filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, 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, 2021, 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 28, 2022 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Corporation has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| 86 2021 Annual Report | Northern Trust Corporation |
Assessment of the allowance for credit losses for commercial loans and leases evaluated on a collective basis
As discussed in Notes 1 and 7 to the consolidated financial statements, the Corporation’s allowance for credit losses for commercial loans and leases evaluated on a collective basis (the collective ACL) was $95.5 million of a total allowance for credit losses assigned to loans and leases of $138.4 million as of December 31, 2021. Expected credit losses are measured on a collective basis as long as the financial assets included in the respective pool share similar risk characteristics. The allowance estimation methodology for the collective assessment is based on data representative of the Corporation’s financial asset portfolio from a historical observation period that includes both expansionary and recessionary periods. The estimation methodology and the related qualitative adjustment framework segregate the loan and lease portfolio into segments based on loan and obligor specific factors, including loan type, borrower type, collateral type, loan size, and borrower credit quality. The estimation methodology applies probability of default and loss given default assumptions to the projected exposure at default on a pool basis. For each segment, the probability of default (PD) and loss given default (LGD) are derived for each quarter of the remaining life of each instrument. For the first two years (the reasonable and supportable period), these factors are derived by applying quarterly macroeconomic projections using models developed from historical data on macroeconomic factors and loans with similar factors, including the borrower rating assigned to individual obligors, as applicable. For periods beyond the reasonable and supportable period, the Corporation reverts to its own long-run historical loss experience on a straight-line basis over four quarters. The projected exposure at default for every quarter is based on contractual balance projections as of each quarter-end. Estimating expected lifetime credit losses requires the consideration of the effect of future economic conditions. The Corporation employs multiple scenarios over a reasonable and supportable period to project future conditions. The Corporation determines the probability weights assigned to each scenario at each quarter-end. The quantitative allowance is then reviewed within the qualitative adjustment framework, through which the Corporation applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology, and environmental factors that are not fully contemplated in the forecast to compute adjustments to the quantitative allowance that may impact individual or multiple segments of the loan portfolio.
We identified the assessment of the quantitative component of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the quantitative component of the collective ACL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the quantitative component of the collective ACL methodology, including the methods and models used to estimate the PD and LGD and their significant assumptions, the multiple economic forecast scenarios and macroeconomic factors and their respective weightings, and borrower ratings for certain commercial loans and leases. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the Corporation’s measurement of the quantitative component of the collective ACL estimate, including controls over:
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development of the quantitative component of the collective ACL methodology
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performance monitoring of the PD and LGD models
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development and approval of the multiple economic forecast scenarios, macroeconomic factors and their respective weightings
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identification and determination of the significant assumptions used in the PD and LGD models
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analysis of the allowance for credit losses for loans and leases results.
We evaluated the Corporation’s process to develop the quantitative component of the collective ACL estimate by testing certain sources of data, factors, and assumptions that the Corporation used, and considered the relevance and reliability of such data, factors and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
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evaluating the quantitative component of the Corporation’s collective ACL methodology for compliance with U.S. generally accepted accounting principles
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evaluating judgments made by the Corporation relative to the assessment and performance monitoring of the PD and LGD models
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assessing the conceptual soundness and performance testing of the PD and LGD models by inspecting model documentation to determine whether the models were suitable for their intended use
| 2021 Annual Report | Northern Trust Corporation 87 |
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assessing the economic forecast scenarios, the economic input variables and their respective weightings through comparison to publicly available forecasts and the Corporation’s business environment
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testing individual borrower ratings for a selection of commercial loan and lease relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral.
We also assessed the sufficiency of the audit evidence obtained related to the quantitative component of the collective ACL by evaluating the:
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cumulative results of the procedures
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qualitative aspects of the Corporation’s accounting practices
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potential bias in the accounting estimate
We have served as the Corporation’s auditor since 2002.
Chicago, Illinois
February 28, 2022
| 88 2021 Annual Report | Northern Trust Corporation |
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
| DECEMBER 31, | ||||||||
| (In Millions Except Share Information) | 2021 | 2020 | ||||||
| ASSETS | ||||||||
| Cash and Due from Banks | $ | 3,056.8 | $ | 4,389.5 | ||||
| Federal Reserve and Other Central Bank Deposits | 64,582.2 | 55,503.6 | ||||||
| Interest-Bearing Deposits with Banks | 1,949.4 | 4,372.6 | ||||||
| Securities Purchased under Agreements to Resell | 686.4 | 1,596.5 | ||||||
| Debt Securities | ||||||||
| Available for Sale (Amortized cost of $37,948.5 and $41,155.7) | 38,010.5 | 42,022.0 | ||||||
| Held to Maturity (Fair value of $23,315.4 and $17,797.4) | 23,564.5 | 17,791.1 | ||||||
| Trading Account | 0.3 | 0.5 | ||||||
| Total Debt Securities | 61,575.3 | 59,813.6 | ||||||
| Loans and Leases | ||||||||
| Commercial | 18,487.4 | 15,262.0 | ||||||
| Personal | 21,993.2 | 18,497.7 | ||||||
| Total Loans and Leases (Net of unearned income of $10.4 and $9.8) | 40,480.6 | 33,759.7 | ||||||
| Allowance for Credit Losses | (150.6) | (198.8) | ||||||
| Buildings and Equipment | 488.7 | 514.9 | ||||||
| Client Security Settlement Receivables | 1,941.2 | 1,160.2 | ||||||
| Goodwill | 706.2 | 707.2 | ||||||
| Other Assets | 8,573.6 | 8,384.9 | ||||||
| Total Assets | $ | 183,889.8 | $ | 170,003.9 | ||||
| LIABILITIES | ||||||||
| Deposits | ||||||||
| Demand and Other Noninterest-Bearing | $ | 22,028.2 | $ | 17,728.5 | ||||
| Savings, Money Market and Other Interest-Bearing | 35,003.1 | 28,631.8 | ||||||
| Savings Certificates and Other Time | 842.7 | 937.1 | ||||||
| Non U.S. Offices — Noninterest-Bearing | 26,287.3 | 25,382.2 | ||||||
| — Interest-Bearing | 75,767.1 | 71,198.4 | ||||||
| Total Deposits | 159,928.4 | 143,878.0 | ||||||
| Federal Funds Purchased | 0.2 | 260.2 | ||||||
| Securities Sold Under Agreements to Repurchase | 531.9 | 39.8 | ||||||
| Other Borrowings | 3,583.8 | 4,011.5 | ||||||
| Senior Notes | 2,505.5 | 3,122.4 | ||||||
| Long-Term Debt | 1,145.7 | 1,189.3 | ||||||
| Floating Rate Capital Debt | — | 277.8 | ||||||
| Other Liabilities | 4,177.5 | 5,536.6 | ||||||
| Total Liabilities | 171,873.0 | 158,315.6 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred Stock, No Par Value; Authorized 10,000,000 shares: | ||||||||
| Series D, outstanding shares of 5,000 | 493.5 | 493.5 | ||||||
| Series E, outstanding shares of 16,000 | 391.4 | 391.4 | ||||||
| Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 207,761,875 and 208,289,178 | 408.6 | 408.6 | ||||||
| Additional Paid-In Capital | 939.3 | 963.6 | ||||||
| Retained Earnings | 13,117.3 | 12,207.7 | ||||||
| Accumulated Other Comprehensive Income (Loss) | (35.6) | 428.0 | ||||||
| Treasury Stock (37,409,649 and 36,882,346 shares, at cost) | (3,297.7) | (3,204.5) | ||||||
| Total Stockholders’ Equity | 12,016.8 | 11,688.3 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 183,889.8 | $ | 170,003.9 |
See accompanying notes to consolidated financial statements on pages 93-166.
| 2021 Annual Report | Northern Trust Corporation 89 |
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions Except Share Information) | 2021 | 2020 | 2019 | ||||||||
| Noninterest Income | |||||||||||
| Trust, Investment and Other Servicing Fees | $ | 4,361.1 | $ | 3,995.0 | $ | 3,852.1 | |||||
| Foreign Exchange Trading Income | 292.6 | 290.4 | 250.9 | ||||||||
| Treasury Management Fees | 44.3 | 45.4 | 44.5 | ||||||||
| Security Commissions and Trading Income | 140.2 | 133.2 | 103.6 | ||||||||
| Other Operating Income | 243.9 | 194.0 | 145.5 | ||||||||
| Investment Security Losses, net | (0.3) | (0.4) | (1.4) | ||||||||
| Total Noninterest Income | 5,081.8 | 4,657.6 | 4,395.2 | ||||||||
| Net Interest Income | |||||||||||
| Interest Income | 1,406.5 | 1,643.5 | 2,499.9 | ||||||||
| Interest Expense | 23.8 | 200.3 | 822.0 | ||||||||
| Net Interest Income | 1,382.7 | 1,443.2 | 1,677.9 | ||||||||
| Provision for Credit Losses | (81.5) | 125.0 | (14.5) | ||||||||
| Net Interest Income after Provision for Credit Losses | 1,464.2 | 1,318.2 | 1,692.4 | ||||||||
| Noninterest Expense | |||||||||||
| Compensation | 2,011.0 | 1,947.1 | 1,859.0 | ||||||||
| Employee Benefits | 431.4 | 387.7 | 355.2 | ||||||||
| Outside Services | 849.4 | 763.1 | 774.5 | ||||||||
| Equipment and Software | 736.3 | 673.5 | 612.1 | ||||||||
| Occupancy | 208.7 | 230.1 | 212.9 | ||||||||
| Other Operating Expense | 299.1 | 346.7 | 329.8 | ||||||||
| Total Noninterest Expense | 4,535.9 | 4,348.2 | 4,143.5 | ||||||||
| Income before Income Taxes | 2,010.1 | 1,627.6 | 1,944.1 | ||||||||
| Provision for Income Taxes | 464.8 | 418.3 | 451.9 | ||||||||
| NET INCOME | $ | 1,545.3 | $ | 1,209.3 | $ | 1,492.2 | |||||
| Preferred Stock Dividends | 41.8 | 56.2 | 46.4 | ||||||||
| Net Income Applicable to Common Stock | $ | 1,503.5 | $ | 1,153.1 | $ | 1,445.8 | |||||
| PER COMMON SHARE | |||||||||||
| Net Income – Basic | $ | 7.16 | $ | 5.48 | $ | 6.66 | |||||
| – Diluted | 7.14 | 5.46 | 6.63 | ||||||||
| Average Number of Common Shares Outstanding – Basic | 208,075,522 | 208,319,412 | 214,525,547 | ||||||||
| – Diluted | 208,899,230 | 209,007,986 | 215,601,149 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Net Income | $ | 1,545.3 | $ | 1,209.3 | $ | 1,492.2 | |||||
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | |||||||||||
| Net Unrealized Gains (Losses) on Available for Sale Debt Securities | (534.7) | 527.8 | 228.9 | ||||||||
| Net Unrealized Gains (Losses) on Cash Flow Hedges | 0.8 | 0.5 | (7.7) | ||||||||
| Net Foreign Currency Adjustments | 10.5 | 26.9 | 49.9 | ||||||||
| Net Pension and Other Postretirement Benefit Adjustments | 59.8 | 67.5 | (12.1) | ||||||||
| Other Comprehensive Income (Loss) | (463.6) | 622.7 | 259.0 | ||||||||
| Comprehensive Income | $ | 1,081.7 | $ | 1,832.0 | $ | 1,751.2 |
See accompanying notes to consolidated financial statements on pages 93-166.
| 90 2021 Annual Report | Northern Trust Corporation |
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, 2019 | $ | 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 Declared: | |||||||||||||||||||||||
| 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 Awards and Options Exercised | — | — | (55.4) | — | — | 208.0 | 152.6 | ||||||||||||||||
| Stock Purchased | — | — | — | — | — | (1,100.2) | (1,100.2) | ||||||||||||||||
| Balance at December 31, 2019 | $ | 1,273.4 | $ | 408.6 | $ | 1,013.1 | $ | 11,656.7 | $ | (194.7) | $ | (3,066.1) | $ | 11,091.0 | |||||||||
| Cumulative Effect Adjustment related to the adoption of Accounting Standards Update 2016-13 | — | — | — | (10.1) | — | — | (10.1) | ||||||||||||||||
| Balance at January 1, 2020 | 1,273.4 | 408.6 | 1,013.1 | 11,646.6 | (194.7) | (3,066.1) | 11,080.9 | ||||||||||||||||
| Net Income | — | — | — | 1,209.3 | — | — | 1,209.3 | ||||||||||||||||
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | — | — | — | 622.7 | — | 622.7 | ||||||||||||||||
| Dividends Declared: | |||||||||||||||||||||||
| Common Stock, $2.80 per share | — | — | — | (592.0) | — | — | (592.0) | ||||||||||||||||
| Preferred Stock | — | — | — | (44.7) | — | — | (44.7) | ||||||||||||||||
| Redemption of Preferred Stock, Series C | (388.5) | — | — | (11.5) | — | — | (400.0) | ||||||||||||||||
| Stock Awards and Options Exercised | — | — | (49.5) | — | — | 161.4 | 111.9 | ||||||||||||||||
| Stock Purchased | — | — | — | — | — | (299.8) | (299.8) | ||||||||||||||||
| Balance at December 31, 2020 | $ | 884.9 | $ | 408.6 | $ | 963.6 | $ | 12,207.7 | $ | 428.0 | $ | (3,204.5) | $ | 11,688.3 | |||||||||
| Net Income | — | — | — | 1,545.3 | — | — | 1,545.3 | ||||||||||||||||
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | — | — | — | (463.6) | — | (463.6) | ||||||||||||||||
| Dividends Declared: | |||||||||||||||||||||||
| Common Stock, $2.80 per share | — | — | — | (593.9) | — | — | (593.9) | ||||||||||||||||
| Preferred Stock | — | — | — | (41.8) | — | — | (41.8) | ||||||||||||||||
| Stock Awards and Options Exercised | — | — | (24.3) | — | — | 174.4 | 150.1 | ||||||||||||||||
| Stock Purchased | — | — | — | — | — | (267.6) | (267.6) | ||||||||||||||||
| Balance at December 31, 2021 | $ | 884.9 | $ | 408.6 | $ | 939.3 | $ | 13,117.3 | $ | (35.6) | $ | (3,297.7) | $ | 12,016.8 |
See accompanying notes to consolidated financial statements on pages 93-166.
