit losses. Subsequent recoveries, if any, are credited to the allowance. Determinations as to whether an uncollectible loan is charged off or a specific allowance is established are based on management’s assessment as to the level of certainty regarding the amount of loss.
Changes in the allowance for credit losses by segment were as follows:
TABLE 83: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
| 2019 | 2018 | 2017 | |||||||||||||||||||||||||
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL | ||||||||||||||||||
| Balance at Beginning of Year | $ | 78.7 | $ | 59.5 | $ | 138.2 | $ | 80.8 | $ | 73.0 | $ | 153.8 | $ | 104.9 | $ | 87.1 | $ | 192.0 | |||||||||
| Charge-Offs | (3.0 | ) | (3.5 | ) | (6.5 | ) | (0.9 | ) | (9.2 | ) | (10.1 | ) | (11.4 | ) | (10.1 | ) | (21.5 | ) | |||||||||
| Recoveries | 0.9 | 6.3 | 7.2 | 1.7 | 7.3 | 9.0 | 5.5 | 5.8 | 11.3 | ||||||||||||||||||
| Net (Charge-Offs) Recoveries | (2.1 | ) | 2.8 | 0.7 | 0.8 | (1.9 | ) | (1.1 | ) | (5.9 | ) | (4.3 | ) | (10.2 | ) | ||||||||||||
| Provision for Credit Losses | (2.7 | ) | (11.8 | ) | (14.5 | ) | (2.9 | ) | (11.6 | ) | (14.5 | ) | (18.2 | ) | (9.8 | ) | (28.0 | ) | |||||||||
| Balance at End of Year | $ | 73.9 | $ | 50.5 | $ | 124.4 | $ | 78.7 | $ | 59.5 | $ | 138.2 | $ | 80.8 | $ | 73.0 | $ | 153.8 | |||||||||
| Allowance for Credit Losses Assigned to: | |||||||||||||||||||||||||||
| Loans and Leases | $ | 58.1 | $ | 46.4 | $ | 104.5 | $ | 57.6 | $ | 55.0 | $ | 112.6 | $ | 63.5 | $ | 67.7 | $ | 131.2 | |||||||||
| Undrawn Commitments and Standby Letters of Credit | 15.8 | 4.1 | 19.9 | 21.1 | 4.5 | 25.6 | 17.3 | 5.3 | 22.6 | ||||||||||||||||||
| Total Allowance for Credit Losses | $ | 73.9 | $ | 50.5 | $ | 124.4 | $ | 78.7 | $ | 59.5 | $ | 138.2 | $ | 80.8 | $ | 73.0 | $ | 153.8 |
| 2019 Annual Report | Northern Trust Corporation 123 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information regarding the recorded investments in loans and leases and the allowance for credit losses by segment as of December 31, 2019 and 2018.
TABLE 84: RECORDED INVESTMENTS IN LOANS AND LEASES
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | ||||||
| December 31, 2019 | |||||||||
| Loans and Leases | |||||||||
| Specifically Evaluated for Impairment | $ | 10.4 | $ | 81.8 | $ | 92.2 | |||
| Evaluated for Inherent Impairment | 14,263.8 | 17,053.6 | 31,317.4 | ||||||
| Total Loans and Leases | 14,274.2 | 17,135.4 | 31,409.6 | ||||||
| Allowance for Credit Losses on Credit Exposures | |||||||||
| Specifically Evaluated for Impairment | 3.4 | 1.6 | 5.0 | ||||||
| Evaluated for Inherent Impairment | 54.7 | 44.8 | 99.5 | ||||||
| Allowance Assigned to Loans and Leases | 58.1 | 46.4 | 104.5 | ||||||
| Allowance for Undrawn Exposures | |||||||||
| Commitments and Standby Letters of Credit | 15.8 | 4.1 | 19.9 | ||||||
| Total Allowance for Credit Losses | $ | 73.9 | $ | 50.5 | $ | 124.4 |
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | ||||||
| December 31, 2018 | |||||||||
| Loans and Leases | |||||||||
| Specifically Evaluated for Impairment | $ | 15.0 | $ | 101.2 | $ | 116.2 | |||
| Evaluated for Inherent Impairment | 15,160.2 | 17,213.6 | 32,373.8 | ||||||
| Total Loans and Leases | 15,175.2 | 17,314.8 | 32,490.0 | ||||||
| Allowance for Credit Losses on Credit Exposures | |||||||||
| Specifically Evaluated for Impairment | 4.1 | 3.1 | 7.2 | ||||||
| Evaluated for Inherent Impairment | 53.5 | 51.9 | 105.4 | ||||||
| Allowance Assigned to Loans and Leases | 57.6 | 55.0 | 112.6 | ||||||
| Allowance for Undrawn Exposures | |||||||||
| Commitments and Standby Letters of Credit | 21.1 | 4.5 | 25.6 | ||||||
| Total Allowance for Credit Losses | $ | 78.7 | $ | 59.5 | $ | 138.2 |
Note 8 – Concentrations of Credit Risk
Concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The fact that a credit exposure falls into one of these groups does not necessarily indicate that the credit has a higher than normal degree of credit risk. These groups are: banks and bank holding companies, residential real estate, and commercial real estate.
Banks and Bank Holding Companies. At December 31, 2019, on-balance-sheet credit risk to banks and bank holding companies, both U.S. and non-U.S., consisted primarily of interest-bearing deposits with banks of $4.9 billion, federal funds sold and securities purchased under agreements to resell of $712.8 million, and demand balances maintained at correspondent banks of $4.3 billion. At December 31, 2018, on-balance-sheet credit risk to banks and bank holding companies, both U.S. and non-U.S., consisted primarily of interest-bearing deposits with banks of $4.3 billion, federal funds sold and securities purchased under agreements to resell of $1.2 billion, and demand balances maintained at correspondent banks of $4.5 billion. Credit risk associated with U.S. and non-U.S. banks and bank holding companies deemed to be counterparties by Credit Risk Management is managed by the Capital Markets Credit Committee. Credit limits are established through a review process that includes an internally-prepared financial analysis, use of an internal risk rating system and consideration of external ratings from rating agencies. Northern Trust places deposits with banks that have strong internal and external credit ratings and the average life to maturity of deposits with banks is maintained on a short-term basis in order to respond quickly to changing credit conditions.
| 124 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential Real Estate. At December 31, 2019, residential real estate loans totaled $6.0 billion, or 20% of total U.S. loans and leases at December 31, 2019, compared with $6.5 billion, or 22% of total U.S. loans and leases at December 31, 2018. Residential real estate loans consist of traditional first lien mortgages and equity credit lines, which generally require a loan-to-collateral value ratio of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties. Of the $6.0 billion residential real estate loans at December 31, 2019 , $1.6 billion were in Florida, $1.2 billion were in California, and $1.0 billion were in the greater Chicago area, with the remainder distributed throughout the other geographic regions within the U.S. served by Northern Trust. Legally binding undrawn commitments to extend residential real estate credit, which are primarily equity credit lines, totaled $714.2 million and $824.0 million at December 31, 2019 and 2018, respectively.
Commercial Real Estate. The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to experienced investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required. Commercial mortgage financing is provided for the acquisition or refinancing of income-producing properties. Cash flows from the properties generally are sufficient to amortize the loan. These loans are primarily located in the California, Illinois, Florida, Texas, and Arizona markets. Construction, acquisition and development loans provide financing for commercial real estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or refinance the loan through a commercial mortgage with Northern Trust or another financial institution upon completion.
The table below provides additional detail regarding commercial real estate loan types.
TABLE 85: COMMERCIAL REAL ESTATE LOANS
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Commercial Mortgages | ||||||
| Office | $ | 754.3 | $ | 811.2 | ||
| Apartment/ Multi-family | 646.5 | 490.7 | ||||
| Retail | 573.3 | 529.7 | ||||
| Industrial/ Warehouse | 278.0 | 254.9 | ||||
| Other | 420.1 | 426.6 | ||||
| Total Commercial Mortgages | 2,672.2 | 2,513.1 | ||||
| Construction, Acquisition and Development Loans | 432.1 | 420.6 | ||||
| Single Family Investment | 95.5 | 127.0 | ||||
| Other Commercial Real Estate Related | 178.2 | 168.1 | ||||
| Total Commercial Real Estate Loans | $ | 3,378.0 | $ | 3,228.8 |
| 2019 Annual Report | Northern Trust Corporation 125 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Buildings and Equipment
A summary of buildings and equipment is presented below.
TABLE 86: BUILDINGS AND EQUIPMENT
| DECEMBER 31, 2019 | |||||||||
| (In Millions) | ORIGINAL COST | ACCUMULATED DEPRECIATION | NET BOOK VALUE | ||||||
| Land and Improvements | $ | 14.5 | $ | 0.5 | $ | 14.0 | |||
| Buildings | 305.8 | 156.0 | 149.8 | ||||||
| Equipment | 731.0 | 521.5 | 209.5 | ||||||
| Leasehold Improvements | 416.1 | 306.1 | 110.0 | ||||||
| Total Buildings and Equipment | $ | 1,467.4 | $ | 984.1 | $ | 483.3 |
| DECEMBER 31, 2018 | |||||||||
| (In Millions) | ORIGINAL COST | ACCUMULATED DEPRECIATION | NET BOOK VALUE | ||||||
| Land and Improvements | $ | 15.4 | $ | 1.1 | $ | 14.3 | |||
| Buildings | 245.7 | 148.2 | 97.5 | ||||||
| Equipment | 649.9 | 457.6 | 192.3 | ||||||
| Leasehold Improvements | 406.0 | 281.9 | 124.1 | ||||||
| Total Buildings and Equipment | $ | 1,317.0 | $ | 888.8 | $ | 428.2 |
The charge for depreciation amounted to $103.2 million in 2019, $108.6 million in 2018, and $101.2 million in 2017 in the consolidated statements of income.
Note 10 – Lease Commitments
At December 31, 2019, Northern Trust was obligated under a number of non-cancelable operating leases, primarily for real estate. Certain leases contain rent escalation clauses based on market indices, renewal option clauses calling for increased rentals, and rental payments based on usage. There are no restrictions imposed by any lease agreement regarding the payment of dividends, debt financing or Northern Trust entering into further lease agreements.
The components of lease costs for the year ended December 31, 2019 were as follows.
TABLE 87: LEASE COST COMPONENTS
| (In Millions) | DECEMBER 31, 2019 | ||
| Operating Lease Cost | $ | 102.2 | |
| Variable Lease Cost | 38.7 | ||
| Sublease Income | (6.6 | ) | |
| Total Lease Cost | $ | 134.3 |
| 126 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a maturity analysis of lease liabilities as of December 31, 2019.
TABLE 88: MATURITY OF LEASE LIABILITIES
| (In Millions) | MATURITY OF LEASE LIABILITIES | ||
| 2020 | $ | 101.3 | |
| 2021 | 85.8 | ||
| 2022 | 78.5 | ||
| 2023 | 70.5 | ||
| 2024 | 59.6 | ||
| Later Years | 300.0 | ||
| Total Lease Payments | 695.7 | ||
| Less: Imputed Interest | (92.6 | ) | |
| Present Value of Lease Liabilities | $ | 603.1 |
As of December 31, 2019, Northern Trust had commitments for operating leases in addition to the above that have not yet commenced for approximately $40.1 million. These operating leases are for the use of office space with lease terms between 9 and 15 years and are expected to commence early 2020 through late 2021.
Northern Trust uses its incremental borrowing rate to determine the present value of lease payments for operating leases. Operating lease ROU assets and lease liabilities may include options to extend or terminate the lease only when it is reasonably certain that Northern Trust will exercise that option. Northern Trust elects not to separate lease and non-lease components of a contract for its real estate leases. The location and amount of ROU assets and lease liabilities recorded in the consolidated balance sheets as of December 31, 2019 are presented in the following table.
TABLE 89: LOCATION AND AMOUNT OF LEASE ASSETS AND LIABILITIES
| (In Millions) | LOCATION OF LEASE ASSETS AND LEASE LIABILITIES ON THE BALANCE SHEET | DECEMBER 31, 2019 | ||
| Assets | ||||
| Operating Lease Right-of-Use Asset | Other Assets | $ | 491.6 | |
| Liabilities | ||||
| Operating Lease Liability | Other Liabilities | $ | 603.1 |
The weighted-average remaining lease term and weighted-average discount rate applied to leases as of December 31, 2019 were as follows:
TABLE 90: WEIGHTED-AVERAGE REMAINING LEASE TERM AND DISCOUNT RATE
| DECEMBER 31, 2019 | ||
| Operating Leases | ||
| Weighted-Average Remaining Lease Term | 9.2 years | |
| Weighted-Average Discount Rate | 3.0 | % |
The following table provides supplemental cash flow information related to leases for the year ended December 31, 2019.
TABLE 91: SUPPLEMENTAL CASH FLOW INFORMATION
| (In Millions) | DECEMBER 31, 2019 | ||
| Supplemental cash flow information | |||
| Cash paid for amounts included in the measurement of lease liabilities - operating cash flows | $ | 101.2 | |
| Supplemental non-cash information | |||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 108.3 |
| 2019 Annual Report | Northern Trust Corporation 127 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the provisions of Accounting Standards Codification (ASC) Topic 842, Northern Trust has elected not to restate comparative periods in the period of adoption. Therefore, disclosure with respect to minimum annual lease commitments as of December 31, 2018, for all non-cancelable operating leases with a term of one year or more is provided in the table below, as required by ASC Topic 840.
TABLE 92: MINIMUM LEASE PAYMENTS
| (In Millions) | FUTURE MINIMUM LEASE PAYMENTS | ||
| 2019 | $ | 98.8 | |
| 2020 | 97.8 | ||
| 2021 | 85.9 | ||
| 2022 | 77.2 | ||
| 2023 | 67.7 | ||
| Later Years | 335.7 | ||
| Total Minimum Lease Payments | 763.1 | ||
| Less: Sublease Rentals | (23.4 | ) | |
| Net Minimum Lease Payments | $ | 739.7 |
Operating lease rental expense, net of rental income, is recorded in occupancy expense and amounted to $79.0 million in 2018, $76.7 million in 2017, and $76.1 million in 2016.
Note 11 – Goodwill and Other Intangibles
Goodwill. Changes by reporting segment in the carrying amount of goodwill for the years ended December 31, 2019 and 2018, including the effect of foreign exchange rates on non-U.S.-dollar-denominated balances, were as follows:
TABLE 93: GOODWILL
| (In Millions) | CORPORATE & INSTITUTIONAL SERVICES | WEALTH MANAGEMENT | TOTAL | ||||||
| Balance at December 31, 2017 | $ | 534.5 | $ | 71.1 | $ | 605.6 | |||
| Goodwill Acquired | 71.4 | — | 71.4 | ||||||
| Foreign Exchange Rates | (7.7 | ) | — | (7.7 | ) | ||||
| Balance at December 31, 2018 | $ | 598.2 | $ | 71.1 | $ | 669.3 | |||
| Goodwill Acquired | 23.5 | — | 23.5 | ||||||
| Foreign Exchange Rates | 4.0 | — | 4.0 | ||||||
| Balance at December 31, 2019 | $ | 625.7 | $ | 71.1 | $ | 696.8 |
The goodwill impairment test is performed at least annually at the reporting-unit level. The Corporation has determined its reporting units for this purpose to be Corporate & Institutional Services and Wealth Management. Goodwill was tested for impairment during the fourth quarter of 2019 using a quantitative assessment in which the estimated fair values of the reporting units are compared to their carrying values. Impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value. Based upon the quantitative assessments, there were no impairments to goodwill in 2019.
| 128 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization as of December 31, 2019 and 2018 were as follows:
TABLE 94: OTHER INTANGIBLE ASSETS
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Gross Carrying Amount | $ | 207.2 | $ | 211.1 | ||
| Less: Accumulated Amortization | 86.6 | 72.5 | ||||
| Net Book Value | $ | 120.6 | $ | 138.6 |
Other intangible assets consist primarily of the value of acquired client relationships and are included within Other Assets in the consolidated balance sheets. Amortization expense related to other intangible assets was $16.6 million, $17.4 million, and $11.4 million for the years ended December 31, 2019, 2018, and 2017, respectively. Amortization for the years 2020, 2021, 2022, 2023, and 2024 is estimated to be $16.7 million, $14.3 million, $9.7 million, $9.4 million, and $9.3 million respectively.
In the third quarter of 2019, Northern Trust completed its acquisition of Belvedere Advisors LLC, a provider of digital investment advisory and asset management services. The purchase price recorded in connection with the closing of the acquisition, which is subject to certain performance-related adjustments over a five-year period after the acquisition date, totaled $17.6 million inclusive of contingent consideration. Goodwill and developed technology associated with the transaction totaled $9.3 million and $8.3 million, respectively.
In the first quarter of 2019, Northern Trust completed the purchase accounting related to its acquisition of BEx LLC, a provider of foreign exchange software solutions. The purchase price recorded in connection with the closing of the acquisition totaled $37.9 million. Goodwill and developed technology associated with the acquisition totaled $12.5 million and $25.0 million, respectively.
Since its acquisition of Omnium LLC in 2011, Northern Trust has made various investments in Citadel Technology LLC’s Omnium technology platform. In June 2018, Northern Trust completed its acquisition of such platform, along with associated development resources, for a total purchase price of $73.0 million. Goodwill and incremental developed technology associated with the acquisition in 2018 totaled $71.4 million and $1.6 million, respectively.
Note 12 – Deposits
The table below provides the scheduled maturity of total time deposits in denominations of $100,000 or greater at December 31, 2019.
TABLE 95: REMAINING MATURITY OF TIME DEPOSITS $100,000 OR MORE
| DECEMBER 31, 2019 | |||||||||
| U.S. OFFICE | NON-U.S. OFFICES | ||||||||
| (In Millions) | CERTIFICATES OF DEPOSIT | OTHER TIME | TOTAL | ||||||
| 1 Year or Less | $ | 673.6 | $ | 1,018.9 | $ | 1,692.5 | |||
| Over 1 Year to 2 Years | 196.6 | — | 196.6 | ||||||
| Over 2 Years to 3 Years | 7.4 | — | 7.4 | ||||||
| Over 3 Years to 4 Years | 3.8 | — | 3.8 | ||||||
| Over 4 Years to 5 Years | 4.2 | — | 4.2 | ||||||
| Over 5 Years | 0.9 | — | 0.9 | ||||||
| Total | $ | 886.5 | $ | 1,018.9 | $ | 1,905.4 |
As of December 31, 2018, there were $1.3 billion of time deposits in denominations of $100,000 or greater, of which $580.9 million were Certificates of Deposit and $758.6 million were non-U.S.
| 2019 Annual Report | Northern Trust Corporation 129 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Senior Notes and Long-Term Debt
Senior Notes. A summary of senior notes outstanding at December 31, 2019 and 2018 is presented below.