| 2021 Annual Report | Northern Trust Corporation 91 |
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net Income | $ | 1,545.3 | $ | 1,209.3 | $ | 1,492.2 | |||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | |||||||||||
| Investment Security (Losses) Gains, net | 0.3 | 0.4 | 1.4 | ||||||||
| Amortization and Accretion of Securities and Unearned Income, net | 99.7 | 88.9 | 64.6 | ||||||||
| Provision for Credit Losses | (81.5) | 125.0 | (14.5) | ||||||||
| Depreciation and Amortization | 515.6 | 500.3 | 458.9 | ||||||||
| Change in Accrued Income Taxes | 37.2 | 25.4 | (70.7) | ||||||||
| Pension Plan Contributions | (11.2) | (15.6) | (6.1) | ||||||||
| Deferred Income Tax Provision | 2.0 | 16.4 | 34.3 | ||||||||
| Change in Receivables | (460.9) | 4.5 | (50.3) | ||||||||
| Change in Interest Payable | (7.8) | (23.6) | (23.6) | ||||||||
| Change in Collateral With Derivative Counterparties, net | (466.5) | (17.8) | 1,154.0 | ||||||||
| Other Operating Activities, net | 183.8 | (16.4) | (448.2) | ||||||||
| Net Cash Provided by Operating Activities | 1,356.0 | 1,896.8 | 2,592.0 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Change in Federal Funds Sold | — | 5.0 | 129.0 | ||||||||
| Change in Securities Purchased under Agreements to Resell | 897.7 | (700.9) | 357.3 | ||||||||
| Change in Interest-Bearing Deposits with Banks | 2,344.5 | 712.6 | (614.6) | ||||||||
| Net Change in Federal Reserve and Other Central Bank Deposits | (9,970.4) | (19,845.2) | (3,683.2) | ||||||||
| Purchases of Held to Maturity Debt Securities | (54,734.9) | (40,187.9) | (14,154.3) | ||||||||
| Proceeds from Maturity and Redemption of Held to Maturity Debt Securities | 54,902.6 | 35,658.6 | 16,290.9 | ||||||||
| Purchases of Available for Sale Debt Securities | (13,896.2) | (10,886.8) | (12,811.0) | ||||||||
| Proceeds from Sale, Maturity and Redemption of Available for Sale Debt Securities | 10,079.0 | 8,748.2 | 11,057.2 | ||||||||
| Change in Loans and Leases | (6,744.7) | (2,316.7) | 1,087.9 | ||||||||
| Purchases of Buildings and Equipment | (95.5) | (135.8) | (158.0) | ||||||||
| Purchases and Development of Computer Software | (419.6) | (424.6) | (441.8) | ||||||||
| Change in Client Security Settlement Receivables | (801.4) | (226.8) | 821.0 | ||||||||
| Acquisition of a Business, Net of Cash Received | — | — | (10.5) | ||||||||
| Bank-Owned Life Insurance Policy Premiums | — | — | (1,500.0) | ||||||||
| Other Investing Activities, net | (163.7) | (322.7) | 225.1 | ||||||||
| Net Cash Used in Investing Activities | (18,602.6) | (29,923.0) | (3,405.0) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Change in Deposits | 17,885.5 | 32,137.9 | 4,263.6 | ||||||||
| Change in Federal Funds Purchased | (260.0) | (292.7) | (2,041.3) | ||||||||
| Change in Securities Sold under Agreements to Repurchase | 492.1 | (450.0) | 320.9 | ||||||||
| Change in Short-Term Other Borrowings | (426.5) | (2,698.3) | (1,184.5) | ||||||||
| Redemption of Preferred Stock - Series C | — | (400.0) | — | ||||||||
| Proceeds from Senior Notes | — | 993.2 | 498.0 | ||||||||
| Repayments of Senior Notes | (500.0) | (508.6) | — | ||||||||
| Repayment of Floating Rate Capital Debt | (278.8) | — | — | ||||||||
| Proceeds from Issuance of Preferred Stock - Series E | — | — | 392.5 | ||||||||
| Treasury Stock Purchased | (267.6) | (299.8) | (1,100.2) | ||||||||
| Net Proceeds from Stock Options | 53.8 | 19.5 | 44.0 | ||||||||
| Cash Dividends Paid on Common Stock | (583.3) | (584.6) | (529.7) | ||||||||
| Cash Dividends Paid on Preferred Stock | (41.8) | (45.9) | (46.4) | ||||||||
| Other Financing Activities, net | 0.1 | 1.2 | (1.0) | ||||||||
| Net Cash Provided by Financing Activities | 16,073.5 | 27,871.9 | 615.9 | ||||||||
| Effect of Foreign Currency Exchange Rates on Cash | (159.6) | 84.6 | 74.7 | ||||||||
| Change in Cash and Due from Banks | (1,332.7) | (69.7) | (122.4) | ||||||||
| Cash and Due from Banks at Beginning of Period | 4,389.5 | 4,459.2 | 4,581.6 | ||||||||
| Cash and Due from Banks at End of Period | $ | 3,056.8 | $ | 4,389.5 | $ | 4,459.2 | |||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||||
| Interest Paid | $ | 30.8 | $ | 226.8 | $ | 845.5 | |||||
| Income Taxes Paid | 371.0 | 327.7 | 437.0 | ||||||||
| Transfers from Loans to OREO | 12.9 | 0.2 | 3.5 | ||||||||
| Transfers from Available for Sale Debt Securities to Held to Maturity Debt Securities | 6,864.1 | 301.5 | 160.8 | ||||||||
| Transfers to Leases Held For Sale from Leases | — | — | 53.6 |
See accompanying notes to consolidated financial statements on pages 93-166.
| 92 2021 Annual Report | Northern Trust Corporation |
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: 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. 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 also includes Global Family Office, which provides customized services, including but not limited to: investment consulting; global custody; fiduciary; and private banking to meet the complex financial needs of ultra-high-net-worth individuals and family offices across the globe. 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 on the consolidated statements of income. Income and expense accounts are remeasured at period-average rates of exchange.
Asset and liability accounts of entities with functional currencies that are not the U.S. dollar are translated at period-end rates of exchange. Income and expense accounts are translated at period-average rates of exchange. Translation adjustments, net of applicable taxes, are reported directly to accumulated other comprehensive income (AOCI), a component of stockholders’ equity.
E. Securities. Available for Sale (AFS) Securities 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 AFS securities are determined on a specific identification basis and are reported within Investment Security Losses, net, on the consolidated statements of income. Interest income is recorded on the accrual basis, adjusted for the amortization of premium and accretion of discount.
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Held to Maturity (HTM) Securities 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.
Held for Trading Securities are reported at fair value. Realized and unrealized gains and losses on securities held for trading are reported within Security Commissions and Trading Income on the consolidated statements of income.
Nonmarketable Securities primarily consist of Federal Reserve Bank of Chicago and Federal Home Loan Bank stock and community development investments, each of which are recorded in Other Assets on the consolidated balance sheets. Federal Reserve Bank of Chicago and Federal Home Loan Bank stock are reported at cost, which represents redemption value. Community development investments are typically reported at amortized cost. Those community development investments that are designed to generate a return primarily through realization of tax credits and other tax benefits, which are discussed in further detail in Note 29, “Variable Interest Entities,” are amortized over the lives of the related tax credits and other tax benefits.
F. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase. 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 either directly held by, or pledged to the counterparty until the repurchase.
G. Derivative Financial Instruments. Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients, as part of its trading activity for its own account, and as part of its risk management activities. These instruments generally include foreign exchange contracts, interest rate contracts, total return swap contracts and credit default swap contracts. All derivative financial instruments, whether designated as hedges or not, are recorded at fair value within Other Assets and Other Liabilities on the consolidated balance sheets. Derivative asset and liability positions with the same counterparty are reflected on a net basis on the consolidated balance sheets in cases where legally enforceable master netting arrangements or similar agreements exist. These derivative assets and liabilities are further reduced by cash collateral received from, and deposited with, derivative counterparties. The accounting for changes in the fair value of a derivative on the consolidated statements of income depends on whether or not the contract has been designated as a hedge and qualifies for hedge accounting under GAAP. Derivative financial instruments are recorded within the line item, Other Operating Activities, net, on the consolidated statement of cash flows, except for net investment hedges which are recorded within Other Investing Activities, net.
Changes in the fair value of client-related and trading derivative instruments, which are not designated hedges under GAAP, are recognized currently in either Foreign Exchange Trading Income or Security Commissions and Trading Income on the consolidated statements of income. Changes in the fair value of derivative instruments entered into for risk management purposes but not designated as hedges are recognized currently in Other Operating Income on the consolidated statements of income. Certain derivative instruments used by Northern Trust to manage risk are formally designated and qualify for hedge accounting as fair value, cash flow, or net investment hedges.
Derivatives designated as fair value hedges are used to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. Changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recognized currently in Interest Income or Interest Expense on the consolidated statements of income. For substantially all fair value hedges, Northern Trust applies the “shortcut” method of accounting, available under GAAP. As a result, changes recorded in the fair value of the hedged item are assumed to equal the offsetting gain or loss on the derivative. For fair value hedges that do not qualify for the “shortcut” method of accounting, Northern Trust utilizes regression analysis in assessing whether these hedging relationships are highly effective at inception and quarterly thereafter.
Derivatives designated as cash flow hedges are used to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. Changes in the fair value of such derivatives are recognized in AOCI, a component of stockholders’ equity, and there is no change to the accounting for the hedged item. Balances in AOCI are reclassified to earnings when the hedged forecasted transaction impacts earnings, and are reflected in the same income statement line item. Northern Trust applies the “shortcut” method of accounting for cash flow hedges of certain available for sale investment securities. For cash flow hedges of certain other available for sale investment securities, foreign currency denominated investment securities, and forecasted foreign currency denominated revenue and expenditure transactions, Northern Trust closely matches all terms of the hedged item and hedging derivative at inception and on an ongoing basis. For cash flow hedges of available for sale investment securities, to the extent all
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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 on the consolidated statements of income. For discontinued cash flow hedges, the accumulated gain or loss on the derivative remains in AOCI and is reclassified to earnings in the period in which the previously hedged forecasted transaction impacts earnings or is no longer probable of occurring. For discontinued fair value hedges, the previously hedged asset or liability ceases to be adjusted for changes in its fair value. Previous adjustments to the hedged item are amortized over the remaining life of the hedged item.
H. Loans and Leases. Loans and leases are recognized assets that represent a contractual right to receive money either on demand or on fixed or determinable dates. Loans and leases are disaggregated for disclosure purposes by portfolio segment (segment) and by class. Northern Trust has defined its segments as commercial and personal. A class of loans and leases is a subset of a segment, the components of which have similar risk characteristics, measurement attributes, or risk monitoring methods. The classes within the commercial segment have been defined as commercial and institutional, commercial real estate, lease financing, net, non-U.S. and other. The classes within the personal segment have been defined as residential real estate, private client and other.
Loan Classification. Loans that are held for investment are reported at the principal amount outstanding, net of unearned income. Loans classified as held for sale are reported at the lower of cost or fair value. Undrawn commitments relating to loans that are not held for sale are recorded in Other Liabilities and are carried at the amount of unamortized fees with an allowance for credit loss liability recognized for any estimated expected losses.
Nonaccrual Loans and Recognition of Income. Interest income on loans and leases is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. Loans meeting such criteria are classified as nonaccrual and interest income is recorded on a cash basis. Past due status is based on how long since the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans that are 29 days past due or less are reported as current. At the time a loan is determined to be nonaccrual, interest accrued but not collected is reversed against interest income in the current period. Interest collected on nonaccrual loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt. Management’s assessment of indicators of loan and lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent resumption of income recognition, do not meaningfully vary between loan and lease classes. Nonaccrual loans are returned to performing status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to performing status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate primarily to expected payment performance. A loan is eligible to be returned to performing status when: (i) no principal or interest that is due is unpaid and repayment of the remaining contractual principal and interest is expected or (ii) the loan has otherwise become well-secured (possessing realizable value sufficient to discharge the debt, including accrued interest, in full) and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current status in the near future). A loan that has not been brought fully current may be restored to performing status provided there has been a sustained period of repayment performance (generally a minimum of six payment periods) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time. Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial
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condition and prospects of repayment under the revised terms, and there has been a sustained period of repayment performance (generally a minimum of six payment periods) under the revised terms.
Troubled Debt Restructurings (TDRs). A loan that has been modified as a concession by Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties is referred to as a troubled debt restructuring (TDR). All TDRs are reported starting in the calendar year of their restructuring. In subsequent years, a TDR may cease being reported if the loan was modified at a market rate and has performed according to the modified terms for at least six payment periods. A loan that has been modified at a below market rate will return to accrual status if it satisfies the six-payment-period performance requirement.
The expected credit loss is measured based upon the present value of expected future cash flows, discounted at the effective interest rate based on the original contractual rate. If a loan’s contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, the loan’s effective interest rate is calculated based on the factor as it changes over the life of the loan. Northern Trust elected not to project changes in the factor for purposes of estimating expected future cash flows. Further, Northern Trust elected not to adjust the effective interest rate for prepayments. If the loan is collateral dependent, the expected loss is measured based on the fair value of the collateral at the reporting date.
If the loan valuation is less than the recorded value of the loan, either an allowance is established, or a charge-off is recorded, for the difference. Smaller balance (individually less than $1 million) homogeneous loans are collectively evaluated. Northern Trust’s accounting policies for material nonaccrual loans is consistent across all classes of loans and leases.
All loans and leases with TDR modifications are evaluated for additional expected credit losses. The nature and extent of further deterioration in credit quality, including a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses.
Collateral Dependent Financial Assets. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Most of Northern Trust’s collateral dependent credit exposure relates to its residential real estate portfolio for which the collateral is usually the underlying real estate property. For collateral dependent financial assets, it is Northern Trust’s policy to reserve or charge-off the difference between the amortized cost basis of the loan and the value of the collateral.
Premium, Discounts, Origination Costs and Fees. Premiums and discounts on loans are recognized as an adjustment of yield using the interest method based on the contractual terms of the loan. Certain direct origination costs and fees are netted, deferred and amortized over the life of the related loan as an adjustment to the loan’s yield.
I. Allowance for Credit Losses.
2021 and 2020 Allowance for Credit Losses after the Adoption of Accounting Standards Update No. 2016-13
As of December 31, 2021 and 2020, the allowance for credit losses represents management’s best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower relationships.
Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts.
Forecasting and Reversion. Estimating expected lifetime credit losses requires the consideration of the effect of future economic conditions. Northern Trust employs multiple scenarios over a reasonable and supportable period (currently two years) to project future conditions. Management determines the probability weights assigned to each scenario at each quarter-end. Key variables determined to be relevant for projecting credit losses on the portfolios in scope include macroeconomic factors, such as corporate profits, unemployment, and real estate price indices, as well as financial market factors such as equity prices, volatility, and credit spreads. For periods beyond the reasonable and supportable period, Northern Trust reverts to its own historical loss experiences on a straight-line basis over four quarters.
Allowance for Loans and Leases. The allowance estimation methodology for the collective assessment is primarily based on internally developed loss data specific to the Northern Trust financial asset portfolio from a historical observation period that includes both expansionary and recessionary periods. The estimation methodology and the related qualitative adjustment framework segregate the loan and lease portfolio into homogeneous segments based on similar risk characteristics or risk monitoring methods.
Northern Trust utilizes a quantitative probability of default/loss given default approach for the calculation of its credit allowance on a collective basis. For each of the different parameters, specific credit models for the individual loan segments were developed. For each segment, the probability of default and the loss given default are applied to the
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exposure at default for each projected quarter to determine the quantitative component of the allowance. The quantitative allowance is then reviewed within a qualitative adjustment framework, through which management applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology, and environmental factors that are not fully contemplated in the forecast to compute an adjustment to the quantitative allowance for each segment of the loan portfolio.
The allowance related to credit exposure evaluated on an individual basis is determined through an individual evaluation of loans, leases, and lending-related commitments that have defaulted, generally those with Borrower Ratings of 8 and 9, 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 defaulted loans for which the amount of allowance, if any, is determined based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and utilized by management. These appraisals are generally less than twelve months old and are subject to adjustments to reflect management’s judgment as to the realizable value of the collateral.
Northern Trust analyzes its exposure to credit losses from both on-balance sheet and off-balance sheet activity using a consistent methodology for the quantitative framework as well as the qualitative framework.
As of December 31, 2021 and 2020, for purposes of estimating the allowance for credit losses for undrawn loan commitments and standby letters of credit, the exposure at default includes an estimated drawdown of unused credit based on credit utilization factors, resulting in a proportionate amount of expected credit losses.
Allowance for HTM Securities. HTM debt securities classified as U.S. government, government sponsored agency, and certain securities classified as obligations of states and political subdivisions are considered to be guarantees of the U.S. government or an agency of the U.S. government and therefore an allowance for credit losses is not estimated for such investments as the expected probability of non-payment of the amortized cost basis is zero.
HTM debt securities classified as other asset-backed represent pools of underlying receivables from which the cash flows are used to pay the bonds that vary in seniority. Utilizing a qualitative estimation approach, the allowance for other asset-backed securities is assessed by evaluating underlying pool performance based on delinquency rates and available credit support.
HTM debt securities classified as other relates to investments purchased by Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income communities within Northern Trust’s market area. The allowance for CRA investments is assessed using a qualitative estimation approach primarily based on internal historical performance experience and default history of the underlying CRA portfolios to determine a quantitative component of the allowance.
The allowance estimation methodology for all other HTM debt securities is developed using a combination of external and internal data. The estimation methodology groups securities with shared characteristics for which the probability of default and the loss given default are applied to the total exposure at default to determine a quantitative component of the allowance.
Allowance for AFS Securities. AFS securities impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible credit losses. A determination as to whether a security’s decline in market value is related to credit impairment takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is credit related include, but are not limited to, the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer, which may indicate adverse credit conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that Northern Trust will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if a credit loss has occurred that is then based on the best estimate of cash flows to be collected from the security, discounted using the security’s effective interest rate. If the present value of the expected cash flows is found to be less than the current amortized cost of the security, an allowance for credit losses is generally recorded equal to the difference between the two amounts, limited to the amount the amortized cost basis exceeds the fair value of the security.
Allowance for Other Financial Assets. The allowance for other financial assets consists of the allowance for those other financial assets presented in Due from Banks, Other Central Bank Deposits, Interest-Bearing Deposits with Banks, Federal Funds Sold, and Other Assets. The Other Assets category includes other miscellaneous credit exposures reported in Other Assets on the consolidated balance sheets. The allowance estimation methodology for other financial assets primarily utilizes a similar approach as used for the HTM debt securities portfolio. It consists of a combination of externally and internally developed loss data, adjusted for the appropriate contractual term. Northern Trust’s portfolio is composed mostly of institutions within the “1 to 3” internal borrower rating category and expected to exhibit minimal to modest likelihood of loss.
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The portion of the allowance assigned to loans and leases, HTM debt securities, and other financial assets is presented as a contra asset in Allowance for Credit Losses on the consolidated balance sheets. The portion of the allowance assigned to undrawn loan commitments and standby letters of credit is reported in Other Liabilities on the consolidated balance sheets. The allowance for AFS securities is presented parenthetically with the amortized cost basis of AFS securities on the consolidated balance sheets.
The Provision for Credit Losses on the consolidated statements of income represents the change in the Allowance for Credit Losses on the consolidated balance sheets and is the charge to current period earnings. It represents the amount needed to maintain the Allowance for Credit Losses on the consolidated balance sheets at an appropriate level to absorb lifetime expected credit losses related to financial assets in scope. Actual losses may vary from current estimates and the amount of the Provision for Credit Losses may be either greater than or less than actual net charge-offs.
Contractual Term. Northern Trust estimates expected credit losses over the contractual term of the financial assets adjusted for prepayments, unless prepayments are not relevant to specific portfolios or sub-portfolios. Extension and renewal options are typically not considered since it is not Northern Trust’s practice to enter into arrangements where the borrower has the unconditional option to renew, or a conditional extension option whereby the conditions are beyond Northern Trust’s control.
Accrued Interest. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables related to its loan and securities portfolios as its policy is to write-off uncollectible accrued interest receivable balances in a timely manner. Accrued interest is written off by reversing interest income during the quarter the financial asset is moved from an accrual to a nonaccrual status.
2019 Allowance for Credit Losses prior to the Adoption of Accounting Standards Update No. 2016-13
Allowance for Loans and Leases under the Previous “Incurred Loss” Model. As of December 31, 2019, the Allowance for Credit Losses represented management’s estimate of probable losses which occurred as of the date of the consolidated financial statements. The loan and lease portfolio and other lending-related credit exposures were regularly reviewed to evaluate the level of the Allowance for Credit Losses. In determining an appropriate allowance level, Northern Trust evaluated the allowance necessary for impaired loans and lending-related commitments and also estimated losses inherent in other lending-related credit exposures. The allowance for credit losses consisted of the following components:
Specific Allowance. A loan was considered to be impaired when, based on existing information and events, management determined that it was probable that Northern Trust would be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans were identified through ongoing credit management and risk rating processes, including the formal review of past due and watch list credits. Payment performance and delinquency status were critical factors in identifying impairment for all loans and leases, particularly those within the residential real estate, private client and personal-other classes. Other key factors considered in identifying impairment of loans and leases within the commercial and institutional, lease financing, net, non-U.S., and commercial-other classes related to the borrower’s ability to perform under the terms of the obligation as measured through the assessment of future cash flows, including consideration of collateral value, market value, and other factors. The specific allowance was determined through an individual evaluation of loans and lending-related commitments considered impaired that was based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay. For impaired loans where the amount of specific allowance, if any, was determined based on the value of the underlying real estate collateral, third-party appraisals were typically obtained and utilized by management. These appraisals were generally less than twelve months old and were subject to adjustments to reflect management’s judgment as to the realizable value of the collateral.
Inherent Allowance. The inherent allowance estimation methodology was based on internally developed loss data specific to the Northern Trust loan and lease portfolio. The estimation methodology and the related qualitative adjustment framework segregated the loan and lease portfolio into homogeneous segments. For each segment, the probability of default and the loss given default were applied to the total exposure at default to determine a quantitative inherent allowance. The quantitative inherent allowance was then reviewed within the qualitative adjustment framework, where management applied judgment by assessing internal risk factors, potential limitations in the quantitative methodology and environmental factors that were not fully contemplated in the quantitative methodology to compute an adjustment to the quantitative inherent allowance for each segment of the loan portfolio.
The results of the inherent allowance estimation methodology were reviewed quarterly by Northern Trust’s Loan Loss Reserve Committee, which included representatives from Credit Risk Management, reporting segment management, and Corporate Finance.
Loans, leases, and other extensions of credit deemed uncollectible were charged to the Allowance for Credit Losses. Subsequent recoveries, if any, were credited to the allowance. Northern Trust’s policies relative to the charging-off of uncollectible loans and leases were consistent across both loan and lease segments. Determinations as to whether loan balances for which the collectability was in question were charged-off or a specific reserve was established were based on
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management’s assessment as to the level of certainty regarding the amount of loss. The Provision for Credit Losses, which was charged to income, was the amount necessary to adjust the allowance for credit losses to the level determined to be appropriate through the above processes.
As of December 31, 2019, for purposes of estimating the allowance for credit losses for undrawn loan commitments and standby letters of credit, the exposure at default included an estimated drawdown of unused credit based on a credit conversion factor. The proportionate amount of the quantitative methodology calculation after any required adjustment in the qualitative framework resulted in the required allowance for undrawn loan commitments and standby letters of credit as of the reporting date.
The portion of the allowance assigned to loans and leases was reported as a contra asset, directly following loans and leases in the consolidated balance sheets. The portion of the allowance assigned to undrawn loan commitments and standby letters of credit was reported in Other Liabilities on the consolidated balance sheets.
Other-Than-Temporary Impairment (OTTI) related to Securities. As of December 31, 2019, a security was considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected was less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security was less than the security’s amortized cost basis and the investor intended, or more-likely-than-not would have been required, to sell the security before recovery of the security’s amortized cost basis. If OTTI existed, the charge to earnings was limited to the amount of credit loss if the investor did not intend to sell the security, and it was more-likely-than-not that it would not have been required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost was recognized in AOCI, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost was charged to earnings.
J. Standby Letters of Credit. Fees on standby letters of credit are recognized in Other Operating Income on the consolidated statements of income using the straight-line method over the lives of the underlying agreements. Northern Trust’s recorded other liability for standby letters of credit, reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments.
K. Buildings and Equipment. Buildings and equipment owned are carried at original cost less accumulated depreciation. The charge for depreciation is computed using the straight-line method based on the following range of lives: buildings – up to 30 years; equipment – 3 to 10 years; and leasehold improvements – the shorter of the lease term or 15 years.
L. Other Real Estate Owned (OREO). OREO is comprised of commercial and residential real estate properties acquired in partial or total satisfaction of loans. OREO assets are carried at the lower of cost or fair value less estimated costs to sell and are recorded in Other Assets on the consolidated balance sheets. Fair value is typically based on third-party appraisals. Appraisals of OREO properties are updated on an annual basis and are subject to adjustments to reflect management’s judgment as to the realizable value of the properties. Losses identified during the 90-day period after the acquisition of such properties are charged against the Allowance for Credit Losses assigned to Loans and Leases. Subsequent write-downs that may be required to the carrying value of these assets and gains or losses realized from asset sales are recorded within Other Operating Expense on the consolidated statements of income.
M. Goodwill and Other Intangible Assets. Goodwill is not subject to amortization. Separately identifiable acquired intangible assets with finite lives are amortized over their estimated useful lives, primarily on a straight-line basis. Purchased software, software licenses, and allowable internal costs, including compensation relating to software developed for internal use, are capitalized. Software is amortized using the straight-line method over the estimated useful lives of the assets, generally ranging from 3 to 10 years. Fees paid for the use of software services that do not convey a software license are expensed as incurred.
Goodwill and other intangible assets are reviewed for impairment on an annual basis or more frequently if events or changes in circumstances indicate the carrying amounts may not be recoverable.
N. Trust, Investment and Other Servicing Fees. Trust, investment and other servicing fees are recorded on an accrual basis, over the period in which the service is provided. Fees are primarily a function of the market value of assets custodied, managed and serviced, transaction volumes, and securities lending volume and spreads, as set forth in the underlying client agreement. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes.
O. Client Security Settlement Receivables. These receivables result from custody client withdrawals from short-term investment funds that settle on the following business day as well as custody client security sales executed under 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.
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P. Income Taxes. Northern Trust follows an asset and liability approach to account for income taxes. The objective is to recognize the amount of taxes payable or refundable for the current year, and to recognize deferred tax assets and liabilities resulting from temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates.
Tax positions taken or expected to be taken on a tax return are evaluated based on their likelihood of being sustained upon examination by tax authorities. Only tax positions that are considered more-likely-than-not to be sustained are recorded on the consolidated financial statements. A valuation allowance is established for deferred tax assets if it is more-likely-than-not that all or a portion will not be realized. Northern Trust recognizes any interest and penalties related to unrecognized tax benefits in the Provision for Income Taxes on the consolidated statements of income.
Q. Cash Flow Statements. Cash and cash equivalents in the cash flow statements have been defined as “Cash and Due from Banks” on the consolidated balance sheets.