TABLE 96: SENIOR NOTES
| DECEMBER 31, | ||||||||
| ($ In Millions) | RATE | 2019 | 2018 | |||||
| Corporation-Senior Notes(1)(3) | ||||||||
| Fixed Rate Due Nov. 2020(4) | 3.45 | % | $ | 499.9 | $ | 499.7 | ||
| Fixed Rate Due Aug. 2021(5) | 3.38 | 499.4 | 499.1 | |||||
| Fixed Rate Due Aug. 2022(6) | 2.38 | 499.4 | 499.2 | |||||
| Fixed Rate Due Aug. 2028(7)(10) | 3.65 | 547.2 | 513.3 | |||||
| Fixed Rate Due May. 2029(8)(10) | 3.15 | 527.1 | — | |||||
| Total Senior Notes | $ | 2,573.0 | $ | 2,011.3 |
Long-Term Debt. A summary of long-term debt outstanding at December 31, 2019 and 2018 is presented below.
TABLE 97: LONG-TERM DEBT
| DECEMBER 31, | ||||||
| ($ In Millions) | 2019 | 2018 | ||||
| Corporation-Subordinated Debt(3) | ||||||
| 3.95% Notes due Oct. 2025(1)(9)(10) | $ | 798.7 | $ | 763.1 | ||
| 3.375% Fixed-to-Floating Rate Notes due May 2032(2) | 349.4 | 349.3 | ||||
| Total Corporation Subordinated Debt | $ | 1,148.1 | $ | 1,112.4 | ||
| Long-Term Debt Qualifying as Risk-Based Capital | $ | 1,099.5 | $ | 1,099.5 |
(1) Not redeemable prior to maturity, except for senior notes due Aug. 2028 and senior notes due May 2029, which are redeemable within three months of maturity.
(2) The subordinated notes will bear interest from the date they were issued to, but excluding, May 8, 2027, at an annual rate of 3.375%**, payable semi-annually in arrears. From, and including, May 8, 2027, the subordinated notes will bear interest at an annual rate equal to three-month LIBOR plus 1.131%**, payable quarterly in arrears. The subordinated notes are unsecured and may be redeemed, in whole but not in part, on, and only on, May 8, 2027, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed, plus accrued and unpaid interest, if any, up to but excluding the redemption date.
(3) As of December 31, 2019*, debt issue costs of* $2.2 million and $1.3 million are included as a direct deduction from the carrying amount of Senior Notes and Long-Term Debt, respectively. Debt issue costs are amortized on a straight-line basis over the life of the Note.
(4) Notes issued at a discount of 0.117%
(5) Notes issued at a discount of 0.437%
(6) Notes issued at a discount of 0.283%
(7) Notes issued at a discount of 0.125%
(8) Notes issued at a discount of 0.094%
(9) Notes issued at a discount of 0.114%
(10) Interest rate swap contracts were entered into to modify the interest expense on these senior and subordinated notes from fixed rates to floating rates. The swaps are recorded as fair value hedges and at December 31, 2019*, increases in the carrying values of the senior and subordinated notes outstanding of* $126.9 million were recorded. As of December 31, 2018*, net adjustments in the carrying values of subordinated notes outstanding of* $29.3 million were recorded.
Note 14 – Floating Rate Capital Debt
In January 1997, the Corporation issued $150 million of Floating Rate Capital Securities, Series A, through a statutory business trust wholly owned by the Corporation (NTC Capital I). In April 1997, the Corporation also issued, through a separate wholly owned statutory business trust (NTC Capital II), $120 million of Floating Rate Capital Securities, Series B. The sole assets of the trusts are subordinated debentures of Northern Trust Corporation that have the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. The Series A Securities were issued at a discount to yield 60.5 basis points above the three-month London Interbank Offered Rate (LIBOR) and are due January 15, 2027. The Series B Securities were issued at a discount to yield 67.9 basis points above the three-month LIBOR and are due April 15, 2027.
Under the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the regulatory capital treatment of these securities is required to be phased out over a period that began on January 1, 2013. In 2019, 30% of these securities are eligible for Tier 2 capital treatment, declining at an incremental 10% a year until they are fully phased out in 2022.
The Corporation has fully, irrevocably and unconditionally guaranteed all payments due on the Series A and B securities. The holders of the Series A and B securities are entitled to receive preferential cumulative cash distributions quarterly in arrears (based on the liquidation amount of $1,000 per security) at an interest rate equal to the rate on the corresponding
| 130 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subordinated debentures. The interest rate on the Series A and Series B securities is equal to three-month LIBOR plus 0.52% and 0.59%, respectively. Subject to certain exceptions, the Corporation has the right to defer payment of interest on the subordinated debentures at any time or from time to time for a period not exceeding 20 consecutive quarterly periods provided that no extension period may extend beyond the stated maturity date. If interest is deferred on the subordinated debentures, distributions on the Series A and B securities will also be deferred and the Corporation will not be permitted, subject to certain exceptions, to pay or declare any cash distributions with respect to the Corporation’s capital stock or debt securities that rank the same as or junior to the subordinated debentures, until all past due distributions are paid. The subordinated debentures are unsecured and subordinated to substantially all of the Corporation’s existing indebtedness.
The Corporation has the right to redeem the Series A and Series B subordinated debentures, in whole or in part, at a price equal to the principal amount plus accrued and unpaid interest. The following table summarizes the book values of the outstanding subordinated debentures as of December 31, 2019 and 2018.
TABLE 98: SUBORDINATED DEBENTURES
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| NTC Capital I Subordinated Debentures due January 15, 2027 | $ | 154.3 | $ | 154.2 | ||
| NTC Capital II Subordinated Debentures due April 15, 2027 | 123.4 | 123.4 | ||||
| Total Subordinated Debentures | $ | 277.7 | $ | 277.6 |
Note 15 – Stockholders’ Equity
Preferred Stock. The Corporation is authorized to issue 10 million shares of preferred stock without par value. The Board of Directors is authorized to fix the particular designations, preferences and relative, participating, optional and other special rights and qualifications, limitations or restrictions for each series of preferred stock issued.
As of December 31, 2019, the following shares of preferred stock were outstanding: 16,000 shares of Series C Non-Cumulative Perpetual Preferred Stock (the “Series C Preferred Stock”), 5,000 shares of Series D Non-Cumulative Perpetual Preferred Stock (the “Series D Preferred Stock”), and 16,000 shares of Series E Non-Cumulative Perpetual Preferred Stock (the “Series E Preferred Stock”). Further information with respect to each of these series is as follows.
Series C Preferred Stock. As of December 31, 2019, the Corporation had issued and outstanding 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series C Preferred Stock, issued in August 2014. Equity related to Series C Preferred Stock as of December 31, 2019 and 2018 totaled $388.5 million. Series C Preferred Stock had no par value and had a liquidation preference of $25,000 (equivalent to $25 per depositary share).
Dividends on the Series C Preferred Stock, which were not mandatory, accrued and were payable on the liquidation preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January, April, July and October of each year, at a rate per annum equal to 5.85%. On October 22, 2019, the Corporation declared a cash dividend of $365.625 per share of Series C Preferred Stock payable on January 1, 2020, to stockholders of record as of December 15, 2019.
The Series C Preferred Stock had no maturity date and was redeemable at the Corporation’s option in whole, or in part, on any dividend payment date on or after October 1, 2019. On January 2, 2020, the proceeds from the Series E Preferred Stock issuance described below were used to fund the redemption of all outstanding shares of the Corporation's Series C Preferred Stock.
Series D Preferred Stock. As of December 31, 2019, the Corporation had issued and outstanding 500,000 depositary shares, each representing a 1/100th ownership interest in a share of Series D Preferred Stock, issued in August 2016. Equity related to Series D Preferred Stock as of December 31, 2019 and 2018 was $493.5 million. Shares of the Series D Preferred Stock have no par value and a liquidation preference of $100,000 (equivalent to $1,000 per depositary share).
Dividends on the Series D Preferred Stock, which are not mandatory, accrue and are payable on the liquidation preference amount, on a non-cumulative basis, at a rate per annum equal to (i) 4.60% from the original issue date of the Series D Preferred Stock to but excluding October 1, 2026; and (ii) a floating rate equal to Three-Month LIBOR plus 3.202% from and including October 1, 2026. Fixed rate dividends are payable in arrears on the first day of April and October of each year, through and including October 1, 2026, and floating rate dividends will be payable in arrears on the first day of January, April, July and October of each year, commencing on January 1, 2027.
The Series D Preferred Stock has no maturity date and is redeemable at the Corporation’s option in whole, or in part, on any dividend payment date on or after October 1, 2026. The Series D Preferred Stock is redeemable at the Corporation’s option in whole, but not in part, including prior to October 1, 2026, within 90 days of a regulatory capital treatment event, as described in the Series D Preferred Stock Certificate of Designation.
| 2019 Annual Report | Northern Trust Corporation 131 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares of the Series D Preferred Stock rank senior to the Corporation’s common stock, and will rank at least equally with any other series of preferred stock it may issue (except for any senior series that may be issued with the requisite consent of the holders of the Series D Preferred Stock) and all other parity stock, with respect to the payment of dividends and distributions upon liquidation, dissolution or winding up.
Series E Preferred Stock. On November 5, 2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Preferred Stock. Shares of the Series E Preferred Stock have no par value and a liquidation preference of $25,000 (equivalent to $25 per depositary share). The aggregate proceeds from the public offering of the depositary shares, net of underwriting discounts, commissions and offering expenses, were $391.4 million. As noted above, on January 2, 2020, the proceeds from the Series E Preferred Stock issuance were used to fund the redemption of all outstanding shares of the Corporation's Series C Preferred Stock.
Dividends on the Series E Preferred Stock, which are not mandatory, will accrue and be payable on the liquidation preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January, April, July and October of each year, commencing on April 1, 2020, at a rate per annum equal to 4.70%.
The Series E Preferred Stock has no maturity date and is redeemable at the Corporation's option in whole, or in part, on any dividend payment date on or after January 1, 2025. The Series E Preferred Stock is redeemable at the Corporation’s option in whole, but not in part, including prior to January 1, 2025, within 90 days of a regulatory capital treatment event, as described in the Series E Preferred Stock Certificate of Designation.
Shares of the Series E Preferred Stock rank senior to the Corporation’s common stock, and will rank at least equally with any other series of preferred stock it may issue (except for any senior series that may be issued with the requisite consent of the holders of the Series E Preferred Stock) and all other parity stock, with respect to the payment of dividends and distributions upon liquidation, dissolution or winding up.
Common Stock. The Corporation's current stock repurchase authorization to repurchase up to 25.0 million shares was approved by the Board of Directors in July 2018. Shares are repurchased by the Corporation to, among other things, manage the Corporation's capital levels. Repurchased shares are used for general purposes, including the issuance of shares under stock option and other incentive plans. The repurchase authorization approved by the Board of Directors has no expiration date.
Under the Corporation’s 2019 capital plan, which was reviewed without objection by the Federal Reserve, the Corporation may repurchase up to $828.5 million of common stock after December 31, 2019 through June 30, 2020.
The average price paid per share for common stock repurchased in 2019, 2018, and 2017 was $93.40, $102.69, and $90.25, respectively.
An analysis of changes in the number of shares of common stock outstanding follows:
TABLE 99: SHARES OF COMMON STOCK
| 2019 | 2018 | 2017 | ||||
| Balance at January 1 | 219,012,050 | 226,126,674 | 228,605,485 | |||
| Incentive Plan and Awards | 1,688,931 | 1,310,778 | 1,320,129 | |||
| Stock Options Exercised | 786,931 | 575,662 | 1,997,362 | |||
| Treasury Stock Purchased | (11,778,866 | ) | (9,001,064 | ) | (5,796,302 | ) |
| Balance at December 31 | 209,709,046 | 219,012,050 | 226,126,674 |
| 132 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 – Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of accumulated other comprehensive income (loss) (AOCI) at December 31, 2019, 2018, and 2017, and changes during the years then ended.
TABLE 100: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| (In Millions) | NET UNREALIZED GAINS (LOSSES) ON DEBT SECURITIES AVAILABLE FOR SALE (1) | NET UNREALIZED (LOSSES) GAINS ON CASH FLOW HEDGES | NET FOREIGN CURRENCY ADJUSTMENTS | NET PENSION AND OTHER POSTRETIREMENT BENEFIT ADJUSTMENTS | TOTAL | ||||||||||
| Balance at December 31, 2016 | $ | (32.4 | ) | $ | 6.1 | $ | (18.5 | ) | $ | (325.2 | ) | $ | (370.0 | ) | |
| Net Change | (42.4 | ) | (1.6 | ) | 16.7 | (17.0 | ) | (44.3 | ) | ||||||
| Balance at December 31, 2017 | $ | (74.8 | ) | $ | 4.5 | $ | (1.8 | ) | $ | (342.2 | ) | $ | (414.3 | ) | |
| Reclassification of Certain Tax Effects from AOCI | (17.8 | ) | 0.9 | 47.5 | (55.9 | ) | (25.3 | ) | |||||||
| Net Change | (22.3 | ) | (1.4 | ) | 22.2 | (12.6 | ) | (14.1 | ) | ||||||
| Balance at December 31, 2018 | $ | (114.9 | ) | $ | 4.0 | $ | 67.9 | $ | (410.7 | ) | $ | (453.7 | ) | ||
| Net Change | 228.9 | (7.7 | ) | 49.9 | (12.1 | ) | 259.0 | ||||||||
| Balance at December 31, 2019 | $ | 114.0 | $ | (3.7 | ) | $ | 117.8 | $ | (422.8 | ) | $ | (194.7 | ) |
(1) Includes net unrealized gains (losses) on debt securities transferred from available for sale to held to maturity during the years ended December 31, 2019*,* 2018*, and* 2017*.*
TABLE 101: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||||||||
| (In Millions) | BEFORE TAX | TAX EFFECT | AFTER TAX | BEFORE TAX | TAX EFFECT | AFTER TAX | BEFORE TAX | TAX EFFECT | AFTER TAX | ||||||||||||||||||
| Unrealized Gains (Losses) on Debt Securities Available for Sale | |||||||||||||||||||||||||||
| Unrealized Gains (Losses) on Debt Securities Available for Sale | $ | 306.1 | $ | (78.0 | ) | $ | 228.1 | $ | (31.9 | ) | $ | 9.2 | $ | (22.7 | ) | $ | (70.2 | ) | $ | 26.9 | $ | (43.3 | ) | ||||
| Reclassification Adjustment for Losses (Gains) Included in Net Income (1) | 1.1 | (0.3 | ) | 0.8 | 0.5 | (0.1 | ) | 0.4 | 1.4 | (0.5 | ) | 0.9 | |||||||||||||||
| Net Change | $ | 307.2 | $ | (78.3 | ) | $ | 228.9 | $ | (31.4 | ) | $ | 9.1 | $ | (22.3 | ) | $ | (68.8 | ) | $ | 26.4 | $ | (42.4 | ) | ||||
| Unrealized (Losses) Gains on Cash Flow Hedges | |||||||||||||||||||||||||||
| Foreign Exchange Contracts | $ | 14.9 | $ | (3.7 | ) | $ | 11.2 | $ | 70.5 | $ | (17.6 | ) | $ | 52.9 | $ | 32.5 | $ | (19.5 | ) | $ | 13.0 | ||||||
| Interest Rate Contracts | 1.5 | (0.3 | ) | 1.2 | (1.2 | ) | 0.3 | (0.9 | ) | 1.3 | (0.8 | ) | 0.5 | ||||||||||||||
| Reclassification Adjustment for (Gains) Losses Included in Net Income (2) | (26.7 | ) | 6.6 | (20.1 | ) | (71.1 | ) | 17.7 | (53.4 | ) | (24.5 | ) | 9.4 | (15.1 | ) | ||||||||||||
| Net Change | $ | (10.3 | ) | $ | 2.6 | $ | (7.7 | ) | $ | (1.8 | ) | $ | 0.4 | $ | (1.4 | ) | $ | 9.3 | $ | (10.9 | ) | $ | (1.6 | ) | |||
| Foreign Currency Adjustments | |||||||||||||||||||||||||||
| Foreign Currency Translation Adjustments | $ | 6.4 | $ | (1.6 | ) | $ | 4.8 | $ | (107.8 | ) | $ | 1.5 | $ | (106.3 | ) | $ | 156.5 | $ | (3.1 | ) | $ | 153.4 | |||||
| Long-Term Intra-Entity Foreign Currency Transaction (Losses) Gains | (0.5 | ) | 0.1 | (0.4 | ) | (1.8 | ) | 0.5 | (1.3 | ) | 2.0 | (0.7 | ) | 1.3 | |||||||||||||
| Net Investment Hedge Gains (Losses) | 59.7 | (14.2 | ) | 45.5 | 173.0 | (43.2 | ) | 129.8 | (223.2 | ) | 85.2 | (138.0 | ) | ||||||||||||||
| Net Change | $ | 65.6 | $ | (15.7 | ) | $ | 49.9 | $ | 63.4 | $ | (41.2 | ) | $ | 22.2 | $ | (64.7 | ) | $ | 81.4 | $ | 16.7 | ||||||
| Pension and Other Postretirement Benefit Adjustments | |||||||||||||||||||||||||||
| Net Actuarial (Losses) Gains | $ | (36.8 | ) | $ | 7.9 | $ | (28.9 | ) | $ | (54.9 | ) | $ | 9.6 | $ | (45.3 | ) | $ | (58.4 | ) | $ | 25.4 | $ | (33.0 | ) | |||
| Reclassification Adjustment for Losses (Gains) Included in Net Income (3) | |||||||||||||||||||||||||||
| Amortization of Net Actuarial Loss | 22.4 | (5.4 | ) | 17.0 | $ | 36.6 | $ | (3.6 | ) | $ | 33.0 | 26.0 | (9.9 | ) | 16.1 | ||||||||||||
| Amortization of Prior Service Cost | (0.2 | ) | — | (0.2 | ) | $ | (0.3 | ) | $ | — | $ | (0.3 | ) | (0.1 | ) | — | (0.1 | ) | |||||||||
| Net Change | $ | (14.6 | ) | $ | 2.5 | $ | (12.1 | ) | $ | (18.6 | ) | $ | 6.0 | $ | (12.6 | ) | $ | (32.5 | ) | $ | 15.5 | $ | (17.0 | ) | |||
| Total Net Change | $ | 347.9 | $ | (88.9 | ) | $ | 259.0 | $ | 11.6 | $ | (25.7 | ) | $ | (14.1 | ) | $ | (156.7 | ) | $ | 112.4 | $ | (44.3 | ) |
(1) The before-tax reclassification adjustment out of AOCI related to the realized gains (losses) on debt securities available for sale is recorded as Investment Security Gains (Losses), net within the consolidated statements of income.
(2) See Note 27, "Derivative Financial Instruments" for the location of the reclassification adjustment related to cash flow hedges.
(3) The before-tax reclassification adjustment out of AOCI related to pension and other postretirement benefit adjustments is recorded in Employee Benefits expense within the consolidated statements of income.
| 2019 Annual Report | Northern Trust Corporation 133 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Net Income per Common Share
The computations of net income per common share are presented below.