R. Pension and Other Postretirement Benefits. Northern Trust records the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheets. Funded pension and postretirement benefits are reported in Other Assets and unfunded pension and postretirement benefits are reported in Other Liabilities on the consolidated balance sheets. Plan assets and benefit obligations are measured annually at December 31, unless specific circumstances require an interim remeasurement. Plan assets are determined based on fair value generally representing observable market prices. The projected benefit obligations are determined based on the present value of projected benefit distributions at an assumed discount rate. Pension costs are recognized ratably over the estimated working lifetime of eligible participants.
S. Share-Based Compensation Plans. Northern Trust recognizes as expense the grant-date fair value of stock and stock unit awards and other share-based compensation granted to employees as Compensation on the consolidated statements of income. The fair values of stock and stock unit awards, including performance stock unit awards and director awards, are based on the closing price of the Corporation’s stock on the date of grant adjusted for certain awards that do not accrue dividends while vesting. The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The model utilizes weighted-average assumptions regarding the period of time that options granted are expected to be outstanding (expected term) based primarily on the historical exercise behavior attributable to previous option grants, the estimated yield from dividends paid on the Corporation’s stock over the expected term of the options, the historical volatility of Northern Trust’s stock price and the implied volatility of traded options on Northern Trust stock, and a risk free interest rate based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted.
Compensation expense for share-based award grants with terms that provide for a graded vesting schedule, whereby portions of the award vest in increments over the requisite service period, are recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense for performance stock unit awards are recognized on a straight-line basis over the requisite service period of the award based on expected achievement of the performance condition. Adjustments are made for employees that meet certain eligibility criteria at the grant date or during the requisite service period.
Northern Trust does not include an estimate of future forfeitures in its recognition of share-based compensation expense. Share-based compensation expense is adjusted based on forfeitures as they occur. Dividend equivalents are paid on a current basis for restricted stock units granted prior to February 21, 2017 that are not yet vested, and certain deferred stock unit awards that have vested but are not yet distributed. Dividend equivalents are accrued for performance stock unit awards, most restricted stock unit awards granted on or after February 21, 2017 and director awards not yet vested, and are paid upon vesting. Certain restricted stock units granted on or after February 20, 2018 are not entitled to dividend equivalents during the vesting period. Cash flows resulting from the realization of excess tax benefits are classified as operating cash flows on the consolidated statements of cash flows.
T. Net Income Per Common Share. Basic net income per common share is computed by dividing net income/loss applicable to common stock by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income applicable to common stock and potential common shares by the aggregate of the weighted average number of common shares outstanding during the period and common share equivalents calculated for stock options outstanding using the treasury stock method. In a period of a net loss, diluted net income per common share is calculated in the same manner as basic net income per common share.
Northern Trust has issued certain restricted stock unit awards, which are unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. These units are considered participating securities. 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.
| 100 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Recent Accounting Pronouncements
On January 1, 2021, Northern Trust adopted Accounting Standards Update (ASU) No. 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (ASU 2020-01). ASU 2020-01 addresses two accounting issues: (1) application of the measurement alternative under Topic 321 in correlation with the transition into and out of the equity method under Topic 323 and (2) the measurement of certain forward contracts and purchased options to acquire equity securities. ASU 2020-01 clarifies that an entity applying the measurement alternative under Topic 321 that must transition to the equity method under Topic 323 because of an observable transaction will remeasure its investment immediately before transition, whereas an entity applying the equity method under Topic 323 that must transition to Topic 321 because of an observable transaction will remeasure its investment immediately after transition. ASU 2020-01 also clarifies that certain forward contracts or purchased call options to acquire equity securities generally will be measured using the fair value principles of Topic 321 before settlement or exercise. Upon adoption of ASU 2020-01, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated statements of income.
On January 1, 2021, Northern Trust adopted ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs” (ASU 2020-08). ASU 2020-08 clarifies the Codification related to the standard issued in ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” ASU 2020-08 clarifies that an entity should amortize premiums on purchased callable debt securities to the first call date and related call amount and at that point reassess if there is a remaining premium to amortize to a subsequent call date. Upon adoption of ASU 2020-08, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated statements of income.
On January 7, 2021, Northern Trust retrospectively adopted ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (ASU 2021-01). ASU 2021-01 clarifies the scope of Topic 848 to explicitly include those derivative instruments affected by changes in interest rates used for margining, discounting, or contract price alignment as eligible for certain optional expedients and exceptions in Topic 848. Upon adoption of ASU 2021-01, Northern Trust elected the expedients provided in Topic 848 with no significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.
Note 3 – Fair Value Measurements
Fair value under GAAP is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date.
Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred. No transfers into or out of Level 3 occurred during the years ended December 31, 2021, or 2020.
Level 1 – Quoted, active market prices for identical assets or liabilities. Northern Trust’s Level 1 assets are comprised of AFS 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 AFS 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, 2021, Northern Trust’s AFS debt securities portfolio included 2,547 Level 2 securities with an aggregate market value of $35.6 billion. All 2,547 debt securities were valued by external pricing vendors. As of December 31, 2020, Northern Trust’s AFS debt securities portfolio included 2,260 Level 2 debt securities with an aggregate market value of $39.2 billion. All 2,260 debt securities were valued by external pricing vendors. Trading
| 2021 Annual Report | Northern Trust Corporation 101 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
account debt securities, which totaled $0.3 million and $0.5 million as of December 31, 2021 and 2020, respectively were all valued using external pricing vendors.
Northern Trust has established processes and procedures to assess the suitability of valuation methodologies used by external pricing vendors, including reviews of valuation techniques and assumptions used for selected securities. On a daily basis, periodic quality control reviews of prices received from vendors are conducted which include comparisons to prices on similar security types received from multiple pricing vendors and to the previous day’s reported prices for each security. Predetermined tolerance level exceptions are researched and may result in additional validation through available market information or the use of an alternate pricing vendor. Quarterly, Northern Trust reviews documentation from third-party pricing vendors regarding the valuation processes and assumptions used in their valuations and assesses whether the fair value levels assigned by Northern Trust to each security classification are appropriate. Annually, valuation inputs used within third-party pricing vendor valuations are reviewed for propriety on a sample basis through a comparison of inputs used to comparable market data, including security classifications that are less actively traded and security classifications comprising significant portions of the portfolio.
Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting arrangements or similar agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been considered material.
Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace.
Northern Trust’s Level 3 liabilities consist of swaps that Northern Trust entered into with the purchaser of 1.1 million and 1.0 million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern Trust and sold in June 2016 and 2015, respectively. Pursuant to the swaps, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-dilutive adjustments to the ratio. The swaps also require periodic payments from Northern Trust to the counterparty calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swaps is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. See “Visa Class B Common Shares” under Note 26, “Commitments and Contingent Liabilities,” for further information.
Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.
Management of various businesses and departments of Northern Trust (including Corporate Market Risk, Credit Risk Management, Corporate Finance, C&IS and Wealth Management) reviews valuation methods and models for Level 3 assets and liabilities. Fair value measurements are performed upon acquisitions of an asset or liability. Management of the appropriate business or department reviews assumed inputs, especially when unobservable in the marketplace, in order to substantiate their use in each fair value measurement. When appropriate, management reviews forecasts used in the valuation process in light of other relevant financial projections to understand any variances between current and previous fair value measurements. In certain circumstances, third party information is used to support the fair value measurements. If certain third party information seems inconsistent with consensus views, a review of the information is performed by management of the respective business or department to determine the appropriate fair value of the asset or liability.
The following table presents the fair values of Northern Trust’s Level 3 liabilities as of December 31, 2021 and 2020, 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.
| 102 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 52: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
| DECEMBER 31, 2021 | |||||||||||||||||||||||
| FINANCIAL INSTRUMENT | FAIR VALUE | VALUATION TECHNIQUE | UNOBSERVABLE INPUTS | INPUT VALUES | WEIGHTED-AVERAGE INPUT VALUES(1) | ||||||||||||||||||
| Swaps Related to Sale of Certain Visa Class B Common Shares | $37.5 million | Discounted Cash Flow | Conversion Rate | 1.62x | 1.62x | ||||||||||||||||||
| Visa Class A Appreciation | 10.10% | 10.10% | |||||||||||||||||||||
| Expected Duration | 12 | - | 33 months | 20 months |
(1) Weighted average of expected duration based on scenario probability.
| DECEMBER 31, 2020 | |||||||||||||||||||||||
| FINANCIAL INSTRUMENT | FAIR VALUE | VALUATION TECHNIQUE | UNOBSERVABLE INPUTS | INPUT VALUES | WEIGHTED-AVERAGE INPUT VALUES(1) | ||||||||||||||||||
| Swaps Related to Sale of Certain Visa Class B Common Shares | $35.3 million | Discounted Cash Flow | Conversion Rate | 1.62x | 1.62x | ||||||||||||||||||
| Visa Class A Appreciation | 8.73% | 8.73% | |||||||||||||||||||||
| Expected Duration | 12 | - | 33 months | 20 months |
(1) Weighted average of expected duration based on scenario probability.
The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020, segregated by fair value hierarchy level.
TABLE 53: RECURRING BASIS HIERARCHY LEVELING
| DECEMBER 31, 2021 | ||||||||||||||||||||
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | NETTING | ASSETS/ LIABILITIES AT FAIR VALUE | |||||||||||||||
| Debt Securities | ||||||||||||||||||||
| Available for Sale | ||||||||||||||||||||
| U.S. Government | $ | 2,426.1 | $ | — | $ | — | $ | — | $ | 2,426.1 | ||||||||||
| Obligations of States and Political Subdivisions | — | 3,876.1 | — | — | 3,876.1 | |||||||||||||||
| Government Sponsored Agency | — | 18,075.6 | — | — | 18,075.6 | |||||||||||||||
| Non-U.S. Government | — | 374.0 | — | — | 374.0 | |||||||||||||||
| Corporate Debt | — | 2,341.7 | — | — | 2,341.7 | |||||||||||||||
| Covered Bonds | — | 505.6 | — | — | 505.6 | |||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | — | 3,045.1 | — | — | 3,045.1 | |||||||||||||||
| Other Asset-Backed | — | 5,941.6 | — | — | 5,941.6 | |||||||||||||||
| Commercial Mortgage-Backed | — | 1,424.7 | — | — | 1,424.7 | |||||||||||||||
| Total Available for Sale | 2,426.1 | 35,584.4 | — | — | 38,010.5 | |||||||||||||||
| Trading Account | — | 0.3 | — | — | 0.3 | |||||||||||||||
| Total Available for Sale and Trading Debt Securities | 2,426.1 | 35,584.7 | — | — | 38,010.8 | |||||||||||||||
| Other Assets | ||||||||||||||||||||
| Derivative Assets | ||||||||||||||||||||
| Foreign Exchange Contracts | — | 2,207.4 | — | (1,530.7) | 676.7 | |||||||||||||||
| Interest Rate Contracts | — | 140.0 | — | (3.1) | 136.9 | |||||||||||||||
| Total Derivative Assets | — | 2,347.4 | — | (1,533.8) | 813.6 | |||||||||||||||
| Other Liabilities | ||||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||
| Foreign Exchange Contracts | — | 1,998.8 | — | (1,234.5) | 764.3 | |||||||||||||||
| Interest Rate Contracts | — | 98.9 | — | (48.1) | 50.8 | |||||||||||||||
| Other Financial Derivatives(1) | — | — | 37.5 | (0.9) | 36.6 | |||||||||||||||
| Total Derivative Liabilities | $ | — | $ | 2,097.7 | $ | 37.5 | $ | (1,283.5) | $ | 851.7 |
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2021, derivative assets and liabilities shown above also include reductions of $389.4 million and $139.0 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.
(1) This line consists of swaps related to the sale of certain Visa Class B common shares.
| 2021 Annual Report | Northern Trust Corporation 103 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| DECEMBER 31, 2020 | ||||||||||||||||||||
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | NETTING | ASSETS/ LIABILITIES AT FAIR VALUE | |||||||||||||||
| Debt Securities | ||||||||||||||||||||
| Available for Sale | ||||||||||||||||||||
| U.S. Government | $ | 2,799.9 | $ | — | $ | — | $ | — | $ | 2,799.9 | ||||||||||
| Obligations of States and Political Subdivisions | — | 3,083.6 | — | — | 3,083.6 | |||||||||||||||
| Government Sponsored Agency | — | 24,956.7 | — | — | 24,956.7 | |||||||||||||||
| Non-U.S. Government | — | 714.0 | — | — | 714.0 | |||||||||||||||
| Corporate Debt | — | 2,539.6 | — | — | 2,539.6 | |||||||||||||||
| Covered Bonds | — | 553.1 | — | — | 553.1 | |||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | — | 2,345.8 | — | — | 2,345.8 | |||||||||||||||
| Other Asset-Backed | — | 3,997.5 | — | — | 3,997.5 | |||||||||||||||
| Commercial Mortgage Backed | — | 1,031.8 | — | — | 1,031.8 | |||||||||||||||
| Total Available for Sale | 2,799.9 | 39,222.1 | — | — | 42,022.0 | |||||||||||||||
| Trading Account | — | 0.5 | — | — | 0.5 | |||||||||||||||
| Total Available for Sale and Trading Debt Securities | 2,799.9 | 39,222.6 | — | — | 42,022.5 | |||||||||||||||
| Other Assets | ||||||||||||||||||||
| Derivative Assets | ||||||||||||||||||||
| Foreign Exchange Contracts | — | 4,260.7 | — | (3,505.3) | 755.4 | |||||||||||||||
| Interest Rate Contracts | — | 297.5 | — | (2.5) | 295.0 | |||||||||||||||
| Total Derivatives Assets | — | 4,558.2 | — | (3,507.8) | 1,050.4 | |||||||||||||||
| Other Liabilities | ||||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||
| Foreign Exchange Contracts | — | 4,722.5 | — | (2,718.6) | 2,003.9 | |||||||||||||||
| Interest Rate Contracts | — | 125.0 | — | (98.5) | 26.5 | |||||||||||||||
| Other Financial Derivative(1) | — | — | 35.3 | — | 35.3 | |||||||||||||||
| Total Derivative Liabilities | $ | — | $ | 4,847.5 | $ | 35.3 | $ | (2,817.1) | $ | 2,065.7 |
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2020, derivative assets and liabilities shown above also include reductions of $1,867.8 million and $1,177.2 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.