TABLE 102: NET INCOME PER COMMON SHARE
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| ($ In Millions Except Per Common Share Information) | 2019 | 2018 | 2017 | ||||||
| BASIC NET INCOME PER COMMON SHARE | |||||||||
| Average Number of Common Shares Outstanding | 214,525,547 | 223,148,335 | 228,257,664 | ||||||
| Net Income | $ | 1,492.2 | $ | 1,556.4 | $ | 1,199.0 | |||
| Less: Dividends on Preferred Stock | 46.4 | 46.4 | 49.8 | ||||||
| Net Income Applicable to Common Stock | 1,445.8 | 1,510.0 | 1,149.2 | ||||||
| Less: Earnings Allocated to Participating Securities | 16.9 | 20.1 | 18.8 | ||||||
| Earnings Allocated to Common Shares Outstanding | $ | 1,428.9 | $ | 1,489.9 | $ | 1,130.4 | |||
| Basic Net Income Per Common Share | 6.66 | 6.68 | 4.95 | ||||||
| DILUTED NET INCOME PER COMMON SHARE | |||||||||
| Average Number of Common Shares Outstanding | 214,525,547 | 223,148,335 | 228,257,664 | ||||||
| Plus Dilutive Effect of Share-based Compensation | 1,075,602 | 1,339,991 | 1,396,737 | ||||||
| Average Common and Potential Common Shares | 215,601,149 | 224,488,326 | 229,654,401 | ||||||
| Earnings Allocated to Common and Potential Common Shares | $ | 1,428.9 | $ | 1,490.0 | $ | 1,130.5 | |||
| Diluted Net Income Per Common Share | 6.63 | 6.64 | 4.92 |
Note: For the years ended December 31, 2019 and, 2018 there were no common stock equivalents excluded in the computation of diluted net income per share. Common stock equivalents of 115,491 for the year ended December 31, 2017 were not included in the computation of diluted net income per common share because their inclusion would have been antidilutive.
Note 18 – Revenue from Contracts with Clients
Trust, Investment, and Other Servicing Fees. Custody and fund administration income is comprised of revenues received from our core asset servicing business for providing custody, fund administration, and middle-office-related services, primarily to C&IS clients. Investment management and advisory income contains revenue received from providing asset management and related services to Wealth Management and C&IS clients and to Northern Trust sponsored funds. Securities lending income represents revenues generated from securities lending arrangements that Northern Trust enters into as agent, mainly with C&IS clients. Other income largely consists of revenues received from providing employee benefit, investment risk and analytic and other services to C&IS and Wealth Management clients.
Other Noninterest Income. Treasury management income represents revenues received from providing cash and liquidity management services to C&IS and Wealth Management clients. The portion of securities commissions and trading income that relates to revenue from contracts with clients is primarily comprised of commissions earned from providing securities brokerage services to Wealth Management and C&IS clients. The portion of other operating income that relates to revenue from contracts with clients is mainly comprised of service fees for banking-related services provided to Wealth Management and C&IS clients.
Performance Obligations. Clients are typically charged monthly or quarterly in arrears based on the fee arrangement agreed to with each client; payment terms will vary depending on the client and services offered.
Substantially all revenues generated from contracts with clients for asset servicing, asset management, securities lending, treasury management and banking-related services are recognized on an accrual basis, over the period in which services are provided. The nature of Northern Trust’s performance obligations is to provide a series of distinct services in which the customer simultaneously receives and consumes the benefits of the promised services as they are performed. Fee arrangements are mainly comprised of variable amounts based on market value of client assets managed and serviced, transaction volumes, number of accounts, and securities lending volume and spreads. Revenue is recognized using the output method in an amount that reflects the consideration to which Northern Trust expects to be entitled in exchange for providing each month or quarter of service. For contracts with multiple performance obligations, revenue is allocated to each performance obligation based on the price agreed to with the client, representing its relative standalone selling price.
| 134 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Security brokerage revenue is primarily represented by securities commissions received in exchange of providing trade execution related services. Control is transferred at a point in time, on the trade date of the transaction, and fees are typically variable based on transaction volumes and security types.
Northern Trust’s contracts with its clients are typically open-ended arrangements and are therefore considered to have an original duration of less than one year. Northern Trust has elected the practical expedient to not disclose the value of remaining performance obligations for contracts with an original expected duration of one year or less.
The following table presents revenues disaggregated by major revenue source.
TABLE 103: REVENUE DISAGGREGATION
| FOR THE YEAR ENDED DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Noninterest Income | ||||||
| Trust, Investment and Other Servicing Fees | ||||||
| Custody and Fund Administration | $ | 1,636.4 | $ | 1,589.1 | ||
| Investment Management and Advisory | 1,930.6 | 1,862.6 | ||||
| Securities Lending | 87.7 | 102.8 | ||||
| Other | 197.4 | 199.2 | ||||
| Total Trust, Investment and Other Servicing Fees | $ | 3,852.1 | $ | 3,753.7 | ||
| Other Noninterest Income | ||||||
| Foreign Exchange Trading Income | $ | 250.9 | $ | 307.2 | ||
| Treasury Management Fees | 44.5 | 51.8 | ||||
| Security Commissions and Trading Income | 103.6 | 98.3 | ||||
| Other Operating Income | 145.5 | 127.5 | ||||
| Investment Security Gains (Losses), net | (1.4 | ) | (1.0 | ) | ||
| Total Other Noninterest Income | $ | 543.1 | $ | 583.8 | ||
| Total Noninterest Income | $ | 4,395.2 | $ | 4,337.5 |
Trust, investment and other servicing fees and treasury management fees represent revenue from contracts with clients. For the year ended December 31, 2019, revenue from contracts with clients also includes $87.1 million of the $103.6 million total securities commissions and trading income and $41.8 million of the $145.5 million total other operating income. For the year ended December 31, 2018, revenue from contracts with clients also includes $86.7 million of the $98.3 million total securities commissions and trading income and $44.0 million of the $127.5 million total other operating income.
Receivables Balances. The table below represents receivables balances from contracts with clients, which are included in Other Assets in the consolidated balance sheets, at December 31, 2019 and 2018.
TABLE 104: CLIENT RECEIVABLES
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Trust Fees Receivable, net | $ | 801.9 | $ | 742.5 | ||
| Other | 101.1 | 90.1 | ||||
| Total Client Receivables | $ | 903.0 | $ | 832.6 |
| 2019 Annual Report | Northern Trust Corporation 135 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 – Net Interest Income
The components of net interest income were as follows:
TABLE 105: NET INTEREST INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Interest Income | |||||||||
| Loans and Leases | $ | 1,153.4 | $ | 1,098.8 | $ | 919.1 | |||
| Securities – Taxable | 1,070.7 | 905.2 | 594.1 | ||||||
| – Non-Taxable | 3.8 | 7.0 | 9.8 | ||||||
| Interest-Bearing Due from and Deposits with Banks (1) | 72.4 | 70.0 | 63.8 | ||||||
| Federal Reserve and Other Central Bank Deposits and Other | 199.6 | 240.4 | 182.6 | ||||||
| Total Interest Income | $ | 2,499.9 | $ | 2,321.4 | $ | 1,769.4 | |||
| Interest Expense | |||||||||
| Deposits | $ | 488.9 | $ | 384.6 | $ | 182.1 | |||
| Federal Funds Purchased | 25.9 | 50.3 | 10.4 | ||||||
| Securities Sold under Agreements to Repurchase | 6.4 | 7.8 | 6.0 | ||||||
| Other Borrowings | 181.7 | 150.1 | 50.7 | ||||||
| Senior Notes | 72.6 | 53.4 | 46.9 | ||||||
| Long-Term Debt | 38.3 | 45.0 | 39.2 | ||||||
| Floating Rate Capital Debt | 8.2 | 7.5 | 4.9 | ||||||
| Total Interest Expense | $ | 822.0 | $ | 698.7 | $ | 340.2 | |||
| Net Interest Income | $ | 1,677.9 | $ | 1,622.7 | $ | 1,429.2 |
(1) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
Note 20 – Other Operating Income
The components of other operating income were as follows:
TABLE 106: OTHER OPERATING INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Loan Service Fees | $ | 48.0 | $ | 48.9 | $ | 50.7 | |||
| Banking Service Fees | 45.6 | 46.4 | 48.6 | ||||||
| Other Income | 51.9 | 32.2 | 58.2 | ||||||
| Total Other Operating Income | $ | 145.5 | $ | 127.5 | $ | 157.5 |
Other income of $51.9 million in 2019 increased from $32.2 million in 2018, primarily due to income related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year impairment of a community development equity investment previously held at cost, partially offset by a charge related to the decision made in 2019 to sell substantially all of the lease portfolio.
| 136 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 – Other Operating Expense
The components of other operating expense were as follows:
TABLE 107: OTHER OPERATING EXPENSE
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Business Promotion | $ | 104.2 | $ | 98.3 | $ | 95.4 | |||
| FDIC Insurance Premiums | 9.9 | 27.4 | 34.7 | ||||||
| Staff Related | 42.8 | 33.6 | 42.8 | ||||||
| Other Intangibles Amortization | 16.6 | 17.4 | 11.4 | ||||||
| Other Expenses | 156.3 | 153.9 | 147.3 | ||||||
| Total Other Operating Expense | $ | 329.8 | $ | 330.6 | $ | 331.6 |
Other operating expense in 2019 as compared to 2018 primarily reflects decreased FDIC insurance premiums, partially offset by higher staff-related expense and business promotion expense.
Note 22 – Income Taxes
The following table reconciles the total provision for income taxes recorded in the consolidated statements of income with the amounts computed at the statutory federal tax rate for the periods presented below.
TABLE 108: INCOME TAXES
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Federal Rate | 21.0 | % | 21.0 | % | 35.0 | % | |||
| Tax at Statutory Rate | $ | 408.3 | $ | 411.1 | $ | 571.9 | |||
| Tax Exempt Income | (11.5 | ) | (6.9 | ) | (9.6 | ) | |||
| Foreign Tax Rate Differential | 4.6 | (7.3 | ) | (50.0 | ) | ||||
| Excess Tax Benefit Related to Share-Based Compensation | (17.5 | ) | (16.8 | ) | (31.6 | ) | |||
| State Taxes, net | 55.0 | 66.3 | 40.7 | ||||||
| Impact of Tax Cuts and Jobs Act | — | (4.8 | ) | (53.1 | ) | ||||
| Change in Accounting Method | — | (24.4 | ) | — | |||||
| Valuation Allowance | 29.5 | (0.8 | ) | 0.3 | |||||
| Other | (16.5 | ) | (15.0 | ) | (33.7 | ) | |||
| Provision for Income Taxes | $ | 451.9 | $ | 401.4 | $ | 434.9 |
Income tax expense for the twelve months ended December 31, 2019 and 2018 was $451.9 million and $401.4 million, representing an effective tax rate of 23.2% and 20.5%, respectively. For the twelve months ended December 31, 2019, the provision for income taxes included an increase in the U.S. taxes payable on the income of the Corporation’s non-U.S. branches. This increase included a valuation allowance against deferred tax assets as management believes the foreign tax credit carryforward generated in 2019 will not be fully realized.
For the twelve months ended December 31, 2018, the provision for income taxes included income tax benefits recorded in 2018 associated with the timing of tax deductions for software development-related expenses and the implementation of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017, partially offset by a change in the earnings mix in tax jurisdictions in which the Corporation operates.
Additionally, the 2017 provision for income taxes included a net benefit attributable to the implementation of the TCJA of $53.1 million and Federal and State research tax credits of $17.6 million related to the Corporation’s technology spend between 2013 and 2016, each resulting in a reduction of the effective tax rate.
| 2019 Annual Report | Northern Trust Corporation 137 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The TCJA was enacted on December 22, 2017, and reduced the U.S. federal corporate tax rate from 35% to 21%. It also required companies to pay a mandatory deemed repatriation tax on earnings of foreign subsidiaries that were previously tax deferred. At December 31, 2017, Northern Trust made a reasonable estimate as to the impact of the TCJA. During 2018, Northern Trust completed the related calculations and additional analyses associated with the implementation of the TCJA, resulting in a number of adjustments to the 2018 tax provision as follows:
TABLE 109: IMPACT OF TAX CUTS AND JOBS ACT
| (In Millions) | 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 2018 tax benefit of $16.8 million resulting from an adjustment to the Corporation’s 2017 income tax provision for mandatory deemed repatriation with respect to the pre-2018 earnings of its non-U.S. subsidiaries, offset by a $12.7 million net provision recorded in 2018 associated with the repricing of deferred taxes.
For tax years beginning after December 31, 2017, the TCJA introduces new provisions for U.S. taxation of certain Global Intangible Low-Taxed Income (GILTI). Northern Trust has made the policy election to record any current year tax expense associated with GILTI in the period in which it is incurred.
The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no longer subject to income tax examinations by U.S. federal authorities before 2013, U.S. state or local tax authorities for years before 2011, or non-U.S. tax authorities for years before 2012.
Included in Other Liabilities within the consolidated balance sheets at December 31, 2019 and 2018 were $25.3 million and $21.9 million of unrecognized tax benefits, respectively. If recognized, 2019 and 2018 net income would have increased by $22.7 million and $19.8 million, respectively, resulting in a decrease of those years’ effective income tax rates. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
TABLE 110: UNRECOGNIZED TAX BENEFITS
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Balance at January 1 | $ | 21.9 | $ | 27.7 | $ | 17.2 | |||
| Additions for Tax Positions Taken in the Current Year | 0.9 | 0.5 | 9.9 | ||||||
| Additions for Tax Positions Taken in Prior Years | 4.0 | 1.7 | 6.2 | ||||||
| Reductions for Tax Positions Taken in Prior Years | (1.5 | ) | (7.8 | ) | (5.4 | ) | |||
| Reductions Resulting from Expiration of Statutes | — | (0.2 | ) | (0.2 | ) | ||||
| Balance at December 31 | $ | 25.3 | $ | 21.9 | $ | 27.7 |
Unrecognized tax benefits had net increases of $3.4 million, resulting in a remaining balance of $25.3 million at December 31, 2019, compared to net decreases of $5.8 million resulting in a remaining balance of $21.9 million at December 31, 2018. It is possible that changes in the amount of unrecognized tax benefits could occur in the next 12 months due to changes in judgment related to recognition or measurement, settlements with taxing authorities, or expiration of statute of limitations. Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period.
A benefit for interest and penalties of $1.3 million, net of tax, was included in the provision for income taxes for the year ended December 31, 2019. This compares to a provision for interest and penalties of $0.3 million, net of tax, and $0.1 million, net of tax, for the year ended December 31, 2018 and 2017, respectively. As of December 31, 2019 and 2018, the liability for the potential payment of interest and penalties totaled $8.4 million and $9.2 million, net of tax, respectively.
| 138 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the consolidated provision for income taxes for each of the three years ended December 31 are as follows:
TABLE 111: PROVISION FOR INCOME TAXES
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Current Tax Provision: | |||||||||
| Federal | $ | 216.4 | $ | 132.8 | $ | 347.3 | |||
| State | 50.7 | 95.4 | 38.3 | ||||||
| Non-U.S. | 150.5 | 162.7 | 125.4 | ||||||
| Total | 417.6 | 390.9 | 511.0 | ||||||
| Deferred Tax Provision: | |||||||||
| Federal | $ | 16.5 | $ | 33.8 | $ | (96.4 | ) | ||
| State | 16.5 | (13.8 | ) | 24.6 | |||||
| Non-U.S. | 1.3 | (9.5 | ) | (4.3 | ) | ||||
| Total | 34.3 | 10.5 | (76.1 | ) | |||||
| Provision for Income Taxes | $ | 451.9 | $ | 401.4 | $ | 434.9 |
In addition to the amounts shown above, tax charges and benefits have been recorded directly to stockholders’ equity for the following:
TABLE 112: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY
| FOR THE YEAR ENDED DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | 2017 | |||
| Tax Effect of Other Comprehensive Income | 88.9 | 25.7 | (112.4 | ) |
Deferred taxes result from temporary differences between the amounts reported in the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax assets and liabilities have been computed as follows:
TABLE 113: NET DEFERRED TAX LIABILITIES
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Deferred Tax Liabilities: | ||||||
| Lease Financing | $ | 36.9 | $ | 43.3 | ||
| Software Development | 249.4 | 193.2 | ||||
| Accumulated Depreciation | 99.8 | 129.5 | ||||
| Compensation and Benefits | 8.3 | 10.9 | ||||
| State Taxes, net | 66.4 | 58.9 | ||||
| Other Liabilities | 206.7 | 114.5 | ||||
| Gross Deferred Tax Liabilities | 667.5 | 550.3 | ||||
| Deferred Tax Assets: | ||||||
| Allowance for Credit Losses | 26.1 | 29.0 | ||||
| Other Assets | 147.0 | 120.6 | ||||
| Gross Deferred Tax Assets | 173.1 | 149.6 | ||||
| Valuation Reserve | (29.8 | ) | (0.3 | ) | ||
| Deferred Tax Assets, net of Valuation Reserve | 143.3 | 149.3 | ||||
| Net Deferred Tax Liabilities | $ | 524.2 | $ | 401.0 |
Northern Trust had various state net operating loss carryforwards as of December 31, 2019 and 2018. The income tax benefits associated with these loss carryforwards were approximately $1.0 million as of December 31, 2019 and $0.3 million
| 2019 Annual Report | Northern Trust Corporation 139 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2018. A valuation allowance related to the loss carryforwards of $0.3 million was recorded at December 31, 2019 and 2018, as management believes the net operating losses will not be fully realized.
The Corporation generated a foreign tax credit carryforward during the twelve months ended December 31, 2019. A valuation allowance related to the credit carryforward of $29.5 million was recorded at December 31, 2019, as management believes that the foreign tax credit carryforward will not be fully realized.
Note 23 – Employee Benefits
The Corporation and certain of its subsidiaries provide various benefit programs, including defined benefit pension, postretirement health care, and defined contribution plans. A description of each major plan and related disclosures are provided below.
Pension. A noncontributory qualified defined benefit pension plan covers substantially all U.S. employees of Northern Trust. Employees of certain European subsidiaries retain benefits in local defined benefit plans, although those plans are closed to new participants and to future benefit accruals. Employees continue to accrue benefits under the Swiss pension plan, which is accounted for as a defined benefit plan under U.S. GAAP.
Northern Trust also maintains a noncontributory supplemental pension plan for participants whose retirement benefits under the U.S. Qualified Plan are expected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified trust, referred to as a “Rabbi” Trust, used to hold assets designated for the funding of benefits in excess of those permitted in certain of its qualified retirement plans. This arrangement offers participants a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. As the “Rabbi” Trust assets remain subject to the claims of creditors and are not the property of the employees, they are accounted for as corporate assets and are included in Other Assets in the consolidated balance sheets. Total assets in the “Rabbi” Trust related to the nonqualified pension plan at December 31, 2019 and 2018 amounted to $128.8 million and $129.9 million, respectively. Contributions of $3.0 million and $21.9 million were made to the “Rabbi” Trust in 2019 and 2018, respectively.