(1) This line consists of swaps related to the sale of certain Visa Class B common shares.
The following table presents the changes in Level 3 liabilities for the years ended December 31, 2021 and 2020.
TABLE 54: CHANGES IN LEVEL 3 LIABILITIES
| LEVEL 3 LIABILITIES | SWAPS RELATED TO SALE OF CERTAIN VISA CLASS B COMMON SHARES | |||||||
| (In Millions) | 2021 | 2020 | ||||||
| Fair Value at January 1 | $ | 35.3 | $ | 33.4 | ||||
| Total (Gains) Losses: | ||||||||
| Included in Earnings(1) | 21.3 | 18.3 | ||||||
| Purchases, Issues, Sales, and Settlements | ||||||||
| Settlements | (19.1) | (16.4) | ||||||
| Fair Value at December 31 | $ | 37.5 | $ | 35.3 | ||||
| Unrealized Losses (Gains) Included in Earnings Related to Financial Instruments Held at December 31(1) | $ | 22.0 | $ | 18.6 |
(1) Gains (losses) are recorded in Other Operating Income on the consolidated statements of income.
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.
| 104 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets measured at fair value on a nonrecurring basis at December 31, 2021 and 2020, all of which were categorized as Level 3 under the fair value hierarchy, were comprised of nonaccrual loans whose values were based on real estate and other available collateral, and of OREO properties.
Fair values of real estate loan collateral were estimated using a market approach typically supported by third-party valuations and property-specific fees and taxes. The fair values of real estate loan collateral were subject to adjustments to reflect management’s judgment as to realizable value and consisted of discount factors ranging from 15.0% to 20.0% with a weighted average based on fair values of 15.4% and 16.8% as of December 31, 2021 and 2020, respectively. Other loan collateral, which typically consists of accounts receivable, inventory and equipment, is valued using a market approach adjusted for asset-specific characteristics and in limited instances third-party valuations are used. OREO assets are carried at the lower of cost or fair value less estimated costs to sell, with fair value typically based on third-party appraisals.
Collateral-based nonaccrual loans that have been adjusted to fair value totaled $15.0 million and $24.6 million at December 31, 2021 and 2020, respectively.
The following table presents the fair values of Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020, 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 55: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS
| DECEMBER 31, 2021 | |||||||||||||||||||||||
| FINANCIAL INSTRUMENT | FAIR VALUE(1) | VALUATION TECHNIQUE | UNOBSERVABLE INPUTS | INPUT VALUES | WEIGHTED-AVERAGE INPUT VALUES | ||||||||||||||||||
| Loans | $15.0 million | Market Approach | Discount factor applied to real estate collateral-based loans to reflect realizable value | 15.0% | – | 20.0% | 15.4% |
(1) Includes real estate collateral-based loans and other collateral-based loans.
| DECEMBER 31, 2020 | |||||||||||||||||||||||
| FINANCIAL INSTRUMENT | FAIR VALUE(1) | VALUATION TECHNIQUE | UNOBSERVABLE INPUTS | INPUT VALUES | WEIGHTED-AVERAGE INPUT VALUES | ||||||||||||||||||
| Loans | $24.6 million | Market Approach | Discount factor applied to real estate collateral-based loans to reflect realizable value | 15.0% | – | 20.0% | 16.8% |
(1) Includes real estate collateral-based loans and other collateral-based loans.
| 2021 Annual Report | Northern Trust Corporation 105 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the fair values of all financial instruments.
TABLE 56: FAIR VALUE OF FINANCIAL INSTRUMENTS
| DECEMBER 31, 2021 | |||||||||||||||||
| FAIR VALUE | |||||||||||||||||
| (In Millions) | BOOK VALUE | TOTAL FAIR VALUE | LEVEL 1 | LEVEL 2 | LEVEL 3 | ||||||||||||
| ASSETS | |||||||||||||||||
| Cash and Due from Banks | $ | 3,056.8 | $ | 3,056.8 | $ | 3,056.8 | $ | — | $ | — | |||||||
| Federal Reserve and Other Central Bank Deposits | 64,582.2 | 64,582.2 | — | 64,582.2 | — | ||||||||||||
| Interest-Bearing Deposits with Banks | 1,949.4 | 1,949.4 | — | 1,949.4 | — | ||||||||||||
| Securities Purchased under Agreements to Resell | 686.4 | 686.4 | — | 686.4 | — | ||||||||||||
| Debt Securities | |||||||||||||||||
| Available for Sale(1) | 38,010.5 | 38,010.5 | 2,426.1 | 35,584.4 | — | ||||||||||||
| Held to Maturity | 23,564.5 | 23,315.4 | 47.0 | 23,268.4 | — | ||||||||||||
| Trading Account | 0.3 | 0.3 | — | 0.3 | — | ||||||||||||
| Loans (excluding Leases) | |||||||||||||||||
| Held for Investment | 40,319.3 | 40,208.2 | — | — | 40,208.2 | ||||||||||||
| Held for Sale | 12.3 | 24.5 | — | 24.5 | |||||||||||||
| Client Security Settlement Receivables | 1,941.2 | 1,941.2 | — | 1,941.2 | — | ||||||||||||
| Other Assets | |||||||||||||||||
| Federal Reserve and Federal Home Loan Bank Stock | 140.1 | 140.1 | — | 140.1 | — | ||||||||||||
| Community Development Investments | 959.6 | 959.6 | — | 959.6 | — | ||||||||||||
| Employee Benefit and Deferred Compensation | 218.4 | 222.9 | 119.1 | 103.8 | — | ||||||||||||
| LIABILITIES | |||||||||||||||||
| Deposits | |||||||||||||||||
| Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing | $ | 83,318.6 | $ | 83,318.6 | $ | 83,318.6 | $ | — | $ | — | |||||||
| Savings Certificates and Other Time | 842.7 | 843.8 | — | 843.8 | — | ||||||||||||
| Non U.S. Offices Interest-Bearing | 75,767.1 | 75,767.1 | — | 75,767.1 | — | ||||||||||||
| Federal Funds Purchased | 0.2 | 0.2 | — | 0.2 | — | ||||||||||||
| Securities Sold Under Agreements to Repurchase | 531.9 | 531.9 | — | 531.9 | — | ||||||||||||
| Other Borrowings | 3,583.8 | 3,583.9 | — | 3,583.9 | — | ||||||||||||
| Senior Notes | 2,505.5 | 2,591.4 | — | 2,591.4 | — | ||||||||||||
| Long-Term Debt | |||||||||||||||||
| Subordinated Debt | 1,145.7 | 1,189.4 | — | 1,189.4 | — | ||||||||||||
| Other Liabilities | |||||||||||||||||
| Standby Letters of Credit | 15.7 | 15.7 | — | — | 15.7 | ||||||||||||
| Loan Commitments | 59.8 | 59.8 | — | — | 59.8 | ||||||||||||
| DERIVATIVE INSTRUMENTS | |||||||||||||||||
| Asset/Liability Management | |||||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||||
| Assets | $ | 245.3 | $ | 245.3 | $ | — | $ | 245.3 | $ | — | |||||||
| Liabilities | 25.5 | 25.5 | — | 25.5 | — | ||||||||||||
| Interest Rate Contracts | |||||||||||||||||
| Assets | 7.6 | 7.6 | — | 7.6 | — | ||||||||||||
| Liabilities | 8.7 | 8.7 | — | 8.7 | — | ||||||||||||
| Other Financial Derivatives | |||||||||||||||||
| Liabilities(2) | 37.5 | 37.5 | — | — | 37.5 | ||||||||||||
| Client-Related and Trading | |||||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||||
| Assets | 1,962.1 | 1,962.1 | — | 1,962.1 | — | ||||||||||||
| Liabilities | 1,973.3 | 1,973.3 | — | 1,973.3 | — | ||||||||||||
| Interest Rate Contracts | |||||||||||||||||
| Assets | 132.4 | 132.4 | — | 132.4 | — | ||||||||||||
| Liabilities | 90.2 | 90.2 | — | 90.2 | — |
(1) Refer to the table located on page 103 for the disaggregation of AFS debt securities.
(2) This line consists of swaps related to the sale of certain Visa Class B common shares.
| 106 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| DECEMBER 31, 2020 | |||||||||||||||||
| FAIR VALUE | |||||||||||||||||
| (In Millions) | BOOK VALUE | TOTAL FAIR VALUE | LEVEL 1 | LEVEL 2 | LEVEL 3 | ||||||||||||
| ASSETS | |||||||||||||||||
| Cash and Due from Banks | $ | 4,389.5 | $ | 4,389.5 | $ | 4,389.5 | $ | — | $ | — | |||||||
| Federal Reserve and Other Central Bank Deposits | 55,503.6 | 55,503.6 | — | 55,503.6 | — | ||||||||||||
| Interest-Bearing Deposits with Banks | 4,372.6 | 4,372.6 | — | 4,372.6 | — | ||||||||||||
| Securities Purchased under Agreements to Resell | 1,596.5 | 1,596.5 | — | 1,596.5 | — | ||||||||||||
| Debt Securities | |||||||||||||||||
| Available for Sale(1) | 42,022.0 | 42,022.0 | 2,799.9 | 39,222.1 | — | ||||||||||||
| Held to Maturity | 17,791.1 | 17,797.4 | 90.0 | 17,707.4 | — | ||||||||||||
| Trading Account | 0.5 | 0.5 | — | 0.5 | — | ||||||||||||
| Loans (excluding Leases) | |||||||||||||||||
| Held for Investment | 33,558.0 | 34,017.5 | — | — | 34,017.5 | ||||||||||||
| Client Security Settlement Receivables | 1,160.2 | 1,160.2 | — | 1,160.2 | — | ||||||||||||
| Other Assets | |||||||||||||||||
| Federal Reserve and Federal Home Loan Bank Stock | 275.0 | 275.0 | — | 275.0 | — | ||||||||||||
| Community Development Investments | 919.6 | 919.6 | — | 919.6 | — | ||||||||||||
| Employee Benefit and Deferred Compensation | 215.8 | 228.9 | 138.6 | 90.3 | — | ||||||||||||
| LIABILITIES | |||||||||||||||||
| Deposits | |||||||||||||||||
| Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing | $ | 71,742.5 | $ | 71,742.5 | $ | 71,742.5 | $ | — | $ | — | |||||||
| Savings Certificates and Other Time | 937.1 | 943.0 | — | 943.0 | — | ||||||||||||
| Non U.S. Offices Interest-Bearing | 71,198.4 | 71,198.4 | — | 71,198.4 | — | ||||||||||||
| Federal Funds Purchased | 260.2 | 260.2 | — | 260.2 | — | ||||||||||||
| Securities Sold Under Agreements to Repurchase | 39.8 | 39.8 | — | 39.8 | — | ||||||||||||
| Other Borrowings | 4,011.5 | 4,012.7 | — | 4,012.7 | — | ||||||||||||
| Senior Notes | 3,122.4 | 3,222.6 | — | 3,222.6 | — | ||||||||||||
| Long-Term Debt | |||||||||||||||||
| Subordinated Debt | 1,189.3 | 1,250.1 | — | 1,250.1 | — | ||||||||||||
| Floating Rate Capital Debt | 277.8 | 264.6 | — | 264.6 | — | ||||||||||||
| Other Liabilities | |||||||||||||||||
| Standby Letters of Credit | 22.4 | 22.4 | — | — | 22.4 | ||||||||||||
| Loan Commitments | 77.0 | 77.0 | — | — | 77.0 | ||||||||||||
| DERIVATIVE INSTRUMENTS | |||||||||||||||||
| Asset/Liability Management | |||||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||||
| Assets | $ | 15.6 | $ | 15.6 | $ | — | $ | 15.6 | $ | — | |||||||
| Liabilities | 311.8 | 311.8 | — | 311.8 | — | ||||||||||||
| Interest Rate Contracts | |||||||||||||||||
| Assets | 8.3 | 8.3 | — | 8.3 | — | ||||||||||||
| Liabilities | 10.2 | 10.2 | — | 10.2 | — | ||||||||||||
| Other Financial Derivatives | |||||||||||||||||
| Liabilities(2) | 35.3 | 35.3 | — | — | 35.3 | ||||||||||||
| Client-Related and Trading | |||||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||||
| Assets | 4,245.1 | 4,245.1 | — | 4,245.1 | — | ||||||||||||
| Liabilities | 4,410.7 | 4,410.7 | — | 4,410.7 | — | ||||||||||||
| Interest Rate Contracts | |||||||||||||||||
| Assets | 289.2 | 289.2 | — | 289.2 | — | ||||||||||||
| Liabilities | 114.8 | 114.8 | — | 114.8 | — |
(1) Refer to the table located on page 104 for the disaggregation of AFS debt securities.
(2) This line consists of swaps related to the sale of certain Visa Class B common shares.
| 2021 Annual Report | Northern Trust Corporation 107 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Securities
Available for Sale Debt Securities. The following tables provide the amortized cost, fair values, and remaining maturities of AFS debt securities.