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. Qualified Plan, Non-U.S. Pension Plans, and U.S. Non-Qualified Plan for 2019, 2018, and 2017. Prior service costs are being amortized on a straight-line basis over 11 years for the U.S. Qualified Plan and 10 years for the U.S. Non-Qualified Plan.
TABLE 114: EMPLOYEE BENEFIT PLAN STATUS
| U.S. QUALIFIED PLAN | NON-U.S. PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||||||||||||
| ($ In Millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Accumulated Benefit Obligation | $ | 1,181.9 | $ | 980.6 | $ | 204.7 | $ | 178.4 | $ | 131.5 | $ | 120.9 | ||||||
| Projected Benefit Obligation | 1,323.4 | 1,092.0 | 211.1 | 183.5 | 149.2 | 135.6 | ||||||||||||
| Plan Assets at Fair Value | 1,601.2 | 1,380.1 | 190.1 | 166.7 | — | — | ||||||||||||
| Funded Status at December 31 | $ | 277.8 | $ | 288.1 | $ | (21.0 | ) | $ | (16.8 | ) | $ | (149.2 | ) | $ | (135.6 | ) | ||
| Weighted-Average Assumptions: | ||||||||||||||||||
| Discount Rates | 3.37 | % | 4.47 | % | 1.40 | % | 2.16 | % | 3.37 | % | 4.47 | % | ||||||
| Rate of Increase in Compensation Level | 4.97 | 4.39 | 1.50 | 1.75 | 4.97 | 4.39 | ||||||||||||
| Expected Long-Term Rate of Return on Assets | 5.25 | 6.00 | 1.72 | 2.39 | N/A | N/A |
TABLE 115: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
| U.S. QUALIFIED PLAN | NON-U.S. PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||||||||||||
| (In Millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net Actuarial Loss | $ | 426.7 | $ | 435.4 | $ | 46.5 | $ | 41.2 | $ | 82.5 | $ | 65.8 | ||||||
| Prior Service (Benefit) Cost | (1.0 | ) | (1.4 | ) | 3.0 | 3.6 | 0.2 | 0.4 | ||||||||||
| Gross Amount in Accumulated Other Comprehensive Income | 425.7 | 434.0 | 49.5 | 44.8 | 82.7 | 66.2 | ||||||||||||
| Income Tax Effect | 105.7 | 108.5 | 6.2 | 6.0 | 20.4 | 16.4 | ||||||||||||
| Net Amount in Accumulated Other Comprehensive Income | $ | 320.0 | $ | 325.5 | $ | 43.3 | $ | 38.8 | $ | 62.3 | $ | 49.8 |
| 140 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 116: NET PERIODIC PENSION EXPENSE
| U.S. QUALIFIED PLAN | NON-U.S. PENSION PLANS | U.S. NON-QUALIFIED PLAN | |||||||||||||||||||||||||
| ($ In Millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Service Cost | $ | 41.6 | $ | 41.4 | $ | 38.3 | $ | 2.0 | $ | 1.7 | $ | 0.4 | $ | 4.1 | $ | 4.3 | $ | 3.7 | |||||||||
| Interest Cost | 47.2 | 44.3 | 45.9 | 3.9 | 4.0 | 4.0 | 5.8 | 5.3 | 5.2 | ||||||||||||||||||
| Expected Return on Plan Assets | (86.9 | ) | (88.2 | ) | (93.8 | ) | (4.4 | ) | (4.4 | ) | (4.5 | ) | — | N/A | N/A | ||||||||||||
| Settlement Expense | — | — | — | — | 0.5 | 1.1 | — | — | — | ||||||||||||||||||
| Amortization: | |||||||||||||||||||||||||||
| Net Actuarial Loss | 17.2 | 28.2 | 19.0 | 0.6 | 0.9 | 1.3 | 5.6 | 7.4 | 5.7 | ||||||||||||||||||
| Prior Service (Benefit) Cost | (0.4 | ) | (0.4 | ) | (0.4 | ) | 0.3 | 0.2 | 0.1 | 0.2 | 0.2 | 0.2 | |||||||||||||||
| Net Periodic Pension Expense | $ | 18.7 | $ | 25.3 | $ | 9.0 | $ | 2.4 | $ | 2.9 | $ | 2.4 | $ | 15.7 | $ | 17.2 | $ | 14.8 | |||||||||
| Weighted-Average Assumptions: | |||||||||||||||||||||||||||
| Discount Rates | 4.47 | % | 3.79 | % | 4.46 | % | 2.16 | % | 2.08 | % | 2.33 | % | 4.47 | % | 3.79 | % | 4.46 | % | |||||||||
| Rate of Increase in Compensation Level | 4.39 | 4.39 | 4.39 | 1.75 | 1.75 | 1.75 | 4.39 | 4.39 | 4.39 | ||||||||||||||||||
| Expected Long-Term Rate of Return on Assets | 6.00 | 6.00 | 6.75 | 2.39 | 2.61 | 3.13 | N/A | N/A | N/A |
The components of net periodic pension expense are included in the line item “Employee Benefits” expense in the consolidated statements of income.
TABLE 117: CHANGE IN PROJECTED BENEFIT OBLIGATION
| U.S. QUALIFIED PLAN | NON-U.S. PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||||||||||||
| (In Millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Beginning Balance | $ | 1,092.0 | $ | 1,209.9 | $ | 183.5 | $ | 198.3 | $ | 135.6 | $ | 144.5 | ||||||
| Service Cost | 41.6 | 41.4 | 2.0 | 1.7 | 4.1 | 4.3 | ||||||||||||
| Interest Cost | 47.2 | 44.3 | 3.9 | 4.0 | 5.8 | 5.3 | ||||||||||||
| Employee Contributions | — | — | 0.6 | 0.4 | — | — | ||||||||||||
| Plan Amendment | — | — | (0.4 | ) | 1.3 | — | — | |||||||||||
| Actuarial Loss (Gain) | 213.3 | (112.4 | ) | 20.9 | (9.3 | ) | 22.0 | (9.7 | ) | |||||||||
| Settlement | — | — | — | (2.7 | ) | — | — | |||||||||||
| Benefits Paid | (70.7 | ) | (91.2 | ) | (3.6 | ) | (1.1 | ) | (18.3 | ) | (8.8 | ) | ||||||
| Foreign Exchange Rate Changes | — | — | 4.2 | (9.1 | ) | — | — | |||||||||||
| Ending Balance | $ | 1,323.4 | $ | 1,092.0 | $ | 211.1 | $ | 183.5 | $ | 149.2 | $ | 135.6 |
Actuarial losses of $256.2 million in 2019 were primarily caused by decreases in discount rates. Actuarial gains of $131.4 million in 2018 were primarily caused by increases in discount rates.
TABLE 118: ESTIMATED FUTURE BENEFIT PAYMENTS
| (In Millions) | U.S. QUALIFIED PLAN | NON-U.S.PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||
| 2020 | $ | 81.0 | $ | 3.9 | $ | 15.0 | |||
| 2021 | 82.9 | 4.2 | 16.7 | ||||||
| 2022 | 84.3 | 4.2 | 18.4 | ||||||
| 2023 | 91.1 | 4.6 | 20.3 | ||||||
| 2024 | 89.6 | 4.9 | 16.2 | ||||||
| 2025-2029 | 469.7 | 29.9 | 60.8 |
| 2019 Annual Report | Northern Trust Corporation 141 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 119: CHANGE IN PLAN ASSETS
| U.S. QUALIFIED PLAN | NON-U.S PENSION PLANS | |||||||||||
| (In Millions) | 2019 | 2018 | 2019 | 2018 | ||||||||
| Fair Value of Assets at Beginning of Period | $ | 1,380.1 | $ | 1,506.4 | $ | 166.7 | $ | 178.7 | ||||
| Actual Return on Assets | 291.8 | (85.1 | ) | 18.6 | (2.3 | ) | ||||||
| Employer Contributions | — | 50.0 | 3.1 | 2.6 | ||||||||
| Employee Contributions | — | — | 0.6 | 0.4 | ||||||||
| Settlement | — | — | — | (2.7 | ) | |||||||
| Benefits Paid | (70.7 | ) | (91.2 | ) | (3.6 | ) | (1.1 | ) | ||||
| Foreign Exchange Rate Changes | — | — | 4.7 | (8.9 | ) | |||||||
| Fair Value of Assets at End of Period | $ | 1,601.2 | $ | 1,380.1 | $ | 190.1 | $ | 166.7 |
The minimum required and maximum remaining deductible contributions for the U.S. Qualified Plan in 2020 are estimated to be zero and $275.0 million, respectively.
During 2017, the investment strategy employed for Northern Trust's U.S. Qualified Plan was changed to utilize a dynamic glide path based on a set of pre-approved asset allocations to return-seeking and liability-hedging assets that vary in accordance with the U.S. Qualified Plan's projected benefit obligation funded ratio. In general, as the U.S. Qualified Plan’s projected benefit obligation funded ratio increases beyond an established threshold, the U.S. Qualified Plan’s allocation to liability-hedging assets will increase while the allocation to return-seeking assets will decrease. Conversely, a decrease in the U.S. Qualified Plan’s projected benefit obligation funded ratio beyond an established threshold will result in a decrease in the U.S. Qualified Plan’s allocation to liability-hedging assets and increase in the allocation to return-seeking assets. Liability-hedging assets include U.S. long credit bonds, U.S. long government bonds, and a custom completion strategy used to hedge more closely the liability duration of projected plan benefits with bond duration across all durations. Return-seeking assets include: U.S. equity, international developed equity, emerging markets equity, real estate, high yield bonds, global listed infrastructure, emerging market debt, private equity and hedge funds.
Northern Trust utilizes an asset/liability methodology to determine the investment policies that will best meet its short and long-term objectives. The process is performed by modeling current and alternative strategies for asset allocation, funding policy and actuarial methods and assumptions. The financial modeling uses projections of expected capital market returns and expected volatility of those returns to determine alternative asset mixes having the greatest probability of meeting the U.S. Qualified Plan’s investment objectives. Risk tolerance is established through careful consideration of the U.S. Qualified Plan liabilities, funded status, and corporate financial condition. The intent of this strategy is to protect the U.S. Qualified Plan's healthy funded status and generate returns, which in combination with minimal voluntary contributions are expected to outpace the U.S. Qualified Plan's liability growth over the long run.
The target allocation of the U.S. Qualified Plan assets since February 2019 is 45% U.S. long credit bonds, 10% U.S. long government bonds, 10% custom completion, 8% U.S. equities, 5% international developed equity, 3% emerging markets equity, 3% private real estate, 4% high yield bonds, 3% global listed infrastructure, 4% emerging market debt, 2% private equity, and 3% hedge funds.
Equity investments include common stocks that are listed on an exchange and investments in commingled funds that invest primarily in publicly traded equities. Equity investments are diversified across U.S. and non-U.S. stocks and divided by investment style and market capitalization. Fixed income securities held include U.S. treasury securities and investments in commingled funds that invest in a diversified blend of longer duration fixed income securities; the custom completion strategy uses U.S. treasury securities and interest rate futures (or similar instruments) to align more closely with the target hedge ratio across maturities. Diversifying investments, including private equity, hedge funds, private real estate, emerging market debt, high yield bonds, and global listed infrastructure, are used judiciously to enhance long-term returns while improving portfolio diversification. Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt positions. Direct or co-investment in non-public stock by the U.S. Qualified Plan is prohibited. The U.S. Qualified Plan’s private equity investments are limited to 2% of the total limited partnership and the maximum allowable loss cannot exceed the commitment amount. The U.S. Qualified Plan invests in one hedge fund of funds, which invests, either directly or indirectly, in diversified portfolios of funds or other pooled investment vehicles.
Investments in private real estate, high yield bonds, emerging market debt, and global listed infrastructure are designed to provide income and added diversification.
Though not a primary strategy for meeting the U.S. Qualified Plan’s objectives, derivatives may be used from time to time, depending on the nature of the asset class to which they relate, to gain market exposure in an efficient and timely manner,
| 142 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to hedge foreign currency exposure or interest rate risk, or to alter the duration of a portfolio. There were five derivatives held by the U.S. Qualified Plan at December 31, 2019. There were four derivatives held by the U.S. Qualified Plan at December 31, 2018.
Investment risk is measured and monitored on an ongoing basis through monthly liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Standards used to evaluate the U.S. Qualified Plan’s investment manager performance include, but are not limited to, the achievement of objectives, operation within guidelines and policy, and comparison against a relative benchmark. In addition, each manager of the investment funds held by the U.S. Qualified Plan is ranked against a universe of peers and compared to a relative benchmark. Total U.S. Qualified Plan performance analysis includes an analysis of the market environment, asset allocation impact on performance, risk and return relative to other ERISA plans, and manager impacts upon U.S. Qualified Plan performance.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by Northern Trust for the U.S. Qualified Plan assets measured at fair value.
Level 1 – Quoted, active market prices for identical assets or liabilities. The U.S. Qualified Plan’s Level 1 investments are comprised of a mutual fund and domestic common stocks. The U.S. Qualified Plan’s Level 1 investments that are exchange traded are valued at the closing price reported by the respective exchanges on the day of valuation.
Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. The U.S. Qualified Plan’s Level 2 assets are comprised of U.S. government obligations and collective trust funds. The investments in collective trust funds fair values are calculated on a scheduled basis using the closing market prices and accruals of securities in the funds (total value of the funds) divided by the number of fund shares currently issued and outstanding. Redemptions of the collective trust funds occur by contract at the respective fund’s redemption date NAV.
Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The U.S. Qualified Plan’s Level 3 assets are comprised of private equity and hedge funds, which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair value of the underlying investments of each fund, the fund’s investment manager or general partner takes into account the estimated value reported by the underlying funds as well as any other considerations that may, in their judgment, increase or decrease such estimated value.
The U.S. Qualified Plan’s Level 3 assets are also comprised of real estate funds, which invest in real estate assets. The investment in properties by the real estate funds are carried at fair value, which is estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date. The valuation plan for each real estate investment is subject to review on an annual basis which is based on either an external appraisal from appraisal firms or internal valuations prepared by the real estate fund's investment advisor.
While Northern Trust believes its valuation methods for U.S. Qualified Plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets, could have a material effect on the computation of the estimated fair values.
| 2019 Annual Report | Northern Trust Corporation 143 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair values of Northern Trust’s U.S. Qualified Plan assets, by major asset category, and their level within the fair value hierarchy defined by GAAP as of December 31, 2019 and 2018.
TABLE 120: FAIR VALUE OF U.S. QUALIFIED PLAN ASSETS
| DECEMBER 31, 2019 | ||||||||||||
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL | ||||||||
| Domestic Common Stock | $ | 12.3 | $ | — | $ | — | $ | 12.3 | ||||
| Domestic Corporate Bonds | — | 254.6 | — | 254.6 | ||||||||
| Foreign Corporate Bonds | — | 45.0 | — | 45.0 | ||||||||
| U.S. Government Obligations | — | 168.3 | — | 168.3 | ||||||||
| Non-U.S. Government Obligations | — | 18.8 | — | 18.8 | ||||||||
| Domestic Municipal and Provincial Bonds | — | 23.1 | — | 23.1 | ||||||||
| Foreign Municipal and Provincial Bonds | — | 0.3 | — | 0.3 | ||||||||
| Collective Trust Funds | — | 866.6 | — | 866.6 | ||||||||
| Mutual Funds | 112.8 | — | — | 112.8 | ||||||||
| Northern Trust Private Equity Funds | — | — | 20.3 | 20.3 | ||||||||
| Northern Trust Hedge Funds | — | — | 30.2 | 30.2 | ||||||||
| Real Estate Funds | — | — | 46.3 | 46.3 | ||||||||
| Cash and Other | 2.6 | — | — | 2.6 | ||||||||
| Total Assets at Fair Value | $ | 127.7 | $ | 1,376.7 | $ | 96.8 | $ | 1,601.2 |
| DECEMBER 31, 2018 | ||||||||||||
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL | ||||||||
| Domestic Common Stock | $ | 27.7 | $ | — | $ | — | $ | 27.7 | ||||
| Domestic Corporate Bonds | — | 227.6 | — | 227.6 | ||||||||
| Foreign Corporate Bonds | — | 34.2 | — | 34.2 | ||||||||
| U.S. Government Obligations | — | 155.5 | — | 155.5 | ||||||||
| Non-U.S. Government Obligations | — | 15.1 | — | 15.1 | ||||||||
| Domestic Municipal and Provincial Bonds | — | 22.7 | — | 22.7 | ||||||||
| Foreign Municipal and Provincial Bonds | — | 2.0 | — | 2.0 | ||||||||
| Collective Trust Funds | — | 745.8 | — | 745.8 | ||||||||
| Mutual Funds | 92.4 | — | — | 92.4 | ||||||||
| Exchange Traded Fund | 0.1 | — | — | 0.1 | ||||||||
| Northern Trust Private Equity Funds | — | — | 25.5 | 25.5 | ||||||||
| Northern Trust Hedge Funds | — | — | 29.2 | 29.2 | ||||||||
| Cash and Other | 2.3 | — | — | 2.3 | ||||||||
| Total Assets at Fair Value | $ | 122.5 | $ | 1,202.9 | $ | 54.7 | $ | 1,380.1 |
The following table presents the changes in Level 3 assets for the years ended December 31, 2019 and 2018.
TABLE 121: CHANGE IN U.S. QUALIFIED PLAN LEVEL 3 ASSETS
| PRIVATE EQUITY FUNDS | HEDGE FUNDS | REAL ESTATE FUNDS | ||||||||||||||||
| (In Millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Fair Value at January 1 | $ | 25.5 | $ | 29.3 | $ | 29.2 | $ | 44.6 | $ | — | $ | — | ||||||
| Actual Return on Plan Assets(1) | (2.8 | ) | (1.5 | ) | 1.2 | (2.7 | ) | 0.2 | — | |||||||||
| Realized Gain | 7.4 | 8.7 | — | 2.4 | — | — | ||||||||||||
| Purchases | 0.1 | 0.3 | — | — | 46.1 | — | ||||||||||||
| Sales | (9.9 | ) | (11.3 | ) | (0.2 | ) | (15.1 | ) | — | — | ||||||||
| Fair Value at December 31 | $ | 20.3 | $ | 25.5 | $ | 30.2 | $ | 29.2 | $ | 46.3 | $ | — |
(1) The return on plan assets represents the change in the unrealized gain (loss) on assets still held at December 31.
| 144 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A building block approach is employed for Northern Trust’s U.S. Qualified Plan in determining the long-term rate of return for plan assets. Historical markets and long-term historical relationships between equities, fixed income and other asset classes are studied using the widely accepted capital market principle that assets with higher volatility generate a greater return over the long-run. Current market factors such as inflation expectations and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio rate of return is established with consideration given to diversification and rebalancing. The rate is reviewed against peer data and historical returns to verify the return is reasonable and appropriate. Based on this approach and the U.S. Qualified Plan’s target asset allocation, the expected long-term rate of return on assets as of the U.S. Qualified Plan’s December 31, 2019 measurement date was set at 5.25%.
Postretirement Health Care. Northern Trust maintains an unfunded postretirement health care plan under which those employees who retire at age 55 or older under the provisions of the U.S. defined benefit plan and had attained 15 years of service as of December 31, 2011 may be eligible for subsidized postretirement health care coverage. The provisions of this health care plan may be changed further at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time.
The following tables set forth the postretirement health care plan status and amounts included in AOCI at December 31, 2019 and 2018, the net periodic postretirement benefit cost of the plan for 2019 and 2018, and the change in the accumulated postretirement benefit obligation during 2019 and 2018.
TABLE 122: POSTRETIREMENT HEALTH CARE PLAN STATUS
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Accumulated Postretirement Benefit Obligation at Measurement Date: | ||||||
| Retirees and Dependents | $ | 25.2 | $ | 23.5 | ||
| Actives Eligible for Benefits | 3.6 | 4.6 | ||||
| Net Postretirement Benefit Obligation | $ | 28.8 | $ | 28.1 |
TABLE 123: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Net Actuarial (Gain) Loss | $ | (5.4 | ) | $ | (6.5 | ) |
| Prior Service Cost | — | — | ||||
| Gross Amount in Accumulated Other Comprehensive Income | (5.4 | ) | (6.5 | ) | ||
| Income Tax Effect | (1.4 | ) | (2.2 | ) | ||
| Net Amount in Accumulated Other Comprehensive Income | $ | (4.0 | ) | $ | (4.3 | ) |
TABLE 124: NET PERIODIC POSTRETIREMENT EXPENSE (BENEFIT)
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Service Cost | $ | — | $ | — | $ | 0.1 | |||
| Interest Cost | 1.2 | 1.3 | 1.4 | ||||||
| Expected Return on Plan Assets | — | — | — | ||||||
| Amortization | |||||||||
| Net Gain | (1.1 | ) | — | — | |||||
| Prior Service Benefit | — | — | — | ||||||
| Net Periodic Postretirement Expense | $ | 0.1 | $ | 1.3 | $ | 1.5 |
| 2019 Annual Report | Northern Trust Corporation 145 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 125: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
| FOR THE YEAR ENDED DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Beginning Balance | $ | 28.1 | $ | 34.4 | ||
| Service Cost | — | — | ||||
| Interest Cost | 1.2 | 1.3 | ||||
| Actuarial Loss (Gain) | 0.2 | (6.7 | ) | |||
| Net Claims Paid | (0.7 | ) | (0.9 | ) | ||
| Ending Balance | $ | 28.8 | $ | 28.1 |
Northern Trust uses the aggregate Pri-2012 mortality table with a 2012 base year and proposed future improvements under scale MP-2019, as released by the Society of Actuaries in October 2019. These assumptions were updated at December 31, 2019 from the aggregate table RP-2014 and improvement scale MP-2018.
TABLE 126: ESTIMATED FUTURE BENEFIT PAYMENTS
| (In Millions) | TOTAL POSTRETIREMENT MEDICAL BENEFITS | ||
| 2020 | $ | 2.5 | |
| 2021 | 2.4 | ||
| 2022 | 2.3 | ||
| 2023 | 2.2 | ||
| 2024 | 2.1 | ||
| 2025-2029 | 9.6 |
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 3.37% at December 31, 2019, and 4.47% at December 31, 2018. For measurement purposes, a 6.25% annual increase in the cost of pre-age 65 medical benefits and post-age 65 medical benefits were assumed for 2019. For drug claims, an 8.25% annual increase in cost was assumed for 2019. These rates are both assumed to gradually decrease until they reach 4.50% in 2027. The health care cost trend rate assumption has an effect on the amounts reported.
Defined Contribution Plans. The Corporation and its subsidiaries maintain various defined contribution plans covering substantially all employees. The Corporation’s contribution to the U.S. plan and to certain European-based plans includes a matching component. The expense associated with defined contribution plans is charged to employee benefits and totaled $57.6 million in 2019, $54.4 million in 2018, and $53.4 million in 2017.
Note 24 – Share-Based Compensation Plans
Northern Trust recognizes expense for the grant-date fair value of share-based compensation granted to employees and non-employee directors.
Total compensation expense for share-based payment arrangements to employees and the associated tax impacts were as follows for the periods presented.
TABLE 127: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS TO EMPLOYEES
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Restricted Stock Unit Awards | $ | 81.4 | $ | 96.3 | $ | 87.3 | |||
| Stock Options | 1.4 | 2.6 | 9.0 | ||||||
| Performance Stock Units | 25.1 | 32.0 | 31.7 | ||||||
| Total Share-Based Compensation Expense | $ | 107.9 | $ | 130.9 | $ | 128.0 | |||
| Tax Benefits Recognized | $ | 26.7 | $ | 32.5 | $ | 48.7 |
| 146 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019, there was $77.7 million of unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Corporation’s share-based compensation plans. That cost is expected to be recognized as expense over a weighted-average period of approximately two years.
The Northern Trust Corporation 2017 Long-Term Incentive Plan (2017 Plan) is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. All employees of the Corporation and its subsidiaries and all directors of the Corporation are eligible to receive awards under the 2017 Plan. The 2017 Plan provides for the grant of non-qualified and incentive stock options; tandem and free-standing stock appreciation rights; stock awards in the form of restricted stock, restricted stock units and other stock awards; and performance awards.
Beginning with grants made on February 21, 2017 under the Northern Trust Corporation 2012 Stock Plan (2012 Plan), restricted stock unit and performance stock unit grants continue to vest in accordance with the original terms of the award if the applicable employee retires after satisfying applicable age and service requirements. For all applicable periods, stock option grants continue to vest in accordance with the original terms of the award if the employee meets applicable age and service requirements upon separation from service.
Grants are outstanding under the 2017 Plan, the 2012 Plan, and the Amended and Restated Northern Trust Corporation 2002 Stock Plan (2002 Plan). The 2017 Plan was approved by stockholders in April 2017. Upon approval of the 2017 Plan, no additional shares have been or will be granted under the 2012 Plan or 2002 Plan. The total number of shares of the Corporation’s common stock authorized for issuance under the 2017 Plan is 20,000,000 plus shares forfeited under the 2012 Plan and 2002 Plan. As of December 31, 2019, shares available for future grant under the 2017 Plan, including shares forfeited under the 2012 Plan and 2002 Plan, totaled 18,234,658.
The following describes Northern Trust’s share-based payment arrangements and applies to awards under the 2017 Plan, 2012 Plan and the 2002 Plan, as applicable.
Stock Options. Stock options consist of options to purchase common stock at prices not less than 100% of the fair value thereof on the date the options are granted. Options have a maximum 10 year life and generally vest and become exercisable in 1 year to 4 years after the date of grant. All options terminate at such time as determined by the Committee and as provided in the terms and conditions of the respective option grants.
There were no options granted during the years ended December 31, 2019 and 2018. The weighted-average assumptions used for options granted during the year ended December 31, 2017 are as follows:
TABLE 128: WEIGHTED-AVERAGE ASSUMPTIONS USED FOR OPTIONS GRANTED
| 2017 | ||
| Expected Term (in Years) | 6.9 | |
| Dividend Yield | 1.81 | % |
| Expected Volatility | 23.2 | |
| Risk-Free Interest Rate | 2.11 |
The expected term of options represents the period of time options granted are expected to be outstanding based primarily on the historical exercise behavior attributable to previous option grants. Dividend yield represents the estimated yield from dividends paid on the Corporation’s common stock over the expected term of the options. Expected volatility is determined based on a combination of the historical volatility of Northern Trust’s stock price and the implied volatility of traded options on Northern Trust stock. The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.
| 2019 Annual Report | Northern Trust Corporation 147 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about stock options granted, vested, and exercised in the years ended December 31, 2019, 2018, and 2017.
TABLE 129: STOCK OPTIONS GRANTED, VESTED, AND EXERCISED
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions, Except Per Share Information) | 2019 | 2018 | 2017 | ||||||
| Weighted Average Grant-Date Per Share Fair Value of Stock Options Granted | $ | — | $ | — | $ | 19.18 | |||
| Grant-Date Fair Value of Stock Options Vested | 6.6 | 8.1 | 7.3 | ||||||
| Stock Options Exercised | |||||||||
| Intrinsic Value as of Exercise Date | 35.4 | 28.5 | 74.7 | ||||||
| Cash Received | 44.0 | 32.6 | 108.0 | ||||||
| Tax Deduction Benefits Realized | 35.2 | 27.7 | 73.1 |
The following is a summary of changes in nonvested stock options for the year ended December 31, 2019.
TABLE 130: CHANGES IN NONVESTED STOCK OPTIONS
| NONVESTED OPTIONS | SHARES | WEIGHTED- AVERAGE GRANT-DATE FAIR VALUE PER SHARE | |||
| Nonvested at December 31, 2018 | 757,738 | $ | 17.36 | ||
| Granted | — | — | |||
| Vested | (372,799 | ) | 17.26 | ||
| Forfeited or Cancelled | — | — | |||
| Nonvested at December 31, 2019 | 384,939 | $ | 17.45 |
A summary of the status of stock options at December 31, 2019, and changes during the year then ended, are presented in the table below.
TABLE 131: STATUS OF STOCK OPTIONS AND CHANGES
| ($ In Millions Except Per Share Information) | SHARES | WEIGHTED AVERAGE EXERCISE PRICE PER SHARE | WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (YEARS) | AGGREGATE INTRINSIC VALUE | |||||
| Options Outstanding, December 31, 2018 | 2,481,061 | $ | 61.90 | ||||||
| Granted | — | — | |||||||
| Exercised | (786,931 | ) | 55.91 | ||||||
| Forfeited, Expired or Cancelled | 2,806 | 53.10 | |||||||
| Options Outstanding, December 31, 2019 | 1,696,936 | $ | 64.77 | 4.1 | $ | 70.4 | |||
| Options Exercisable, December 31, 2019 | 1,311,997 | $ | 61.42 | 3.8 | $ | 58.5 |
Restricted Stock Unit Awards. Restricted stock unit awards may be granted to participants which entitle them to receive a payment in the Corporation’s common stock or cash and such other terms and conditions as the Committee deems appropriate. Each restricted stock unit provides the recipient the opportunity to receive one share of stock for each stock unit that vests. The restricted stock units granted in 2019 predominately vest at a rate equal to 25% each year for four years on the anniversary of the first day of the month following the month in which the grant date falls. Restricted stock unit grants totaled 855,112, 815,314, and 863,308, with weighted average grant-date fair values of $91.89, $103.74, and $88.19 per share, for the years ended December 31, 2019, 2018, and 2017, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2019, 2018, and 2017, was $89.3 million, $66.4 million, and $88.7 million, respectively.
A summary of the status of outstanding restricted stock unit awards at December 31, 2019, and changes during the year then ended, is presented in the following table.
| 148 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 132: OUTSTANDING RESTRICTED STOCK UNIT AWARDS
| ($ In Millions) | NUMBER | AGGREGATE INTRINSIC VALUE | |||
| Restricted Stock Unit Awards Outstanding, December 31, 2018 | 3,121,842 | $ | 261.0 | ||
| Granted | 855,112 | ||||
| Distributed | (1,271,190 | ) | |||
| Forfeited | (61,002 | ) | |||
| Restricted Stock Unit Awards Outstanding, December 31, 2019 | 2,644,762 | $ | 281.0 | ||
| Units Convertible, December 31, 2019 | 23,435 | $ | 2.5 |
The following is a summary of nonvested restricted stock unit awards at December 31, 2019, and changes during the year then ended.
TABLE 133: NONVESTED RESTRICTED STOCK UNIT AWARDS
| NONVESTED RESTRICTED STOCK UNITS | NUMBER | WEIGHTED AVERAGE GRANT- DATE FAIR VALUE PER UNIT | WEIGHTED AVERAGE REMAINING VESTING TERM (YEARS) | |||
| Nonvested at December 31, 2018 | 2,977,120 | $ | 79.92 | 1.9 | ||
| Granted | 855,112 | 91.89 | ||||
| Vested | (1,147,020 | ) | 72.17 | |||
| Forfeited | (61,002 | ) | 77.64 | |||
| Nonvested at December 31, 2019 | 2,624,210 | $ | 87.26 | 1.7 |
Performance Stock Units. Each performance stock unit provides the recipient the opportunity to receive one share of the Corporation’s common stock for each stock unit at the end of a three-year performance period, subject to the attainment of specified performance targets that are a function of return on equity. For performance stock units outstanding as of December 31, 2019, and granted in 2017, 2018, or 2019, the number of such units that may vest ranges from 0% to 150% of the original award granted based on the attainment of the applicable 3-year average annual return on equity target. Distribution of the shares is then made after vesting.
Performance stock unit grants totaled 213,044, 242,232, and 231,269 for the years ended December 31, 2019, 2018, and 2017, respectively, with weighted average grant-date fair values of $93.00, $104.72, and $69.80. Performance stock units outstanding at target level performance totaled 667,741, 797,531, and 817,432 at December 31, 2019, 2018, and 2017, respectively. Performance stock units had aggregate intrinsic values of $70.9 million, $66.7 million, and $81.7 million, and weighted average remaining vesting terms of 1.0 year, 1.0 year, and 1.1 years, at December 31, 2019, 2018, and 2017, respectively.
Non-employee Director Stock Awards. Stock units with total values of $1.3 million (14,232 units), $1.2 million (11,363 units), and $1.2 million (13,354 units) were granted to non-employee directors in 2019, 2018, and 2017, respectively, which vest or vested on the date of the annual meeting of the Corporation’s stockholders in the following years. Total expense recognized on these grants was $1.4 million, $1.3 million, and $1.3 million in 2019, 2018, and 2017, respectively. Stock units granted to non-employee directors do not have voting rights. Each stock unit entitles a director to one share of common stock at vesting, unless a director elects to defer receipt of the shares. Directors may elect to defer the payment of their annual stock unit grant and cash-based compensation until termination of services as director. Deferred cash compensation is converted into stock units representing shares of common stock of the Corporation. Distributions of deferred stock units are made in stock. For compensation deferred prior to January 1, 2018, distributions of the stock unit accounts that relate to cash-based compensation are made in cash based on the fair value of the stock units at the time of distribution. For compensation deferred on or after January 1, 2018, distributions of the stock unit accounts that relate to cash-based compensation are made in stock.
Note 25 – Cash-Based Compensation Plans
Various incentive plans provide for cash incentives and bonuses to selected employees based upon accomplishment of corporate net income objectives, goals of the reporting segments and support functions, and individual performance. The provision for awards under these plans is charged to compensation expense and totaled $326.1 million in 2019, $326.5 million in 2018, and $289.8 million in 2017.
| 2019 Annual Report | Northern Trust Corporation 149 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26 – Contingent Liabilities
Legal Proceedings. In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to pending and threatened legal actions, and are subject to regulatory examinations, information-gathering requests, investigations, and proceedings, both formal and informal. In certain legal actions, claims for substantial monetary damages are asserted. In regulatory matters, claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought.
Based on current knowledge, after consultation with legal counsel and after taking into account current accruals, management does not believe that losses, fines or penalties, if any, arising from pending litigation or threatened legal actions or regulatory matters either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although such matters could have a material adverse effect on the Corporation’s operating results for a particular period.
Under GAAP, (i) an event is “probable” if the “future event or events are likely to occur”; (ii) an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely”; and (iii) an event is “remote” if “the chance of the future event or events occurring is slight.”
The outcome of litigation and regulatory matters is inherently difficult to predict and/or the range of loss often cannot be reasonably estimated, particularly for matters that (i) will be decided by a jury, (ii) are in early stages, (iii) involve uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iv) are subject to appeals or motions, (v) involve significant factual issues to be resolved, including with respect to the amount of damages, (vi) do not specify the amount of damages sought or (vii) seek very large damages based on novel and complex damage and liability legal theories. Accordingly, the Corporation cannot reasonably estimate the eventual outcome of these pending matters, the timing of their ultimate resolution or what the eventual loss, fines or penalties, if any, related to each pending matter will be.
In accordance with applicable accounting guidance, the Corporation records accruals for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Corporation does not record accruals. No material accruals have been recorded for pending litigation or threatened legal actions or regulatory matters.
For a limited number of matters for which a loss is reasonably possible in future periods, whether in excess of an accrued liability or where there is no accrued liability, the Corporation is able to estimate a range of possible loss. As of December 31, 2019, the Corporation has estimated the range of reasonably possible loss for these matters to be from zero to approximately $20 million in the aggregate. The Corporation’s estimate with respect to the aggregate range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.
In certain other pending matters, there may be a range of reasonably possible loss (including reasonably possible loss in excess of amounts accrued) that cannot be reasonably estimated for the reasons described above. Such matters are not included in the estimated range of reasonably possible loss discussed above.
In 2015, Northern Trust Fiduciary Services (Guernsey) Limited (NTFS), an indirect subsidiary of the Corporation, was charged by a French investigating magistrate judge with complicity in estate tax fraud in connection with the administration of two trusts for which it serves as trustee. Charges also were brought against a number of other persons and entities related to this matter. In 2017, a French court found no estate tax fraud had occurred and NTFS and all other persons and entities charged were acquitted. The Public Prosecutor’s Office of France appealed the court decision and in June 2018 a French appellate court issued its opinion on the matter, acquitting all persons and entities charged, including NTFS. The Public Prosecutor’s Office of France has appealed the appellate court’s decision to the Cour de Cassation, the highest court in France. As trustee, NTFS provided no tax advice and had no involvement in the preparation or filing of the challenged estate tax filings.
Visa Class B Common Shares. Northern Trust, as a member of Visa U.S.A. Inc. (Visa U.S.A.) and in connection with the 2007 restructuring of Visa U.S.A. and its affiliates and the 2008 initial public offering of Visa Inc. (Visa), received certain Visa Class B common shares. The Visa Class B common shares are subject to certain selling restrictions until the final resolution of certain litigation related to interchange fees involving Visa (the covered litigation), at which time the shares are convertible into Visa Class A common shares based on a conversion rate dependent upon the ultimate cost of resolving the covered litigation. On June 28, 2018, and September 27, 2019, Visa deposited an additional $600 million and $300 million, respectively, into an escrow account previously established with respect to the covered litigation. As a result of the additional contributions to the escrow account, the rate at which Visa Class B common shares will convert into Visa Class A common shares was reduced.
| 150 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2018, Visa reached a proposed class settlement agreement covering damage claims but not injunctive relief claims regarding the covered litigation. In December 2019, the district court granted final approval for the proposed class settlement agreement. Certain merchants have opted out of the class settlement and are pursuing claims separately, while other merchants have appealed the approval order granted by the district court. The ultimate resolution of the covered litigation, the timing for removal of the selling restrictions on the Visa Class B common shares and the rate at which such shares will ultimately convert into Visa Class A common shares are uncertain.