TABLE 57: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES
| DECEMBER 31, 2021 | ||||||||||||||
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE | ||||||||||
| U.S. Government | $ | 2,406.2 | $ | 29.3 | $ | 9.4 | $ | 2,426.1 | ||||||
| Obligations of States and Political Subdivisions | 3,841.0 | 73.7 | 38.6 | 3,876.1 | ||||||||||
| Government Sponsored Agency | 18,092.1 | 93.7 | 110.2 | 18,075.6 | ||||||||||
| Non-U.S. Government | 383.4 | 0.1 | 9.5 | 374.0 | ||||||||||
| Corporate Debt | 2,319.8 | 31.6 | 9.7 | 2,341.7 | ||||||||||
| Covered Bonds | 502.6 | 3.9 | 0.9 | 505.6 | ||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 3,052.4 | 28.1 | 35.4 | 3,045.1 | ||||||||||
| Other Asset-Backed | 5,962.0 | 11.3 | 31.7 | 5,941.6 | ||||||||||
| Commercial Mortgage-Backed | 1,389.0 | 38.9 | 3.2 | 1,424.7 | ||||||||||
| Total | $ | 37,948.5 | $ | 310.6 | $ | 248.6 | $ | 38,010.5 |
| DECEMBER 31, 2020 | ||||||||||||||
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE | ||||||||||
| U.S. Government | $ | 2,728.8 | $ | 71.1 | $ | — | $ | 2,799.9 | ||||||
| Obligations of States and Political Subdivisions | 2,927.8 | 155.9 | 0.1 | 3,083.6 | ||||||||||
| Government Sponsored Agency | 24,595.1 | 388.5 | 26.9 | 24,956.7 | ||||||||||
| Non-U.S. Government | 713.6 | 1.1 | 0.7 | 714.0 | ||||||||||
| Corporate Debt | 2,459.9 | 79.8 | 0.1 | 2,539.6 | ||||||||||
| Covered Bonds | 543.1 | 10.0 | — | 553.1 | ||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 2,281.7 | 64.7 | 0.6 | 2,345.8 | ||||||||||
| Other Asset-Backed | 3,953.5 | 46.8 | 2.8 | 3,997.5 | ||||||||||
| Commercial Mortgage-Backed | 952.2 | 79.7 | 0.1 | 1,031.8 | ||||||||||
| Total | $ | 41,155.7 | $ | 897.6 | $ | 31.3 | $ | 42,022.0 |
TABLE 58: REMAINING MATURITY OF AVAILABLE FOR SALE DEBT SECURITIES
| DECEMBER 31, 2021 | 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 | $ | — | $ | — | $ | 2,157.8 | $ | 2,187.1 | $ | 248.4 | $ | 239.0 | $ | — | $ | — | $ | 2,406.2 | $ | 2,426.1 | ||||||||||||
| Obligations of States and Political Subdivisions | 22.8 | 23.0 | 448.3 | 462.1 | 3,239.7 | 3,262.6 | 130.2 | 128.4 | 3,841.0 | 3,876.1 | ||||||||||||||||||||||
| Government Sponsored Agency | 2,706.1 | 2,713.2 | 8,112.2 | 8,121.1 | 6,084.0 | 6,053.4 | 1,189.8 | 1,187.9 | 18,092.1 | 18,075.6 | ||||||||||||||||||||||
| Non-U.S. Government | 72.7 | 72.7 | 228.4 | 223.1 | 82.3 | 78.2 | — | — | 383.4 | 374.0 | ||||||||||||||||||||||
| Corporate Debt | 404.4 | 408.0 | 1,892.6 | 1,911.6 | 18.1 | 17.5 | 4.7 | 4.6 | 2,319.8 | 2,341.7 | ||||||||||||||||||||||
| Covered Bonds | 141.5 | 142.1 | 361.1 | 363.5 | — | — | — | — | 502.6 | 505.6 | ||||||||||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 760.6 | 765.7 | 1,926.8 | 1,926.1 | 365.0 | 353.3 | — | — | 3,052.4 | 3,045.1 | ||||||||||||||||||||||
| Other Asset-Backed | 894.0 | 896.8 | 3,559.0 | 3,541.4 | 1,291.6 | 1,286.3 | 217.4 | 217.1 | 5,962.0 | 5,941.6 | ||||||||||||||||||||||
| Commercial Mortgage-Backed | 7.5 | 7.4 | 962.3 | 982.1 | 419.2 | 435.2 | — | — | 1,389.0 | 1,424.7 | ||||||||||||||||||||||
| Total | $ | 5,009.6 | $ | 5,028.9 | $ | 19,648.5 | $ | 19,718.1 | $ | 11,748.3 | $ | 11,725.5 | $ | 1,542.1 | $ | 1,538.0 | $ | 37,948.5 | $ | 38,010.5 |
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
| 108 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available for Sale Debt Securities with Unrealized Losses. The following table provides information regarding AFS debt securities with no credit losses reported that had been in a continuous unrealized loss position for less than twelve months and for twelve months or longer as of December 31, 2021 and 2020.
TABLE 59: AVAILABLE FOR SALE DEBT SECURITIES IN UNREALIZED LOSS POSITION WITH NO CREDIT LOSSES REPORTED
| AS OF DECEMBER 31, 2021 | 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 | $ | 239.0 | $ | 9.4 | $ | — | $ | — | $ | 239.0 | $ | 9.4 | ||||||||
| Obligations of States and Political Subdivisions | 1,699.5 | 37.4 | 31.6 | 1.2 | 1,731.1 | 38.6 | ||||||||||||||
| Government Sponsored Agency | 8,207.3 | 90.2 | 1,821.4 | 20.0 | 10,028.7 | 110.2 | ||||||||||||||
| Non-U.S. Government | 230.0 | 9.5 | — | — | 230.0 | 9.5 | ||||||||||||||
| Corporate Debt | 693.7 | 9.7 | — | — | 693.7 | 9.7 | ||||||||||||||
| Covered Bonds | 92.1 | 0.9 | — | — | 92.1 | 0.9 | ||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 1,116.8 | 31.9 | 172.3 | 3.5 | 1,289.1 | 35.4 | ||||||||||||||
| Other Asset-Backed | 3,815.5 | 31.4 | 11.7 | 0.3 | 3,827.2 | 31.7 | ||||||||||||||
| Commercial Mortgage-Backed | 566.8 | 3.2 | — | — | 566.8 | 3.2 | ||||||||||||||
| Total | $ | 16,660.7 | $ | 223.6 | $ | 2,037.0 | $ | 25.0 | $ | 18,697.7 | $ | 248.6 |
| AS OF DECEMBER 31, 2020 | LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL | |||||||||||||||||
| (In Millions) | FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES | ||||||||||||||
| Obligations of States and Political Subdivisions | $ | 52.3 | $ | 0.1 | $ | — | $ | — | $ | 52.3 | $ | 0.1 | ||||||||
| Government Sponsored Agency | 2,402.3 | 13.6 | 2,528.7 | 13.3 | 4,931.0 | 26.9 | ||||||||||||||
| Non-U.S. Government | 90.5 | 0.7 | — | — | 90.5 | 0.7 | ||||||||||||||
| Corporate Debt | 66.6 | 0.1 | — | — | 66.6 | 0.1 | ||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 162.8 | 0.5 | 49.9 | 0.1 | 212.7 | 0.6 | ||||||||||||||
| Other Asset-Backed | 176.8 | 0.2 | 792.3 | 2.6 | 969.1 | 2.8 | ||||||||||||||
| Commercial Mortgage-Backed | 44.4 | 0.1 | — | — | 44.4 | 0.1 | ||||||||||||||
| Total | $ | 2,995.7 | $ | 15.3 | $ | 3,370.9 | $ | 16.0 | $ | 6,366.6 | $ | 31.3 |
As of December 31, 2021, 1,233 AFS debt securities with a combined fair value of $18.7 billion were in an unrealized loss position, with their unrealized losses totaling $248.6 million. As of December 31, 2021, unrealized losses in AFS debt securities of $110.2 million related to government sponsored agency, which are primarily attributable to changes in market interest rates and credit spreads since their purchase.
As of December 31, 2020, 412 AFS debt securities with a combined fair value of $6.4 billion were in an unrealized loss position, with their unrealized losses totaling $31.3 million. As of December 31, 2020, unrealized losses in AFS debt securities of $26.9 million related to government-sponsored agency, which are primarily attributable to changes in market interest rates and credit spreads since their purchase.
14% and 16% of the AFS corporate debt securities portfolio were backed by guarantees provided by U.S. and non-U.S. governmental entities as of December 31, 2021 and 2020, respectively. The remaining unrealized losses on Northern Trust’s AFS debt securities portfolio as of December 31, 2021 and 2020 are attributable to changes in overall market interest rates or credit spreads.
As of December 31, 2021, Northern Trust did not intend to sell any AFS debt securities 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.
AFS debt securities impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible credit losses. A determination as to whether a security’s decline in market value is related to credit impairment takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is credit-related include, but are not limited to, the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer, which may indicate adverse credit conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that Northern Trust will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if a credit loss has occurred.
| 2021 Annual Report | Northern Trust Corporation 109 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There was no provision for corporate debt AFS securities for the year ended December 31, 2021 and 2020, and no allowance for credit losses for corporate debt AFS securities as of December 31, 2021 and 2020.
Held to Maturity Debt Securities. The following tables provide the amortized cost, fair values and remaining maturities of held to maturity (HTM) debt securities.
TABLE 60: RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF HELD TO MATURITY DEBT SECURITIES
| DECEMBER 31, 2021 | ||||||||||||||
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE | ||||||||||
| U.S. Government | $ | 47.0 | $ | — | $ | — | $ | 47.0 | ||||||
| Obligations of States and Political Subdivisions | 0.8 | — | — | 0.8 | ||||||||||
| Government Sponsored Agency | 5,927.6 | 1.1 | 106.1 | 5,822.6 | ||||||||||
| Non-U.S. Government | 5,773.3 | 3.9 | 9.8 | 5,767.4 | ||||||||||
| Corporate Debt | 901.8 | 2.5 | 6.5 | 897.8 | ||||||||||
| Covered Bonds | 2,942.4 | 8.3 | 9.6 | 2,941.1 | ||||||||||
| Certificates of Deposit | 674.7 | — | — | 674.7 | ||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 6,098.0 | 14.3 | 80.0 | 6,032.3 | ||||||||||
| Other Asset-Backed | 682.6 | 1.0 | — | 683.6 | ||||||||||
| Other | 516.3 | 3.4 | 71.6 | 448.1 | ||||||||||
| Total | $ | 23,564.5 | $ | 34.5 | $ | 283.6 | $ | 23,315.4 |
| DECEMBER 31, 2020 | ||||||||||||||
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE | ||||||||||
| U.S. Government | $ | 90.0 | $ | — | $ | — | $ | 90.0 | ||||||
| Obligations of States and Political Subdivisions | 2.1 | 0.1 | — | 2.2 | ||||||||||
| Government Sponsored Agency | 3.0 | 0.3 | — | 3.3 | ||||||||||
| Non-U.S. Government | 8,336.6 | 7.3 | 0.2 | 8,343.7 | ||||||||||
| Corporate Debt | 588.0 | 6.5 | 0.1 | 594.4 | ||||||||||
| Covered Bonds | 3,184.6 | 24.6 | 0.3 | 3,208.9 | ||||||||||
| Certificates of Deposit | 807.2 | — | — | 807.2 | ||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 3,648.0 | 43.5 | 0.9 | 3,690.6 | ||||||||||
| Other Asset-Backed | 677.0 | 0.9 | — | 677.9 | ||||||||||
| Other | 454.6 | 1.1 | 76.5 | 379.2 | ||||||||||
| Total | $ | 17,791.1 | $ | 84.3 | $ | 78.0 | $ | 17,797.4 |
As of December 31, 2021, the $23.6 billion HTM debt securities portfolio had an unrealized loss of $106.1 million, $80 million and $71.6 million related to government sponsored agency, sub-sovereign, supranational and non-U.S. agency bonds, and other residential mortgage-backed securities, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase. As of December 31, 2020, the $17.8 billion HTM debt securities portfolio had an unrealized loss of $76.5 million related to other residential mortgage-backed securities, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase.
| 110 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 61: REMAINING MATURITY OF HELD TO MATURITY DEBT SECURITIES
| DECEMBER 31, 2021 | 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 | $ | 47.0 | $ | 47.0 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 47.0 | $ | 47.0 | ||||||||||||
| Obligations of States and Political Subdivisions | 0.8 | 0.8 | — | — | — | — | — | — | 0.8 | 0.8 | ||||||||||||||||||||||
| Government Sponsored Agency | 1,161.5 | 1,143.6 | 2,101.4 | 2,064.6 | 1,848.8 | 1,815.0 | 815.9 | 799.4 | 5,927.6 | 5,822.6 | ||||||||||||||||||||||
| Non-U.S. Government | 4,502.7 | 4,502.6 | 1,109.2 | 1,103.9 | 161.4 | 160.9 | — | — | 5,773.3 | 5,767.4 | ||||||||||||||||||||||
| Corporate Debt | 177.4 | 178.8 | 708.3 | 703.4 | 16.1 | 15.6 | — | — | 901.8 | 897.8 | ||||||||||||||||||||||
| Covered Bonds | 650.1 | 651.3 | 1,684.0 | 1,688.0 | 608.3 | 601.8 | — | — | 2,942.4 | 2,941.1 | ||||||||||||||||||||||
| Certificates of Deposit | 674.7 | 674.7 | — | — | — | — | — | — | 674.7 | 674.7 | ||||||||||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 1,086.9 | 1,091.5 | 4,507.7 | 4,451.4 | 503.4 | 489.4 | — | — | 6,098.0 | 6,032.3 | ||||||||||||||||||||||
| Other Asset-Backed | 190.4 | 190.6 | 398.0 | 398.7 | 94.2 | 94.3 | — | — | 682.6 | 683.6 | ||||||||||||||||||||||
| Other | 106.0 | 104.1 | 232.0 | 221.8 | 60.1 | 58.4 | 118.2 | 63.8 | 516.3 | 448.1 | ||||||||||||||||||||||
| Total | $ | 8,597.5 | $ | 8,585.0 | $ | 10,740.6 | $ | 10,631.8 | $ | 3,292.3 | $ | 3,235.4 | $ | 934.1 | $ | 863.2 | $ | 23,564.5 | $ | 23,315.4 |
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
HTM debt securities consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the year ended December 31, 2021, $6.9 billion of government sponsored agency securities were transferred from AFS to HTM for capital management purposes, all of which were transferred in the second quarter of 2021. Upon transfer of a debt security from the AFS to HTM classification, the amortized cost is reset to fair value. Any net unrealized gain or loss at the date of transfer will remain in AOCI and be amortized into net interest income over the remaining life of the securities using the effective interest method. The amortization of amounts retained in AOCI will offset the effect on interest income of the amortization of the premium or discount resulting from transferring the securities at fair value. During the year ended December 31, 2020, $301.5 million of securities reflected in U.S. government were transferred from AFS to HTM, all of which were transferred in the second quarter of 2020.