In June 2016 and 2015, Northern Trust recorded a $123.1 million and $99.9 million net gain on the sale of 1.1 million and 1.0 million of its Visa Class B common shares, respectively. These sales do not affect Northern Trust’s risk related to the impact of the covered litigation on the rate at which such shares will ultimately convert into Visa Class A common shares. Northern Trust continued to hold approximately 4.1 million Visa Class B common shares, which are recorded at their original cost basis of zero, as of both December 31, 2019 and 2018.
Clearing and Settlement Organizations. The Bank is a participating member of various cash, securities, and foreign exchange clearing and settlement organizations. It participates in these organizations on behalf of its clients and on its own behalf as a result of its own activities. A wide variety of cash and securities transactions are settled through these organizations, including those involving obligations of states and political subdivisions, asset-backed securities, commercial paper, dollar placements, and securities issued by the Government National Mortgage Association.
As a result of its participation in cash, securities, and foreign exchange clearing and settlement organizations, the Bank could be responsible for a pro rata share of certain credit-related losses arising out of the clearing activities. The method in which such losses would be shared by the clearing members is stipulated in each clearing organization’s membership agreement. Credit exposure related to these agreements varies from day to day, primarily as a result of fluctuations in the volume of transactions cleared through the organizations. At December 31, 2019 and 2018, we have not recorded any material liabilities under these arrangements. Controls related to these clearing transactions are closely monitored by management to protect the assets of Northern Trust and its clients.
Note 27 – Derivative Financial Instruments
Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients, as part of its trading activity for its own account; and as part of its risk management activities. These instruments may include foreign exchange contracts, interest rate contracts, total return swap contracts, and swaps related to the sale of certain Visa Class B common shares. Please refer to Note 1, “Summary of Significant Accounting Policies” for the significant accounting policies for derivative financial instruments.
Foreign exchange contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients. Foreign exchange contracts are also used for trading and risk management purposes. For risk management purposes, Northern Trust uses foreign exchange contracts to reduce its exposure to changes in foreign exchange rates relating to certain forecasted non-functional currency denominated revenue and expenditure transactions, foreign-currency- denominated assets and liabilities, including debt securities and net investments in non-U.S. affiliates.
Interest rate contracts include swap and option contracts. Interest rate swap contracts involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Northern Trust enters into interest rate swap contracts with its clients and also may utilize such contracts to reduce or eliminate the exposure to changes in the cash flows or fair value of hedged assets or liabilities due to changes in interest rates. Interest rate option contracts may include caps, floors, collars and swaptions, and provide for the transfer or reduction of interest rate risk, typically in exchange for a fee. Northern Trust enters into option contracts as a seller of interest rate protection to clients. Northern Trust receives a fee at the outset of the agreement for the assumption of the risk of an unfavorable change in interest rates. This assumed interest rate risk is then mitigated by entering into an offsetting position with an outside counterparty. Northern Trust may also purchase or enter into option contracts for risk management purposes including to reduce the exposure to changes in the cash flows of hedged assets due to changes in interest rates.
| 2019 Annual Report | Northern Trust Corporation 151 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the notional and fair values of all derivative financial instruments as of December 31, 2019 and 2018.
TABLE 134: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
| DECEMBER 31, 2019 | DECEMBER 31, 2018 | |||||||||||||||||
| FAIR VALUE | FAIR VALUE | |||||||||||||||||
| (In Millions) | NOTIONAL VALUE | ASSET**(1)** | LIABILITY**(2)** | NOTIONAL VALUE | ASSET(1) | LIABILITY(2) | ||||||||||||
| Derivatives Designated as Hedging under GAAP | ||||||||||||||||||
| Interest Rate Contracts | ||||||||||||||||||
| Fair Value Hedges | $ | 4,538.2 | $ | 20.3 | $ | 20.9 | $ | 4,590.4 | $ | 29.8 | $ | 23.3 | ||||||
| Cash Flow Hedges | 200.0 | 0.2 | 0.2 | 600.0 | 0.2 | 1.2 | ||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||
| Cash Flow Hedges | 1,661.5 | 8.5 | 11.5 | 2,648.2 | 13.8 | 57.8 | ||||||||||||
| Net Investment Hedges | 2,873.8 | 73.7 | 11.9 | 3,475.1 | 292.4 | 14.5 | ||||||||||||
| Total Derivatives Designated as Hedging under GAAP | $ | 9,273.5 | $ | 102.7 | $ | 44.5 | $ | 11,313.7 | $ | 336.2 | $ | 96.8 | ||||||
| Derivatives Not Designated as Hedging under GAAP | ||||||||||||||||||
| Non-Designated Risk Management Derivatives | ||||||||||||||||||
| Foreign Exchange Contracts | $ | 176.5 | $ | 0.9 | $ | 0.7 | $ | 122.2 | $ | 0.5 | $ | 0.2 | ||||||
| Other Financial Derivatives(3) | 640.3 | — | 33.4 | 483.4 | 1.3 | 32.8 | ||||||||||||
| Total Non-Designated Risk Management Derivatives | $ | 816.8 | $ | 0.9 | $ | 34.1 | $ | 605.6 | $ | 1.8 | $ | 33.0 | ||||||
| Client-Related and Trading Derivatives | ||||||||||||||||||
| Foreign Exchange Contracts | $ | 291,533.6 | $ | 3,151.7 | $ | 3,158.1 | $ | 281,864.4 | $ | 2,159.4 | $ | 2,190.0 | ||||||
| Interest Rate Contracts | 8,976.8 | 132.4 | 76.3 | 7,711.2 | 66.1 | 68.6 | ||||||||||||
| Total Client-Related and Trading Derivatives | $ | 300,510.4 | $ | 3,284.1 | $ | 3,234.4 | $ | 289,575.6 | $ | 2,225.5 | $ | 2,258.6 | ||||||
| Total Derivatives Not Designated as Hedging under GAAP | $ | 301,327.2 | $ | 3,285.0 | $ | 3,268.5 | $ | 290,181.2 | $ | 2,227.3 | $ | 2,291.6 | ||||||
| Total Gross Derivatives | $ | 310,600.7 | $ | 3,387.7 | $ | 3,313.0 | $ | 301,494.9 | $ | 2,563.5 | $ | 2,388.4 | ||||||
| Less: Netting(4) | 2,338.0 | 1,618.4 | 1,357.1 | 1,796.3 | ||||||||||||||
| Total Derivative Financial Instruments | $ | 1,049.7 | $ | 1,694.6 | $ | 1,206.4 | $ | 592.1 |
(1) Derivative assets are reported in Other Assets on the consolidated balance sheets.
(2) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets.
(3) This line includes swaps related to sales of certain Visa Class B common shares and total return swap contracts.
(4) See further detail in Note 28, "Offsetting of Assets and Liabilities."
Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheets. They are used merely to express the volume of this activity. Northern Trust’s credit-related risk of loss is limited to the positive fair value of the derivative instrument, net of any collateral received, which is significantly less than the notional amount.
Hedging Derivative Instruments Designated under GAAP. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, and equity price. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value, cash flow or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and changes in fair value are recognized currently in other operating income (see below section “Derivative Instruments Not Designated as Hedging under GAAP”).
Fair Value Hedges. Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates.
Cash Flow Hedges. Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates.
There were no material gains or losses reclassified into earnings during the years ended December 31, 2019, 2018, and 2017 as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated that net losses of $2.9 million and net gains of $2.7 million will be reclassified into net income within the next twelve months
| 152 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
relating to cash flow hedges of foreign-currency-denominated transactions and cash flow hedges of foreign-currency-denominated debt securities, respectively. It is estimated that a net loss of $0.1 million will be reclassified into net income upon the receipt of interest payments on earning assets within the next twelve months relating to cash flow hedges of available for sale debt securities. As of December 31, 2019, 23 months was the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign-currency-denominated transactions was being hedged. There was no ineffectiveness recognized in earnings for cash flow hedges during the year ended December 31, 2017.
The following table provides fair value and cash flow hedge derivative gains and losses recognized in income during the years ended December 31, 2019, 2018 and 2017.
TABLE 135: LOCATION AND AMOUNT OF FAIR VALUE AND CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECORDED IN INCOME
| (in Millions) | INTEREST INCOME | INTEREST EXPENSE | OTHER OPERATING INCOME | OTHER OPERATING EXPENSE | ||||||||||||||||||||||||||||||||||||
| For the Year Ended December 31, | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
| Total amounts on the consolidated statements of income | $ | 2,499.9 | $ | 2,321.4 | $ | 1,769.4 | $ | 822.0 | $ | 698.7 | $ | 340.2 | $ | 145.5 | $ | 127.5 | $ | 157.5 | $ | 329.8 | $ | 330.6 | $ | 331.6 | ||||||||||||||||
| Gains (Losses) on fair value hedges recognized on | ||||||||||||||||||||||||||||||||||||||||
| Interest Rate Contracts | ||||||||||||||||||||||||||||||||||||||||
| Recognized on derivatives | (95.9 | ) | 13.9 | 8.8 | 99.4 | (9.5 | ) | (24.3 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||
| Recognized on hedged items | 95.9 | (13.9 | ) | (8.8 | ) | (99.4 | ) | 9.5 | 24.3 | — | — | — | — | — | — | |||||||||||||||||||||||||
| Amounts related to interest settlements on derivatives | 21.2 | 17.8 | (9.6 | ) | 5.2 | 7.9 | 27.7 | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Total gains (losses) recognized on fair value hedges | $ | 21.2 | $ | 17.8 | $ | (9.6 | ) | $ | 5.2 | $ | 7.9 | $ | 27.7 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Gains (Losses) on cash flow hedges recognized on | ||||||||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||||||||||||||||||||||||
| Net gains (losses) reclassified from AOCI to net income | 26.4 | 67.4 | 19.3 | — | — | — | 0.8 | 3.9 | 5.0 | — | — | (0.1 | ) | |||||||||||||||||||||||||||
| Interest Rate Contracts | ||||||||||||||||||||||||||||||||||||||||
| Net gains (losses) reclassified from AOCI to net income | (0.5 | ) | (0.2 | ) | 0.3 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Total gains (losses) reclassified from AOCI to net income on cash flow hedges | $ | 25.9 | $ | 67.2 | $ | 19.6 | $ | — | $ | — | $ | — | $ | 0.8 | $ | 3.9 | $ | 5.0 | $ | — | $ | — | $ | (0.1 | ) |
| 2019 Annual Report | Northern Trust Corporation 153 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged items as of December 31, 2019 and 2018.
TABLE 136: HEDGED ITEMS IN FAIR VALUE HEDGES
| DECEMBER 31, 2019 | DECEMBER 31, 2018 | |||||||||||||
| (In Millions) | CARRYING VALUE OF THE HEDGED ITEMS | CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT**(1)** | CARRYING VALUE OF THE HEDGED ITEMS | CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(2) | ||||||||||
| Available for Sale Debt Securities(3) | $ | 2,981.0 | $ | 3.3 | $ | 3,831.6 | $ | 99.4 | ||||||
| Senior Notes and Long-Term Subordinated Debt | 1,748.5 | 126.9 | 1,248.8 | 29.3 | ||||||||||
| Total | $ | 4,729.5 | $ | 130.2 | $ | 5,080.4 | $ | 128.7 |
(1) The cumulative hedge accounting basis adjustment includes $1.5 million related to discontinued hedging relationships of available for sale debt securities as of December 31, 2019*. There are* no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31, 2019*.*
(2) There are no amounts related to discontinued hedging relationships as of December 31, 2018*.*
(3) Carrying value represents amortized cost.
Net Investment Hedges. Certain foreign exchange contracts are designated as net investment hedges to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. Net investment hedge gains of $59.7 million and $173.0 million were recognized in AOCI related to foreign exchange contracts for the years ended December 31, 2019 and 2018, respectively. There was no ineffectiveness recognized in earnings for net investment hedges during the year ended December 31, 2017.
Derivative Instruments Not Designated as Hedging under GAAP. Northern Trust’s derivative instruments that are not designated as hedging under GAAP include derivatives for purposes of client-related and trading activities, as well as other risk management purposes. These activities consist principally of providing foreign exchange services to clients in connection with Northern Trust’s global custody business. However, in the normal course of business, Northern Trust also engages in trading of currencies for its own account.
Non-designated risk management derivatives include foreign exchange contracts entered into to manage the foreign currency risk of non-U.S.-dollar-denominated assets and liabilities, the net investment in certain non-U.S. affiliates, commercial loans, and forecasted foreign-currency-denominated transactions. Swaps related to sales of certain Visa Class B common shares were entered into pursuant to which Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into Visa Class A common shares. Total return swaps are entered into to manage the equity price risk associated with certain investments.
Changes in the fair value of derivative instruments not designated as hedges under GAAP are recognized currently in income. The following table provides the location and amount of gains and losses recorded in the consolidated statements of income for the years ended December 31, 2019, 2018, and 2017 for derivative instruments not designated as hedges under GAAP.
TABLE 137: LOCATION AND AMOUNT OF GAINS AND LOSSES RECORDED IN INCOME FOR DERIVATIVES NOT DESIGNATED AS HEDGING UNDER GAAP
| (In Millions) | DERIVATIVE GAINS (LOSSES) LOCATION RECOGNIZED IN INCOME | AMOUNT OF DERIVATIVE GAINS (LOSSES) RECOGNIZED IN INCOME | ||||||||
| 2019 | 2018 | 2017 | ||||||||
| Non-designated risk management derivatives | ||||||||||
| Foreign Exchange Contracts | Other Operating Income | $ | (1.6 | ) | $ | (4.1 | ) | $ | 8.2 | |
| Other Financial Derivatives(1) | Other Operating Income | (20.0 | ) | (19.2 | ) | (13.3 | ) | |||
| Gains (Losses) from non-designated risk management derivatives | $ | (21.6 | ) | $ | (23.3 | ) | $ | (5.1 | ) | |
| Client-related and trading derivatives | ||||||||||
| Foreign Exchange Contracts | Foreign Exchange Trading Income | 250.9 | 307.2 | 209.9 | ||||||
| Interest Rate Contracts | Security Commissions and Trading Income | 12.9 | 7.7 | 10.7 | ||||||
| Gains (Losses) from client-related and trading derivatives | $ | 263.8 | $ | 314.9 | $ | 220.6 | ||||
| Total gains (losses) from derivatives not designated as hedging under GAAP | $ | 242.2 | $ | 291.6 | $ | 215.5 |
(1) This line includes swaps related to the sale of certain Visa Class B common shares and total return swap contracts.
| 154 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 28 – Offsetting of Assets and Liabilities
The following table provides information regarding the offsetting of derivative assets and of securities purchased under agreements to resell within the consolidated balance sheets as of December 31, 2019 and 2018.
TABLE 138: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
| December 31, 2019 | |||||||||||||||
| (In Millions) | GROSS RECOGNIZED ASSETS | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(2) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET | NET AMOUNT**(4)** | ||||||||||
| Derivative Assets (1) | |||||||||||||||
| Foreign Exchange Contracts Over the Counter (OTC) | $ | 2,691.1 | $ | 2,334.1 | $ | 357.0 | $ | 16.5 | $ | 340.5 | |||||
| Interest Rate Swaps OTC | 151.9 | 3.9 | 148.0 | — | 148.0 | ||||||||||
| Interest Rate Swaps Exchange Cleared | 1.0 | — | 1.0 | — | 1.0 | ||||||||||
| Total Derivatives Subject to a Master Netting Arrangement | 2,844.0 | 2,338.0 | 506.0 | 16.5 | 489.5 | ||||||||||
| Total Derivatives Not Subject to a Master Netting Arrangement | 543.7 | — | 543.7 | 0.3 | 543.4 | ||||||||||
| Total Derivatives | 3,387.7 | 2,338.0 | 1,049.7 | 16.8 | 1,032.9 | ||||||||||
| Securities Purchased under Agreements to Resell (3) | $ | 707.8 | $ | — | $ | 707.8 | $ | 707.8 | $ | — |
| December 31, 2018 | |||||||||||||||
| (In Millions) | GROSS RECOGNIZED ASSETS | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(2) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET | NET AMOUNT(4) | ||||||||||
| Derivative Assets (1) | |||||||||||||||
| Foreign Exchange Contracts OTC | $ | 1,902.3 | $ | 1,308.8 | $ | 593.5 | $ | 12.7 | $ | 580.8 | |||||
| Interest Rate Swaps OTC | 71.6 | 22.6 | 49.0 | — | 49.0 | ||||||||||
| Interest Rate Swaps Exchange Cleared | 24.5 | 24.4 | 0.1 | — | 0.1 | ||||||||||
| Other Financial Derivative | 1.3 | 1.3 | — | — | — | ||||||||||
| Total Derivatives Subject to a Master Netting Arrangement | 1,999.7 | 1,357.1 | 642.6 | 12.7 | 629.9 | ||||||||||
| Total Derivatives Not Subject to a Master Netting Arrangement | 563.8 | — | 563.8 | 2.7 | 561.1 | ||||||||||
| Total Derivatives | 2,563.5 | 1,357.1 | 1,206.4 | 15.4 | 1,191.0 | ||||||||||
| Securities Purchased under Agreements to Resell(3) | $ | 1,031.2 | $ | — | $ | 1,031.2 | $ | 1,031.2 | $ | — |
(1) Derivative assets are reported in Other Assets in the consolidated balance sheets. Other Assets (excluding derivative assets) totaled $7.4 billion and $4.6 billion as of December 31, 2019 and 2018*, respectively.*
(2) Including cash collateral received from counterparties.
(3) Securities purchased under agreements to resell are reported in federal funds sold and securities purchased under agreements to resell in the consolidated balance sheets. Federal funds sold totaled $5.0 million and $134.0 million as of December 31, 2019 and 2018*, respectively.*
(4) Northern Trust did not possess any cash collateral that was not offset in the consolidated balance sheets that could have been used to offset the net amounts presented in the consolidated balance sheets as of December 31, 2019 and 2018*.*
| 2019 Annual Report | Northern Trust Corporation 155 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information regarding the offsetting of derivative liabilities and of securities sold under agreements to repurchase within the consolidated balance sheets as of December 31, 2019 and 2018.