Credit Quality Indicators. The following table provides the amortized cost of HTM debt securities by credit rating.
TABLE 62: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING
| AS OF DECEMBER 31, 2021 | ||||||||||||||||||||
| (In Millions) | AAA | AA | A | BBB | NOT RATED | TOTAL | ||||||||||||||
| U.S. Government | $ | 47.0 | $ | — | $ | — | $ | — | $ | — | $ | 47.0 | ||||||||
| Obligations of States and Political Subdivisions | — | 0.8 | — | — | — | 0.8 | ||||||||||||||
| Government Sponsored Agency | 5,927.6 | — | — | — | — | 5,927.6 | ||||||||||||||
| Non-U.S. Government | 398.0 | 942.6 | 4,088.8 | 343.9 | — | 5,773.3 | ||||||||||||||
| Corporate Debt | 2.3 | 386.7 | 512.8 | — | — | 901.8 | ||||||||||||||
| Covered Bonds | 2,942.4 | — | — | — | — | 2,942.4 | ||||||||||||||
| Certificates of Deposit | — | — | — | — | 674.7 | 674.7 | ||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 4,207.6 | 1,858.0 | 31.3 | 1.1 | — | 6,098.0 | ||||||||||||||
| Other Asset-Backed | 682.6 | — | — | — | — | 682.6 | ||||||||||||||
| Other | — | — | — | — | 516.3 | 516.3 | ||||||||||||||
| Total | $ | 14,207.5 | $ | 3,188.1 | $ | 4,632.9 | $ | 345.0 | $ | 1,191.0 | $ | 23,564.5 | ||||||||
| Percent of Total | 60 | % | 14 | % | 20 | % | 1 | % | 5 | % | 100 | % |
| 2021 Annual Report | Northern Trust Corporation 111 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| AS OF DECEMBER 31, 2020 | ||||||||||||||||||||
| (In Millions) | AAA | AA | A | BBB | NOT RATED | TOTAL | ||||||||||||||
| U.S. Government | $ | 90.0 | $ | — | $ | — | $ | — | $ | — | $ | 90.0 | ||||||||
| Obligations of States and Political Subdivisions | — | 1.0 | — | 1.1 | — | 2.1 | ||||||||||||||
| Government Sponsored Agency | 3.0 | — | — | — | — | 3.0 | ||||||||||||||
| Non-U.S. Government | 319.8 | 1,337.4 | 6,630.6 | 48.8 | — | 8,336.6 | ||||||||||||||
| Corporate Debt | 3.8 | 279.1 | 305.1 | — | — | 588.0 | ||||||||||||||
| Covered Bonds | 3,184.6 | — | — | — | — | 3,184.6 | ||||||||||||||
| Certificates of Deposit | — | — | — | — | 807.2 | 807.2 | ||||||||||||||
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 2,590.9 | 1,057.1 | — | — | — | 3,648.0 | ||||||||||||||
| Other Asset-Backed | 677.0 | — | — | — | — | 677.0 | ||||||||||||||
| Other | — | — | — | — | 454.6 | 454.6 | ||||||||||||||
| Total | $ | 6,869.1 | $ | 2,674.6 | $ | 6,935.7 | $ | 49.9 | $ | 1,261.8 | $ | 17,791.1 | ||||||||
| Percent of Total | 39 | % | 15 | % | 39 | % | — | % | 7 | % | 100 | % |
Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. Northern Trust maintains a high quality debt securities portfolio, with 94% and 93% of the HTM portfolio comprised of securities rated A or higher as of December 31, 2021 and 2020, respectively. The remaining HTM debt securities portfolio was comprised of 1% rated BBB at December 31, 2021, and 5% and 7% not rated by Moody’s, S&P Global, or Fitch Ratings at December 31, 2021 and 2020, respectively. Securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security.
Investment Security Gains and Losses. Proceeds of $116.7 million, $879.9 million, and $1.2 billion in 2021, 2020, and 2019, respectively, from the sale of debt securities resulted in the following gains and losses shown in the following table.
TABLE 63: INVESTMENT SECURITY GAINS AND LOSSES
| DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Gross Realized Debt Securities Gains | $ | 1.4 | $ | 3.4 | $ | 2.4 | |||||
| Gross Realized Debt Securities Losses | (1.7) | (3.8) | (3.5) | ||||||||
| Changes in Other-Than-Temporary Impairment Losses(1) | — | — | (0.3) | ||||||||
| Net Investment Security Losses | $ | (0.3) | $ | (0.4) | $ | (1.4) |
(1) Other-than-temporary impairment losses relate to certain Community Reinvestment Act (CRA) eligible HTM debt securities.
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 either directly held by, or pledged to the counterparty until the repurchase.
During the third quarter of 2021, Northern Trust became a Government Securities Division (GSD) netting and sponsoring member in the Fixed Income Clearing Corporation (FICC) sponsored member program. FICC, a wholly-owned subsidiary of The Depository Trust & Clearing Corporation, is a central counterparty and provides netting and settlement for the U.S. Government securities marketplace. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when FICC is the counterparty.
The following tables summarize information related to Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase.
| 112 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 64: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
| ($ In Millions) | 2021 | 2020 | ||||||
| Balance at December 31 | $ | 686.4 | $ | 1,596.5 | ||||
| Average Balance During the Year | 1,067.4 | 1,253.1 | ||||||
| Average Interest Rate Earned During the Year | 0.33 | % | 0.31 | % | ||||
| Maximum Month-End Balance During the Year | $ | 1,819.1 | $ | 2,055.6 |
TABLE 65: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
| ($ In Millions) | 2021 | 2020 | ||||||
| Balance at December 31 | $ | 531.9 | $ | 39.8 | ||||
| Average Balance During the Year | 232.0 | 218.3 | ||||||
| Average Interest Rate Paid During the Year | 0.07 | % | 0.47 | % | ||||
| Maximum Month-End Balance During the Year | $ | 892.6 | $ | 269.8 |
TABLE 66: REPURCHASE AGREEMENTS ACCOUNTED FOR AS SECURED BORROWINGS
| REMAINING CONTRACTUAL MATURITY OF THE AGREEMENTS | ||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||
| ($ In Millions) | OVERNIGHT AND CONTINUOUS | UP TO 30 DAYS | TOTAL | OVERNIGHT AND CONTINUOUS | UP TO 30 DAYS | TOTAL | ||||||||||||||
| U.S. Treasury and Agency Securities | $ | 32.4 | $ | 499.5 | $ | 531.9 | $ | 39.8 | $ | — | $ | 39.8 | ||||||||
| Total Borrowings | 32.4 | 499.5 | 531.9 | 39.8 | — | 39.8 | ||||||||||||||
| Net Amount of Recognized Liabilities for Repurchase Agreements in Note 28 | 32.4 | 499.5 | 531.9 | 39.8 | — | 39.8 | ||||||||||||||
| 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 in the following table.
TABLE 67: LOANS AND LEASES
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Commercial | ||||||||
| Commercial and Institutional | $ | 11,489.2 | $ | 10,058.3 | ||||
| Commercial Real Estate | 4,326.3 | 3,558.4 | ||||||
| Non-U.S. | 1,990.2 | 1,345.7 | ||||||
| Lease Financing, net | 11.0 | 11.4 | ||||||
| Other | 670.7 | 288.2 | ||||||
| Total Commercial | 18,487.4 | 15,262.0 | ||||||
| Personal | ||||||||
| Private Client | 15,256.3 | 11,815.1 | ||||||
| Residential Real Estate | 6,319.9 | 6,035.7 | ||||||
| Non-U.S. | 381.8 | 597.9 | ||||||
| Other | 35.2 | 49.0 | ||||||
| Total Personal | 21,993.2 | 18,497.7 | ||||||
| Total Loans and Leases | $ | 40,480.6 | $ | 33,759.7 |
Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan-to-collateral value ratio of no more than 65% to 80% at inception. Northern Trust’s equity credit line products generally have draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest-only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding balance to an amortizing payment loan. As of December 31, 2021 and 2020, equity credit lines totaled $258.2 million and $304.4 million, respectively, and equity credit lines for which first liens were held by Northern Trust represented 97% of the total equity credit lines as of both of those dates.
| 2021 Annual Report | Northern Trust Corporation 113 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1.6 billion at December 31, 2021 and $1.1 billion at December 31, 2020. Demand deposit overdrafts reclassified as loan balances totaled $8.0 million and $26.4 million at December 31, 2021 and 2020, respectively. Loans classified as held for sale totaled $12.3 million at December 31, 2021 related to the decision to exit a non-strategic loan portfolio. There were no loans classified as held for sale at December 31, 2020. Loans classified as held for sale are recorded at the lower of cost or fair value.
As of December 31, 2021 and 2020, there were no leases classified as held for sale.
The components of the net investment in leveraged leases is as follows:
TABLE 68: LEVERAGED LEASES
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Leveraged Leases | ||||||||
| Net Rental Receivable | $ | 11.4 | $ | 11.8 | ||||
| Residual Value | — | — | ||||||
| Unearned Income | (0.4) | (0.4) | ||||||
| Investment in Leveraged Leases | 11.0 | 11.4 | ||||||
| Lease Financing, net | $ | 11.0 | $ | 11.4 |
Paycheck Protection Program. In response to the COVID-19 pandemic, Northern Trust became a lender under the Paycheck Protection Program, as amended (PPP), which was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and is administered by the U.S. Small Business Administration (SBA). Loans issued under the PPP are funded by Northern Trust directly to participating borrowers. The PPP loans are guaranteed by the SBA and borrowers are eligible to apply for PPP loan forgiveness for up to the full principal amount and accrued interest of the PPP loan.
To the extent a borrower uses PPP loan proceeds to cover eligible costs and has met all other SBA loan forgiveness requirements, the SBA will determine loan forgiveness under the CARES Act and will pay to Northern Trust the eligible PPP loan forgiven amount, which will be credited to the borrower’s loan to repay or pay down the PPP loan. The SBA forgiveness portal opened on August 10, 2020 and Northern Trust’s vendor portal opened on September 11, 2020 to begin processing the PPP loan forgiveness applications. When Northern Trust submits forgiveness applications to the SBA, the SBA has at least 90 days to respond as to the approval or denial of such application. 1,301 and 36 loans were forgiven through the PPP loan forgiveness process which resulted in $231.5 million and $6.7 million of loan principal and interest being forgiven during the year ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, Northern Trust had 213 outstanding loans totaling $56.9 million under the PPP in its commercial and institutional portfolio with an average loan balance of $0.3 million. For its origination efforts, Northern Trust received approximately $0.1 million and $2.6 million in SBA fees, net of service charges, during the year ended December 31, 2021 and 2020, respectively.
Northern Trust accounts for loans originated under the PPP as loan receivables in accordance with Accounting Standards Codification (ASC) 310 and recognizes such loans at the principal amount less the net amount of loan origination fees. PPP loans are reported in Total Loans and Leases on the consolidated balance sheets.
The SBA provides a 100% guarantee on PPP loans covering principal and interest. Northern Trust considers the risk mitigating effects of these guarantees, and accounts for them as a credit enhancement embedded in the contract. As a result, no allowance for credit losses is measured for Northern Trust’s exposure under the PPP.
Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels.
| 114 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting and management reporting. Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s borrower rating models, by loan and lease class.
-
Commercial and Institutional: leverage, profit margin, liquidity, asset size and capital levels;
-
Commercial Real Estate: debt service coverage, loan-to-value ratio, leasing status and guarantor support;
-
Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels;
-
Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels;
-
Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio;
-
Private Client: cash-flow-to-debt and net worth ratios, leverage and liquidity; and
-
Personal-Other: cash-flow-to-debt and net worth ratios.
While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required. Risk ratings are generally validated at least annually.