TABLE 139: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
| December 31, 2019 | |||||||||||||||
| (In Millions) | GROSS RECOGNIZED LIABILITIES | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(2) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET | NET AMOUNT**(3)** | ||||||||||
| Derivative Liabilities (1) | |||||||||||||||
| Foreign Exchange Contracts OTC | $ | 2,181.6 | $ | 1,548.6 | $ | 633.0 | $ | 0.1 | $ | 632.9 | |||||
| Interest Rate Swaps OTC | 96.7 | 57.3 | 39.4 | — | 39.4 | ||||||||||
| Interest Rate Swaps Exchange Cleared | 0.7 | — | 0.7 | — | 0.7 | ||||||||||
| Other Financial Derivatives | 33.4 | 12.5 | 20.9 | — | 20.9 | ||||||||||
| Total Derivatives Subject to a Master Netting Arrangement | 2,312.4 | 1,618.4 | 694.0 | 0.1 | 693.9 | ||||||||||
| Total Derivatives Not Subject to a Master Netting Arrangement | 1,000.6 | — | 1,000.6 | — | 1,000.6 | ||||||||||
| Total Derivatives | 3,313.0 | 1,618.4 | 1,694.6 | 0.1 | 1,694.5 | ||||||||||
| Securities Sold under Agreements to Repurchase | $ | 489.7 | $ | — | $ | 489.7 | $ | 489.7 | $ | — |
| December 31, 2018 | |||||||||||||||
| (In Millions) | GROSS RECOGNIZED LIABILITIES | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(2) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET | NET AMOUNT(3) | ||||||||||
| Derivative Liabilities (1) | |||||||||||||||
| Foreign Exchange Contracts OTC | $ | 1,821.0 | $ | 1,751.7 | $ | 69.3 | $ | — | $ | 69.3 | |||||
| Interest Rate Swaps OTC | 68.8 | 19.0 | 49.8 | — | 49.8 | ||||||||||
| Interest Rate Swaps Exchange Cleared | 24.4 | 24.4 | — | — | — | ||||||||||
| Other Financial Derivatives | 32.8 | 1.2 | 31.6 | — | 31.6 | ||||||||||
| Total Derivatives Subject to a Master Netting Arrangement | 1,947.0 | 1,796.3 | 150.7 | — | 150.7 | ||||||||||
| Total Derivatives Not Subject to a Master Netting Arrangement | 441.4 | — | 441.4 | — | 441.4 | ||||||||||
| Total Derivatives | 2,388.4 | 1,796.3 | 592.1 | — | 592.1 | ||||||||||
| Securities Sold under Agreements to Repurchase | $ | 168.3 | $ | — | $ | 168.3 | $ | 168.3 | $ | — |
(1) Derivative liabilities are reported in Other Liabilities in the consolidated balance sheets. Other Liabilities (excluding derivative liabilities) totaled $3.1 billion and $2.5 billion as of December 31, 2019 and 2018*, respectively.*
(2) Including cash collateral deposited with counterparties.
(3) Northern Trust did not place any cash collateral with counterparties that was not offset in the consolidated balance sheets that could have been used to offset the net amounts presented in the consolidated balance sheets as of December 31, 2019 and 2018*.*
All of Northern Trust’s securities sold under agreements to repurchase (repurchase agreements) and securities purchased under agreements to resell (reverse repurchase agreements) involve the transfer of financial assets in exchange for cash subject to a right and obligation to repurchase those assets for an agreed upon amount. In the event of a repurchase failure, the cash or financial assets are available for offset. All of Northern Trust’s repurchase agreements and reverse repurchase agreements are subject to a master netting arrangement, which sets forth the rights and obligations for repurchase and offset. Under the master netting arrangement, Northern Trust is entitled to set off receivables from and collateral placed with a single counterparty against obligations owed to that counterparty. In addition, collateral held by Northern Trust can be offset against receivables from that counterparty. However, Northern Trust’s repurchase agreements and reverse repurchase agreements do not meet the requirements to net under GAAP.
Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally enforceable master netting arrangements or similar agreements exist. Derivative assets and liabilities can be further offset by cash collateral received from, and deposited with, the transacting counterparty. The basis for this view is that, upon termination of transactions subject to a master netting arrangement or similar agreement, the individual derivative receivables do not
| 156 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
represent resources to which general creditors have rights and individual derivative payables do not represent claims that are equivalent to the claims of general creditors.
Credit risk associated with derivative instruments relates to the failure of the counterparty and the failure of Northern Trust to pay based on the contractual terms of the agreement, and is generally limited to the unrealized fair value gains and losses on these instruments, net of any collateral received or deposited. The amount of credit risk will increase or decrease during the lives of the instruments as interest rates, foreign exchange rates, or equity prices fluctuate. Northern Trust’s risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Credit Support Annexes and other similar agreements are currently in place with a number of Northern Trust’s counterparties which mitigate the aforementioned credit risk associated with derivative activity conducted with those counterparties by requiring that significant net unrealized fair value gains be supported by collateral placed with Northern Trust.
Additional cash collateral received from and deposited with derivative counterparties totaling $196.3 million and $2.0 million, respectively, as of December 31, 2019, and $27.6 million and $91.5 million, respectively, as of December 31, 2018, was not offset against derivative assets and liabilities on the consolidated balance sheets as the amounts exceeded the net derivative positions with those counterparties.
Certain master netting arrangements Northern Trust enters into with derivative counterparties contain credit risk-related contingent features in which the counterparty has the option to declare Northern Trust in default and accelerate cash settlement of net derivative liabilities with the counterparty in the event Northern Trust’s credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position was $766.2 million and $324.1 million at December 31, 2019 and 2018, respectively. Cash collateral amounts deposited with derivative counterparties on those dates included $327.1 million and $316.5 million, respectively, posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required at December 31, 2019 and 2018 of $439.1 million and $7.6 million, respectively. Accelerated settlement of these liabilities would not have a material effect on the consolidated financial position or liquidity of Northern Trust.
Note 29 – Off-Balance-Sheet Financial Instruments, Guarantees and Other Commitments
Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the potential credit exposure should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. Commitments and letters of credit consist of the following:
Legally Binding Commitments to Extend Credit generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements.
Standby Letters of Credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges, and similar transactions. Northern Trust is obligated to meet the entire financial obligation of these agreements and in certain cases is able to recover the amounts paid through recourse against collateral received or other participants.
Financial Guarantees are issued by Northern Trust to guarantee the performance of a client to a third party under certain arrangements.
Commercial Letters of Credit are instruments issued by Northern Trust on behalf of its clients that authorize a third party (the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement and other similar instruments. Commercial letters of credit are issued primarily to facilitate international trade.
Custody Securities Lent with Indemnification involves Northern Trust lending securities owned by clients to borrowers who are reviewed and approved by the Northern Trust Capital Markets Credit Committee, as part of its securities custody activities and at the direction of its clients. In connection with these activities, Northern Trust has issued indemnifications to certain clients against certain losses that are a direct result of a borrower’s failure to return securities when due, should the value of such securities exceed the value of the collateral required to be posted. Borrowers are required to collateralize fully securities received with cash or marketable securities. As securities are loaned, collateral is maintained at a minimum 100% of the fair value of the securities plus accrued interest. The collateral is revalued on a daily basis. The amount of securities loaned as of December 31, 2019 and 2018 subject to indemnification was $138.1 billion and $128.9 billion, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management
| 2019 Annual Report | Northern Trust Corporation 157 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
believes that the exposure to credit loss from this activity is not significant and no liability was recorded at December 31, 2019, or 2018 related to these indemnifications.
The following table provides details of Northern Trust's off-balance sheet financial instruments as of December 31, 2019 and 2018.
TABLE 140: SUMMARY OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Legally Binding Commitments to Extend Credit(1) | $ | 24,406.2 | $ | 25,023.0 | ||
| Standby Letters of Credit and Financial Guarantees(2)(3) | 2,416.7 | 2,486.2 | ||||
| Commercial Letters of Credit | 32.3 | 32.3 | ||||
| Custody Securities Lent with Indemnification | 138,085.9 | 128,904.8 |
(1) These amounts exclude $243.6 million and $242.3 million of commitments participated to others at December 31, 2019 and 2018*, respectively.*
(2) These amounts include $44.5 million and $72.3 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2019 and 2018*, respectively.*
(3) At December 31, 2019*,* $1.4 billion of the standby letters of credit will expire within one year or less and $845.9 million in one to five years.
Note 30 – Variable Interest Entities
Variable Interest Entities (VIEs) are defined within GAAP as entities which either have a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. Investors that finance a VIE through debt or equity interests, or other counterparties that provide other forms of support, such as guarantees, subordinated fee arrangements, or certain types of derivative contracts, are variable interest holders in the entity and the variable interest holder, if any, that has both the power to direct the activities that most significantly impact the entity and a variable interest that could potentially be significant to the entity is deemed to be the VIE’s primary beneficiary and is required to consolidate the VIE.
Leveraged Leases. In leveraged leasing transactions, Northern Trust acts as lessor of the underlying asset subject to the lease and typically funds 20-30% of the asset’s cost via an equity ownership in a trust with the remaining 70-80% provided by third party non-recourse debt holders. In such transactions, the trusts, which are VIEs, are created to provide the lessee use of the property with substantially all of the rights and obligations of ownership. The lessee’s maintenance and operation of the leased property has a direct effect on the fair value of the underlying property, and the lessee also has the ability to increase the benefits it can receive and limit the losses it can suffer by the manner in which it uses the property. As a result, Northern Trust has determined that it is not the primary beneficiary of the leveraged lease trust VIEs given it lacks the power to direct the activities that most significantly impact the economic performance of the leveraged lease trust VIEs.
Northern Trust’s maximum exposure to loss as a result of its involvement with leveraged lease trust VIEs is limited to the carrying amounts of its leveraged lease investments. As of December 31, 2019 and 2018, the carrying amounts of these investments, which are included in loans and leases in the consolidated balance sheets, were $42.6 million and $56.8 million, respectively. Northern Trust’s funding requirements relative to the leveraged lease trust VIEs are limited to its invested capital. Northern Trust has no other liquidity arrangements or obligations to purchase assets of the leveraged lease trust VIEs that would expose Northern Trust to a loss.
Tax Credit Structures. Northern Trust invests in qualified affordable housing projects and community development entities (collectively, community development projects) that are designed to generate a return primarily through the realization of tax credits. The community development projects are formed as limited partnerships and limited liability companies in which Northern Trust invests as a limited partner/investor member through equity contributions. The economic performance of the community development projects, some of which are VIEs, is subject to the performance of their underlying investment and their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. Northern Trust has determined that it is not the primary beneficiary of any community development project VIEs as it lacks the power to direct the activities that most significantly impact the economic performance of the underlying investments or to affect their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the general partners and managing members who exercise full and exclusive control of the operations of the community development project VIEs.
Northern Trust’s maximum exposure to loss as a result of its involvement with community development projects is limited to the carrying amounts of its investments, including any undrawn commitments. As of December 31, 2019 and 2018, the carrying amounts of these investments in community development projects that generate tax credits, included in Other Assets
| 158 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the consolidated balance sheets, totaled $749.3 million and $602.4 million, respectively, of which $700.3 million and $549.8 million are VIEs as of December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, liabilities related to unfunded commitments on investments in tax credit community development projects, included in Other Liabilities in the consolidated balance sheets, totaled $376.2 million and $321.0 million, respectively, of which $354.3 million and $279.5 million related to undrawn commitments on VIEs as of December 31, 2019 and 2018, respectively.
Northern Trust’s funding requirements are limited to its invested capital and undrawn commitments for future equity contributions. Northern Trust has no exposure to loss from liquidity arrangements and no obligation to purchase assets of the community development projects.
Tax credits and other tax benefits attributable to community development projects totaled $67.4 million and $63.0 million, respectively, as of December 31, 2019 and 2018.
Investment Funds. Northern Trust acts as asset manager for various funds in which clients of Northern Trust are investors. As an asset manager of funds, Northern Trust earns a competitively priced fee that is based on assets managed and varies with each fund’s investment objective. Based on its analysis, Northern Trust has determined that it is not the primary beneficiary of these VIEs under GAAP.
Periodically, Northern Trust makes seed capital investments to certain funds. As of December 31, 2019, Northern Trust had $112.0 million of investments valued using net asset value per share and included in Other Assets and had no unfunded commitments related to seed capital investments. As of December 31, 2018, Northern Trust had $29.2 million of investments valued using net asset value per share and included in Other Assets and had no unfunded commitments related to seed capital investments.
Note 31 – Pledged and Restricted Assets
Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements and Federal Home Loan Bank borrowings, as well as for other purposes, including support for securities settlement, primarily related to client activities, for potential Federal Reserve Bank discount window borrowings, and for derivative contracts.
The following table presents Northern Trust's pledged assets.
TABLE 141: TYPE OF PLEDGED ASSETS
| FOR THE YEAR ENDED DECEMBER 31, | ||||||
| (In Billions) | 2019 | 2018 | ||||
| Securities | ||||||
| Obligations of States and Political Subdivisions | $ | 1.0 | $ | 0.6 | ||
| Government Sponsored Agency and Other Securities | 33.4 | 30.9 | ||||
| Loans | 7.7 | 8.1 | ||||
| Total Pledged Assets | $ | 42.1 | $ | 39.6 |
Collateral required for these purposes totaled $8.5 billion and $9.3 billion at December 31, 2019 and 2018, respectively. The following table presents the available for sale debt securities pledged as collateral that are included in pledged assets.
TABLE 142: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES INCLUDED IN PLEDGED ASSETS
| SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE | DERIVATIVE CONTRACTS | |||||||||||
| (In Millions) | DECEMBER 31, 2019 | DECEMBER 31, 2018 | DECEMBER 31, 2019 | DECEMBER 31, 2018 | ||||||||
| Debt Securities | ||||||||||||
| Available for Sale | $ | 487.1 | $ | 151.5 | $ | 14.4 | $ | 29.0 |
The secured parties to these transactions have the right to repledge or sell the securities as it relates to $487.2 million and $151.5 million of the pledged collateral as of December 31, 2019 and 2018, respectively.
Northern Trust accepts financial assets as collateral that it is and is not permitted to repledge or sell. The collateral is generally obtained under certain repurchase agreements and derivative contracts. The following table presents the fair value of securities accepted as collateral. There was no repledged or sold collateral at December 31, 2019 or 2018.
| 2019 Annual Report | Northern Trust Corporation 159 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 143: ACCEPTED COLLATERAL
| FOR THE YEAR ENDED DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| Collateral that may be repledged or sold | ||||||
| Repurchase agreements | $ | 707.8 | $ | 426.2 | ||
| Derivative contracts | 16.8 | 15.4 | ||||
| Collateral that may not be repledged or sold | ||||||
| Repurchase agreements | — | 605.0 |
Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $1.5 billion in 2019 as compared to $1.7 billion in 2018.
Note 32 – Restrictions on Subsidiary Dividends and Loans or Advances
Various federal and state statutory provisions limit the amount of dividends the Bank can pay to the Corporation without regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state-chartered bank that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would exceed the total of its retained net income (as defined by regulatory agencies) for that year combined with its retained net income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its “undivided profits,” as defined, without regulatory and stockholder approval.
Under Illinois law, an Illinois state bank, prior to paying a dividend, must carry over to surplus at least one-tenth of its net profits since the date of the declaration of the last preceding dividend, until the bank’s surplus is equal to its capital. In addition, an Illinois state bank may not pay any dividend in an amount greater than its net profits then on hand, after deduction of losses and bad debts (defined as debts due to a state bank on which interest is past due and unpaid for a period of six months or more, unless the same are well secured and in the process of collection).
The Bank is also prohibited under federal law from paying any dividends if the Bank is undercapitalized or if the payment of the dividends would cause the Bank to become undercapitalized. In addition, the federal regulatory agencies are authorized to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of dividends could, depending on the financial condition of the Bank, be deemed to constitute an unsafe or unsound practice. The Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III impose additional restrictions on the ability of banking institutions to pay dividends (e.g., the Corporation must include proposed dividends in the capital plan that it submits to the Federal Reserve Board and such dividends may only be declared if the Federal Reserve Board does not object to the Corporation’s capital plan).
Under federal law, financial transactions by the Bank, the Corporation’s insured banking subsidiary, with the Corporation and its affiliates that are in the form of loans or extensions of credit, investments, guarantees, derivative transactions, repurchase agreements, securities lending transactions or purchases of assets, are restricted. These transactions must be on terms and conditions that are, or in good faith would be, offered to non-affiliated companies (i.e. on terms not less favorable to the Bank than market terms). Further, extensions of credit must be secured fully with qualifying collateral and are limited to 10% of the Bank’s capital and surplus for transactions with a single affiliate and to 20% of the Bank’s capital and surplus with all affiliates. Other state and federal laws may limit the transfer of funds by the Corporation’s banking subsidiaries to the Corporation and certain of its affiliates.
Note 33 – Reporting Segments and Related Information
Segment Information. Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management.
Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Equity is allocated to the reporting segments based on a variety of factors including, but not limited to, risk, regulatory considerations, and internal metrics. Allocations of capital and certain corporate
| 160 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expense may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1, "Summary of Significant Accounting Policies." Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between reporting segments. Northern Trust's presentations are not necessarily consistent with similar information for other financial institutions.
Effective January 1, 2019, Northern Trust implemented several enhancements to its FTP methodology, including the allocation of contingent liquidity charges to C&IS and Wealth Management client instruments and products. These methodology enhancements affect the results of each reporting segment. Due to the lack of historical information, segment results for periods ended prior to January 1, 2019 have not been revised to reflect the methodology enhancements.
Also effective January 1, 2019, all revenues, expenses and average assets are allocated to C&IS and Wealth Management with the exception of non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments not directly attributable to a specific reporting segment.
For reporting periods ended prior to January 1, 2019, income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive-level compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and were reported in Treasury and Other.
Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.
The following tables reflect the earnings contribution and average assets of Northern Trust’s reporting segments for the years ended December 31, 2019, 2018, and 2017.
TABLE 144: CORPORATE AND INSTITUTIONAL SERVICES RESULTS OF OPERATIONS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| ($ In Millions) | 2019 | 2018 | 2017 | ||||||
| Noninterest Income | |||||||||
| Trust, Investment and Other Servicing Fees | $ | 2,211.5 | $ | 2,173.1 | $ | 1,984.6 | |||
| Foreign Exchange Trading Income | 232.2 | 233.4 | 197.9 | ||||||
| Other Noninterest Income | 178.2 | 183.0 | 176.1 | ||||||
| Total Noninterest Income | 2,621.9 | 2,589.5 | 2,358.6 | ||||||
| Net Interest Income(1) | 918.7 | 992.2 | 733.8 | ||||||
| Revenue(1) | 3,540.6 | 3,581.7 | 3,092.4 | ||||||
| Provision for Credit Losses | 1.9 | 1.9 | 3.4 | ||||||
| Noninterest Expense | 2,605.5 | 2,421.4 | 2,194.5 | ||||||
| Income before Income Taxes(1) | 933.2 | 1,158.4 | 894.5 | ||||||
| Provision for Income Taxes(1) | 219.4 | 255.3 | 279.5 | ||||||
| Net Income | $ | 713.8 | $ | 903.1 | $ | 615.0 | |||
| Percentage of Consolidated Net Income | 48 | % | 58 | % | 51 | % | |||
| Average Assets | $ | 87,557.1 | $ | 82,996.5 | $ | 80,105.6 |
(1) Stated on an FTE basis.
| 2019 Annual Report | Northern Trust Corporation 161 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 145: WEALTH MANAGEMENT RESULTS OF OPERATIONS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| ($ In Millions) | 2019 | 2018 | 2017 | ||||||
| Noninterest Income | |||||||||
| Trust, Investment and Other Servicing Fees | $ | 1,640.6 | $ | 1,580.6 | $ | 1,449.7 | |||
| Foreign Exchange Trading Income | 18.7 | 4.2 | 3.1 | ||||||
| Other Noninterest Income | 131.1 | 102.7 | 103.9 | ||||||
| Total Noninterest Income | 1,790.4 | 1,687.5 | 1,556.7 | ||||||
| Net Interest Income(1) | 792.0 | 816.5 | 736.2 | ||||||
| Revenue(1) | 2,582.4 | 2,504.0 | 2,292.9 | ||||||
| Provision for Credit Losses | (16.4 | ) | (16.4 | ) | (31.4 | ) | |||
| Noninterest Expense | 1,531.6 | 1,460.0 | 1,405.3 | ||||||
| Income before Income Taxes(1) | 1,067.2 | 1,060.4 | 919.0 | ||||||
| Provision for Income Taxes(1) | 271.1 | 262.1 | 347.2 | ||||||
| Net Income | $ | 796.1 | $ | 798.3 | $ | 571.8 | |||
| Percentage of Consolidated Net Income | 53 | % | 51 | % | 48 | % | |||
| Average Assets | $ | 29,994.3 | $ | 26,163.7 | $ | 26,599.9 |
(1) Stated on an FTE basis.
TABLE 146: TREASURY AND OTHER RESULTS OF OPERATIONS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| ($ In Millions) | 2019 | 2018 | 2017 | ||||||
| Noninterest Income | $ | (17.1 | ) | $ | 60.5 | $ | 30.8 | ||
| Net Interest Income(1) | — | (144.8 | ) | 5.0 | |||||
| Revenue(1) | (17.1 | ) | (84.3 | ) | 35.8 | ||||
| Noninterest Expense | 6.4 | 135.5 | 169.6 | ||||||
| Income (Loss) before Income Taxes(1) | (23.5 | ) | (219.8 | ) | (133.8 | ) | |||
| Provision (Benefit) for Income Taxes(1) | (5.8 | ) | (74.8 | ) | (146.0 | ) | |||
| Net Income | $ | (17.7 | ) | $ | (145.0 | ) | $ | 12.2 | |
| Percentage of Consolidated Net Income | (1 | )% | (9 | )% | 1 | % | |||
| Average Assets | $ | — | $ | 13,786.4 | $ | 12,901.9 |
(1) Stated on an FTE basis.
| 162 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 147: CONSOLIDATED FINANCIAL INFORMATION
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| Noninterest Income | |||||||||
| Trust, Investment and Other Servicing Fees | $ | 3,852.1 | $ | 3,753.7 | $ | 3,434.3 | |||
| Foreign Exchange Trading Income | 250.9 | 307.2 | 209.9 | ||||||
| Other Noninterest Income | 292.2 | 276.6 | 301.9 | ||||||
| Total Noninterest Income | 4,395.2 | 4,337.5 | 3,946.1 | ||||||
| Net Interest Income(1) | 1,710.7 | 1,663.9 | 1,475.0 | ||||||
| Revenue(1) | 6,105.9 | 6,001.4 | 5,421.1 | ||||||
| Provision for Credit Losses | (14.5 | ) | (14.5 | ) | (28.0 | ) | |||
| Noninterest Expense | 4,143.5 | 4,016.9 | 3,769.4 | ||||||
| Income before Income Taxes(1) | 1,976.9 | 1,999.0 | 1,679.7 | ||||||
| Provision for Income Taxes(1) | 484.7 | 442.6 | 480.7 | ||||||
| Net Income | $ | 1,492.2 | $ | 1,556.4 | $ | 1,199.0 | |||
| Average Assets | $ | 117,551.4 | $ | 122,946.6 | $ | 119,607.4 |
(1) Stated on an FTE basis. The consolidated figures include $32.8 million*,* $41.2 million*, and* $45.8 million*, of FTE adjustments for* 2019*,* 2018*, and* 2017*, respectively.*
Further discussion of reporting segment results is provided within the “Reporting Segments and Related Information” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Geographic Area Information. Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source income and assets. Non-U.S. source income and assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision revenues, expenses and assets between U.S. and non-U.S.-domiciled customers. Therefore, certain subjective estimates and assumptions have been made to allocate revenues, expenses and assets between U.S. and non-U.S. operations.
For purposes of this disclosure, all foreign exchange trading income has been allocated to non-U.S. operations. Interest expense is allocated to non-U.S. operations based on specifically matched or pooled funding. Allocations of indirect noninterest expenses, when made, are based on various methods such as time, space, and number of employees.
The table below summarizes Northern Trust’s performance based on the allocation process described above without regard to guarantors or the location of collateral.
TABLE 148: DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE
| (In Millions) | TOTAL ASSETS | TOTAL REVENUE**(1)** | INCOME BEFORE INCOME TAXES | NET INCOME | ||||||||
| 2019 | ||||||||||||
| Non-U.S. | $ | 27,888.6 | $ | 1,889.5 | $ | 600.0 | $ | 451.0 | ||||
| U.S. | 108,939.8 | 4,183.6 | 1,344.1 | 1,041.2 | ||||||||
| Total | $ | 136,828.4 | $ | 6,073.1 | $ | 1,944.1 | $ | 1,492.2 | ||||
| 2018 | ||||||||||||
| Non-U.S. | $ | 32,712.9 | $ | 2,018.1 | $ | 786.4 | $ | 625.7 | ||||
| U.S. | 99,499.6 | 3,942.1 | 1,171.4 | 930.7 | ||||||||
| Total | $ | 132,212.5 | $ | 5,960.2 | $ | 1,957.8 | $ | 1,556.4 | ||||
| 2017 | ||||||||||||
| Non-U.S. | $ | 30,325.3 | $ | 1,709.7 | $ | 613.5 | $ | 430.0 | ||||
| U.S. | 108,265.2 | 3,665.6 | 1,020.4 | 769.0 | ||||||||
| Total | $ | 138,590.5 | $ | 5,375.3 | $ | 1,633.9 | $ | 1,199.0 |
(1) Total revenue is comprised of net interest income and noninterest income.
| 2019 Annual Report | Northern Trust Corporation 163 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 34 – Regulatory Capital Requirements
Northern Trust and the Bank are subject to various regulatory capital requirements administered by the federal bank regulatory authorities. Under these requirements, banks must maintain specific risk-based and leverage ratios in order to be classified as “well-capitalized.” The regulatory capital requirements impose certain restrictions upon banks that meet minimum capital requirements but are not “well-capitalized” and obligate the federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not maintain such minimum ratios. Such prompt corrective action could have a direct material effect on a bank’s financial statements.
As of December 31, 2019 and 2018, the Bank had capital ratios above the levels required for classification as a “well-capitalized” institution and had not received any regulatory notification of a lower classification. Additionally, Northern Trust’s subsidiary banks located outside the U.S. are subject to regulatory capital requirements in the jurisdictions in which they operate. As of December 31, 2019 and 2018, Northern Trust’s non-U.S. banking subsidiaries had capital ratios above their specified minimum requirements. There were no conditions or events since December 31, 2019, that management believes have adversely affected the capital categorization of any Northern Trust subsidiary bank.
The table below provides capital ratios for the Corporation and the Bank determined by Basel III phased in requirements.
TABLE 149: RISK-BASED AND LEVERAGE CAPITAL AMOUNTS AND RATIOS
| DECEMBER 31, 2019 | DECEMBER 31, 2018 | |||||||||||||||||||
| ($ In Millions) | STANDARDIZED APPROACH | ADVANCED APPROACH | STANDARDIZED APPROACH | ADVANCED APPROACH | ||||||||||||||||
| BALANCE | RATIO | BALANCE | RATIO | BALANCE | RATIO | BALANCE | RATIO | |||||||||||||
| Common Equity Tier 1 Capital | ||||||||||||||||||||
| Northern Trust Corporation | $ | 8,898.7 | 12.7 | % | $ | 8,898.7 | 13.2 | % | $ | 8,729.8 | 12.9 | % | $ | 8,729.8 | 13.7 | % | ||||
| The Northern Trust Company | 8,476.0 | 12.3 | 8,476.0 | 13.0 | 8,722.5 | 13.1 | 8,722.5 | 14.1 | ||||||||||||
| Minimum to qualify as well-capitalized: | ||||||||||||||||||||
| Northern Trust Corporation | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||
| The Northern Trust Company | 4,472.0 | 6.5 | 4,230.0 | 6.5 | 4,335.9 | 6.5 | 4,007.4 | 6.5 | ||||||||||||
| Tier 1 Capital | ||||||||||||||||||||
| Northern Trust Corporation | 10,152.0 | 14.5 | 10,152.0 | 15.0 | 9,596.7 | 14.1 | 9,596.7 | 15.0 | ||||||||||||
| The Northern Trust Company | 8,476.0 | 12.3 | 8,476.0 | 13.0 | 8,722.5 | 13.1 | 8,722.5 | 14.1 | ||||||||||||
| Minimum to qualify as well-capitalized: | ||||||||||||||||||||
| Northern Trust Corporation | 4,205.3 | 6.0 | 4,051.6 | 6.0 | 4,070.2 | 6.0 | 3,834.9 | 6.0 | ||||||||||||
| The Northern Trust Company | 5,504.0 | 8.0 | 5,206.2 | 8.0 | 5,336.4 | 8.0 | 4,932.2 | 8.0 | ||||||||||||
| Total Capital | ||||||||||||||||||||
| Northern Trust Corporation | 11,456.7 | 16.3 | 11,332.3 | 16.8 | 10,942.0 | 16.1 | 10,803.8 | 16.9 | ||||||||||||
| The Northern Trust Company | 9,610.4 | 14.0 | 9,486.0 | 14.6 | 9,870.7 | 14.8 | 9,732.5 | 15.8 | ||||||||||||
| Minimum to qualify as well-capitalized: | ||||||||||||||||||||
| Northern Trust Corporation | 7,008.8 | 10.0 | 6,752.7 | 10.0 | 6,783.7 | 10.0 | 6,391.5 | 10.0 | ||||||||||||
| The Northern Trust Company | 6,880.1 | 10.0 | 6,507.7 | 10.0 | 6,670.6 | 10.0 | 6,165.3 | 10.0 | ||||||||||||
| Tier 1 Leverage | ||||||||||||||||||||
| Northern Trust Corporation | 10,152.0 | 8.7 | 10,152.0 | 8.7 | 9,596.7 | 8.0 | 9,596.7 | 8.0 | ||||||||||||
| The Northern Trust Company | 8,476.0 | 7.3 | 8,476.0 | 7.3 | 8,722.5 | 7.3 | 8,722.5 | 7.3 | ||||||||||||
| Minimum to qualify as well-capitalized: | ||||||||||||||||||||
| Northern Trust Corporation | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||
| The Northern Trust Company | 5,835.4 | 5.0 | 5,835.4 | 5.0 | 5,998.6 | 5.0 | 5,998.6 | 5.0 | ||||||||||||
| Supplementary Leverage (1) | ||||||||||||||||||||
| Northern Trust Corporation | N/A | N/A | 10,152.0 | 7.6 | N/A | N/A | 9,596.7 | 7.0 | ||||||||||||
| The Northern Trust Company | N/A | N/A | 8,476.0 | 6.4 | N/A | N/A | 8,722.5 | 6.4 | ||||||||||||
| Minimum to qualify as well-capitalized: | ||||||||||||||||||||
| Northern Trust Corporation | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||
| The Northern Trust Company | N/A | N/A | 3,983.6 | 3.0 | N/A | N/A | 4,077.2 | 3.0 |
(1) Effective January 1, 2018, a minimum supplementary leverage ratio of 3 percent became applicable.
| 164 2019 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The risk-based capital guidelines that apply to the Corporation and the Bank, commonly referred to as Basel III, are based upon the 2011 capital accord of the Basel Committee. The Basel III rules are currently being phased in, and will come into full effect by January 1, 2022.
Under the final Basel III rules, the Corporation and the Bank are required to calculate and publicly disclose risk-based capital ratios using two methodologies: an advanced approach and a standardized approach. Under the advanced approach, credit risk weighted assets (RWA) are based on internal credit models and parameters. Additionally, the advanced approach incorporates operational risk RWA. Under the standardized approach, RWA are based on supervisory prescribed risk weights that are primarily dependent on counterparty type and asset class.
Pursuant to the Federal Reserve Board's implementation in the final Basel III rules of a provision of the Dodd-Frank Act, the capital adequacy of the Corporation and the Bank is assessed based on the lower of the advanced approach or standardized approach capital ratios.
The U.S.’s implementation of Basel III has increased the minimum capital thresholds for banking organizations and tightened the standards for what qualifies as capital. The Corporation and the Bank believe their capital strength, balance sheets and business models leave them well positioned for the continued U.S. implementation of Basel III.
Note 35 – Northern Trust Corporation (Corporation only)
Condensed financial information is presented below. Investments in wholly-owned subsidiaries are carried on the equity method of accounting.
TABLE 150: CONDENSED BALANCE SHEETS
| DECEMBER 31, | ||||||
| (In Millions) | 2019 | 2018 | ||||
| ASSETS | ||||||
| Cash on Deposit with Subsidiary Bank | $ | 2,559.1 | $ | 866.8 | ||
| Advances to Wholly-Owned Subsidiaries – Banks | 2,370.0 | 2,910.0 | ||||
| Investments in Wholly-Owned Subsidiaries – Banks | 9,349.8 | 9,585.2 | ||||
| – Nonbank | 163.0 | 182.9 | ||||
| Other Assets | 1,444.7 | 803.1 | ||||
| Total Assets | $ | 15,886.6 | $ | 14,348.0 | ||
| LIABILITIES | ||||||
| Senior Notes | $ | 2,573.0 | $ | 2,011.3 | ||
| Long Term Debt | 1,148.1 | 1,112.4 | ||||
| Floating Rate Capital Debt | 277.7 | 277.6 | ||||
| Other Liabilities | 796.8 | 438.5 | ||||
| Total Liabilities | 4,795.6 | 3,839.8 | ||||
| STOCKHOLDERS’ EQUITY | ||||||
| Preferred Stock | 1,273.4 | 882.0 | ||||
| Common Stock | 408.6 | 408.6 | ||||
| Additional Paid-in Capital | 1,013.1 | 1,068.4 | ||||
| Retained Earnings | 11,656.7 | 10,776.8 | ||||
| Accumulated Other Comprehensive Income (Loss) | (194.7 | ) | (453.7 | ) | ||
| Treasury Stock | (3,066.1 | ) | (2,173.9 | ) | ||
| Total Stockholders’ Equity | 11,091.0 | 10,508.2 | ||||
| Total Liabilities and Stockholders’ Equity | $ | 15,886.6 | $ | 14,348.0 |
| 2019 Annual Report | Northern Trust Corporation 165 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 151: CONDENSED STATEMENTS OF INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| OPERATING INCOME | |||||||||
| Dividends – Bank Subsidiaries | $ | 2,024.1 | $ | 1,200.9 | $ | 525.0 | |||
| – Nonbank Subsidiaries | 0.4 | — | — | ||||||
| Intercompany Interest and Other Charges | 115.1 | 91.9 | 58.2 | ||||||
| Interest and Other Income | 20.2 | (8.7 | ) | 18.1 | |||||
| Total Operating Income | 2,159.8 | 1,284.1 | 601.3 | ||||||
| OPERATING EXPENSES | |||||||||
| Interest Expense | 121.6 | 97.3 | 76.5 | ||||||
| Other Operating Expenses | 28.6 | 17.0 | 25.9 | ||||||
| Total Operating Expenses | 150.2 | 114.3 | 102.4 | ||||||
| Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries | 2,009.6 | 1,169.8 | 498.9 | ||||||
| Benefit for Income Taxes | 24.3 | 24.6 | 43.7 | ||||||
| Income before Equity in Undistributed Net Income of Subsidiaries | 2,033.9 | 1,194.4 | 542.6 | ||||||
| Equity in Undistributed Net Income of Subsidiaries – Banks | (559.9 | ) | 336.7 | 632.6 | |||||
| – Nonbank | 18.2 | 25.3 | 23.8 | ||||||
| Net Income | $ | 1,492.2 | $ | 1,556.4 | $ | 1,199.0 | |||
| Preferred Stock Dividends | 46.4 | 46.4 | 49.8 | ||||||
| Net Income Applicable to Common Stock | $ | 1,445.8 | $ | 1,510.0 | $ | 1,149.2 |
TABLE 152: CONDENSED STATEMENTS OF CASH FLOWS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||
| (In Millions) | 2019 | 2018 | 2017 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Net Income | $ | 1,492.2 | $ | 1,556.4 | $ | 1,199.0 | |||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | |||||||||
| Equity in Undistributed Net Income of Subsidiaries | 541.7 | (362.0 | ) | (656.4 | ) | ||||
| Change in Prepaid Expenses | (400.4 | ) | (0.6 | ) | (0.3 | ) | |||
| Change in Accrued Income Taxes | 114.1 | (141.8 | ) | 17.2 | |||||
| Other Operating Activities, net | 141.9 | 125.6 | 55.7 | ||||||
| Net Cash Provided by Operating Activities | 1,889.5 | 1,177.6 | 615.2 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
| Proceeds from Sale, Maturity and Redemption of Debt Securities – Available for Sale | — | 1.0 | — | ||||||
| Advances to Wholly-Owned Subsidiaries | 540.0 | (436.5 | ) | 100.0 | |||||
| Acquisition of a Business, Net of Cash Received | — | (31.2 | ) | — | |||||
| Other Investing Activities, net | 3.7 | (3.1 | ) | 1.9 | |||||
| Net Cash Provided by (Used in) Investing Activities | 543.7 | (469.8 | ) | 101.9 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
| Proceeds from Senior Notes | 498.0 | 497.9 | 350.0 | ||||||
| Proceeds from Issuance of Preferred Stock - Series E | 391.4 | — | — | ||||||
| Treasury Stock Purchased | (1,100.2 | ) | (924.3 | ) | (523.1 | ) | |||
| Net Proceeds from Stock Options | 44.0 | 32.6 | 108.0 | ||||||
| Cash Dividends Paid on Common Stock | (529.7 | ) | (405.4 | ) | (356.8 | ) | |||
| Cash Dividends Paid on Preferred Stock | (46.4 | ) | (46.4 | ) | (49.8 | ) | |||
| Other Financing Activities, net | 2.0 | 2.1 | 0.1 | ||||||
| Net Cash (Used In) Provided by Financing Activities | (740.9 | ) | (843.5 | ) | (471.6 | ) | |||
| Net Change in Cash on Deposit with Subsidiary Bank | 1,692.3 | (135.7 | ) | 245.5 | |||||
| Cash on Deposit with Subsidiary Bank at Beginning of Year | 866.8 | 1,002.5 | 757.0 | ||||||
| Cash on Deposit with Subsidiary Bank at End of Year | $ | 2,559.1 | $ | 866.8 | $ | 1,002.5 |
| 166 2019 Annual Report | Northern Trust Corporation |
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