Loan and lease segment and class balances as of December 31, 2021 are provided in the following table, segregated by borrower ratings into “1 to 3,” “4 to 5” and “6 to 9” (watch list and nonaccrual status) categories by year of origination at amortized cost basis. Loans that are held for investment are reported at the principal amount outstanding, net of unearned income.
| 2021 Annual Report | Northern Trust Corporation 115 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 69: CREDIT QUALITY INDICATOR AT AMORTIZED COST BASIS BY ORIGINATION YEAR
| DECEMBER 31, 2021 | TERM LOANS AND LEASES | REVOLVING LOANS | REVOLVING LOANS CONVERTED TO TERM LOANS | ||||||||||||||||||||||||||
| (In Millions) | 2021 | 2020 | 2019 | 2018 | 2017 | PRIOR | TOTAL | ||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||
| Commercial and Institutional | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | $ | 1,057.9 | $ | 469.7 | $ | 313.7 | $ | 156.6 | $ | 48.2 | $ | 535.8 | $ | 4,944.9 | $ | 0.1 | $ | 7,526.9 | |||||||||||
| 4 to 5 Category | 1,043.6 | 432.2 | 377.3 | 231.6 | 234.1 | 190.1 | 1,219.0 | 33.1 | 3,761.0 | ||||||||||||||||||||
| 6 to 9 Category | 50.0 | 20.3 | 26.8 | 30.2 | 9.9 | 1.9 | 62.2 | — | 201.3 | ||||||||||||||||||||
| Total Commercial and Institutional | 2,151.5 | 922.2 | 717.8 | 418.4 | 292.2 | 727.8 | 6,226.1 | 33.2 | 11,489.2 | ||||||||||||||||||||
| Commercial Real Estate | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 485.3 | 310.2 | 260.6 | 60.2 | 16.8 | 79.3 | 67.5 | 2.9 | 1,282.8 | ||||||||||||||||||||
| 4 to 5 Category | 967.9 | 638.1 | 460.1 | 223.0 | 81.4 | 364.1 | 182.3 | 20.5 | 2,937.4 | ||||||||||||||||||||
| 6 to 9 Category | 24.5 | — | 50.6 | — | 20.0 | 8.5 | 2.5 | — | 106.1 | ||||||||||||||||||||
| Total Commercial Real Estate | 1,477.7 | 948.3 | 771.3 | 283.2 | 118.2 | 451.9 | 252.3 | 23.4 | 4,326.3 | ||||||||||||||||||||
| Non-U.S. | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 824.1 | 68.9 | 38.4 | — | 9.1 | — | 582.0 | — | 1,522.5 | ||||||||||||||||||||
| 4 to 5 Category | 160.2 | — | — | 1.9 | — | 191.1 | 73.3 | 1.8 | 428.3 | ||||||||||||||||||||
| 6 to 9 Category | 2.9 | — | 23.1 | — | — | — | 13.4 | — | 39.4 | ||||||||||||||||||||
| Total Non-U.S. | 987.2 | 68.9 | 61.5 | 1.9 | 9.1 | 191.1 | 668.7 | 1.8 | 1,990.2 | ||||||||||||||||||||
| Lease Financing, net | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 4 to 5 Category | — | — | — | — | — | 11.0 | — | — | 11.0 | ||||||||||||||||||||
| Total Lease Financing, net | — | — | — | — | — | 11.0 | — | — | 11.0 | ||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 551.5 | — | — | — | — | — | — | — | 551.5 | ||||||||||||||||||||
| 4 to 5 Category | 119.2 | — | — | — | — | — | — | — | 119.2 | ||||||||||||||||||||
| Total Other | 670.7 | — | — | — | — | — | — | — | 670.7 | ||||||||||||||||||||
| Total Commercial | 5,287.1 | 1,939.4 | 1,550.6 | 703.5 | 419.5 | 1,381.8 | 7,147.1 | 58.4 | 18,487.4 | ||||||||||||||||||||
| Personal | |||||||||||||||||||||||||||||
| Private Client | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 455.5 | 97.9 | 87.0 | 14.9 | 38.3 | 129.8 | 7,592.8 | 44.7 | 8,460.9 | ||||||||||||||||||||
| 4 to 5 Category | 579.2 | 333.9 | 519.3 | 81.0 | 54.8 | 39.9 | 4,979.8 | 178.3 | 6,766.2 | ||||||||||||||||||||
| 6 to 9 Category | 7.1 | 0.2 | — | 20.4 | — | — | 1.5 | — | 29.2 | ||||||||||||||||||||
| Total Private Client | 1,041.8 | 432.0 | 606.3 | 116.3 | 93.1 | 169.7 | 12,574.1 | 223.0 | 15,256.3 | ||||||||||||||||||||
| Residential Real Estate | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 1,137.8 | 996.4 | 201.8 | 13.5 | 49.3 | 505.8 | 161.5 | — | 3,066.1 | ||||||||||||||||||||
| 4 to 5 Category | 1,137.3 | 1,002.5 | 242.7 | 79.5 | 113.3 | 369.8 | 218.1 | 2.2 | 3,165.4 | ||||||||||||||||||||
| 6 to 9 Category | 0.4 | 10.5 | 5.4 | 8.4 | 0.5 | 58.2 | 5.0 | — | 88.4 | ||||||||||||||||||||
| Total Residential Real Estate | 2,275.5 | 2,009.4 | 449.9 | 101.4 | 163.1 | 933.8 | 384.6 | 2.2 | 6,319.9 | ||||||||||||||||||||
| Non-U.S. | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 27.6 | — | 1.2 | — | — | 1.0 | 44.1 | — | 73.9 | ||||||||||||||||||||
| 4 to 5 Category | 36.1 | 1.9 | 18.7 | 10.4 | — | 3.8 | 229.0 | 7.8 | 307.7 | ||||||||||||||||||||
| 6 to 9 Category | — | — | — | — | — | 0.2 | — | — | 0.2 | ||||||||||||||||||||
| Total Non-U.S. | 63.7 | 1.9 | 19.9 | 10.4 | — | 5.0 | 273.1 | 7.8 | 381.8 | ||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 13.4 | — | — | — | — | — | — | — | 13.4 | ||||||||||||||||||||
| 4 to 5 Category | 21.8 | — | — | — | — | — | — | — | 21.8 | ||||||||||||||||||||
| Total Other | 35.2 | — | — | — | — | — | — | — | 35.2 | ||||||||||||||||||||
| Total Personal | 3,416.2 | 2,443.3 | 1,076.1 | 228.1 | 256.2 | 1,108.5 | 13,231.8 | 233.0 | 21,993.2 | ||||||||||||||||||||
| Total Loans and Leases | $ | 8,703.3 | $ | 4,382.7 | $ | 2,626.7 | $ | 931.6 | $ | 675.7 | $ | 2,490.3 | $ | 20,378.9 | $ | 291.4 | $ | 40,480.6 |
| 116 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| December 31, 2020 | TERM LOANS AND LEASES | REVOLVING LOANS | REVOLVING LOANS CONVERTED TO TERM LOANS | ||||||||||||||||||||||||||
| (In Millions) | 2020 | 2019 | 2018 | 2017 | 2016 | PRIOR | TOTAL | ||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||
| Commercial and Institutional | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | $ | 663.8 | $ | 546.0 | $ | 204.6 | $ | 96.0 | $ | 396.0 | $ | 448.8 | $ | 3,742.4 | $ | 5.5 | $ | 6,103.1 | |||||||||||
| 4 to 5 Category | 793.4 | 505.1 | 354.1 | 405.4 | 134.6 | 167.3 | 1,238.7 | 32.3 | 3,630.9 | ||||||||||||||||||||
| 6 to 9 Category | 34.3 | 119.8 | 37.3 | 42.8 | 23.0 | 6.0 | 61.1 | — | 324.3 | ||||||||||||||||||||
| Total Commercial and Institutional | 1,491.5 | 1,170.9 | 596.0 | 544.2 | 553.6 | 622.1 | 5,042.2 | 37.8 | 10,058.3 | ||||||||||||||||||||
| Commercial Real Estate | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 406.3 | 109.2 | 27.6 | 36.5 | 11.8 | 99.4 | 124.3 | 8.7 | 823.8 | ||||||||||||||||||||
| 4 to 5 Category | 703.1 | 811.8 | 332.7 | 107.4 | 184.5 | 382.8 | 60.4 | 11.4 | 2,594.1 | ||||||||||||||||||||
| 6 to 9 Category | 15.3 | 55.2 | 32.0 | 25.8 | — | 12.2 | — | — | 140.5 | ||||||||||||||||||||
| Total Commercial Real Estate | 1,124.7 | 976.2 | 392.3 | 169.7 | 196.3 | 494.4 | 184.7 | 20.1 | 3,558.4 | ||||||||||||||||||||
| Non-U.S. | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 555.2 | 16.8 | — | 11.1 | — | — | 78.5 | — | 661.6 | ||||||||||||||||||||
| 4 to 5 Category | 313.1 | 0.7 | 2.0 | — | — | 157.9 | 39.2 | 1.8 | 514.7 | ||||||||||||||||||||
| 6 to 9 Category | — | 23.1 | — | — | — | — | 146.3 | — | 169.4 | ||||||||||||||||||||
| Total Non-U.S. | 868.3 | 40.6 | 2.0 | 11.1 | — | 157.9 | 264.0 | 1.8 | 1,345.7 | ||||||||||||||||||||
| Lease Financing, net | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 4 to 5 Category | — | — | — | — | — | 11.4 | — | — | 11.4 | ||||||||||||||||||||
| Total Lease Financing, net | — | — | — | — | — | 11.4 | — | — | 11.4 | ||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 81.7 | — | — | — | — | — | — | — | 81.7 | ||||||||||||||||||||
| 4 to 5 Category | 206.5 | — | — | — | — | — | — | — | 206.5 | ||||||||||||||||||||
| Total Other | 288.2 | — | — | — | — | — | — | — | 288.2 | ||||||||||||||||||||
| Total Commercial | 3,772.7 | 2,187.7 | 990.3 | 725.0 | 749.9 | 1,285.8 | 5,490.9 | 59.7 | 15,262.0 | ||||||||||||||||||||
| Personal | |||||||||||||||||||||||||||||
| Private Client | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 668.6 | 273.7 | 51.7 | 60.4 | 10.2 | 136.1 | 5,392.8 | 47.9 | 6,641.4 | ||||||||||||||||||||
| 4 to 5 Category | 492.1 | 479.9 | 117.3 | 60.4 | 77.5 | 77.5 | 3,564.7 | 207.3 | 5,076.7 | ||||||||||||||||||||
| 6 to 9 Category | 6.0 | 0.5 | 22.1 | 3.2 | — | — | 63.7 | 1.5 | 97.0 | ||||||||||||||||||||
| Total Private Client | 1,166.7 | 754.1 | 191.1 | 124.0 | 87.7 | 213.6 | 9,021.2 | 256.7 | 11,815.1 | ||||||||||||||||||||
| Residential Real Estate | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 1,554.3 | 317.4 | 42.9 | 109.9 | 205.1 | 627.8 | 152.8 | 1.7 | 3,011.9 | ||||||||||||||||||||
| 4 to 5 Category | 854.6 | 359.5 | 115.8 | 163.2 | 209.7 | 896.5 | 273.1 | 7.4 | 2,879.8 | ||||||||||||||||||||
| 6 to 9 Category | 15.3 | 8.3 | 0.7 | 0.5 | 1.9 | 94.8 | 22.5 | — | 144.0 | ||||||||||||||||||||
| Total Residential Real Estate | 2,424.2 | 685.2 | 159.4 | 273.6 | 416.7 | 1,619.1 | 448.4 | 9.1 | 6,035.7 | ||||||||||||||||||||
| Non-U.S. | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 23.3 | 14.9 | — | — | — | 1.8 | 275.6 | — | 315.6 | ||||||||||||||||||||
| 4 to 5 Category | 12.7 | 26.0 | 11.8 | 0.5 | 0.5 | 7.9 | 217.5 | 5.1 | 282.0 | ||||||||||||||||||||
| 6 to 9 Category | — | — | — | — | — | 0.3 | — | — | 0.3 | ||||||||||||||||||||
| Total Non-U.S. | 36.0 | 40.9 | 11.8 | 0.5 | 0.5 | 10.0 | 493.1 | 5.1 | 597.9 | ||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Risk Rating: | |||||||||||||||||||||||||||||
| 1 to 3 Category | 34.6 | — | — | — | — | — | — | — | 34.6 | ||||||||||||||||||||
| 4 to 5 Category | 14.4 | — | — | — | — | — | — | — | 14.4 | ||||||||||||||||||||
| Total Other | 49.0 | — | — | — | — | — | — | — | 49.0 | ||||||||||||||||||||
| Total Personal | 3,675.9 | 1,480.2 | 362.3 | 398.1 | 504.9 | 1,842.7 | 9,962.7 | 270.9 | 18,497.7 | ||||||||||||||||||||
| Total Loans and Leases | $ | 7,448.6 | $ | 3,667.9 | $ | 1,352.6 | $ | 1,123.1 | $ | 1,254.8 | $ | 3,128.5 | $ | 15,453.6 | $ | 330.6 | $ | 33,759.7 |
| 2021 Annual Report | Northern Trust Corporation 117 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 nonaccrual credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default. Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable likelihood of loss.
Past Due Status. Past due status is based on the length of time from the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans and leases that are 29 days past due or less are reported as current.
The following table provides balances and delinquency status of accrual and nonaccrual loans and leases by segment and class, as well as the other real estate owned and nonaccrual asset balances, as of December 31, 2021 and 2020.
TABLE 70: DELINQUENCY STATUS
| ACCRUAL | NONACCRUAL WITH NO ALLOWANCE | |||||||||||||||||||||||||
| (In Millions) | CURRENT | 30 – 59 DAYS PAST DUE | 60 – 89 DAYS PAST DUE | 90 DAYS OR MORE PAST DUE | TOTAL ACCRUAL | NONACCRUAL | TOTAL LOANS AND LEASES | |||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||
| Commercial and Institutional | $ | 11,434.7 | $ | 32.5 | $ | 2.1 | $ | 0.4 | $ | 11,469.7 | $ | 19.5 | $ | 11,489.2 | $ | 8.8 | ||||||||||
| Commercial Real Estate | 4,256.6 | 3.1 | — | — | 4,259.7 | 66.6 | 4,326.3 | 52.3 | ||||||||||||||||||
| Non-U.S. | 1,990.2 | — | — | — | 1,990.2 | — | 1,990.2 | — | ||||||||||||||||||
| Lease Financing, net | 11.0 | — | — | — | 11.0 | — | 11.0 | — | ||||||||||||||||||
| Other | 670.7 | — | — | — | 670.7 | — | 670.7 | — | ||||||||||||||||||
| Total Commercial | 18,363.2 | 35.6 | 2.1 | 0.4 | 18,401.3 | 86.1 | 18,487.4 | 61.1 | ||||||||||||||||||
| Personal | ||||||||||||||||||||||||||
| Private Client | 14,927.3 | 229.5 | 71.8 | 27.7 | 15,256.3 | — | 15,256.3 | — | ||||||||||||||||||
| Residential Real Estate | 6,273.2 | 7.0 | 3.3 | 0.2 | 6,283.7 | 36.2 | 6,319.9 | 36.2 | ||||||||||||||||||
| Non-U.S. | 381.6 | 0.2 | — | — | 381.8 | — | 381.8 | — | ||||||||||||||||||
| Other | 35.2 | — | — | — | 35.2 | — | 35.2 | — | ||||||||||||||||||
| Total Personal | 21,617.3 | 236.7 | 75.1 | 27.9 | 21,957.0 | 36.2 | 21,993.2 | 36.2 | ||||||||||||||||||
| Total Loans and Leases | $ | 39,980.5 | $ | 272.3 | $ | 77.2 | $ | 28.3 | $ | 40,358.3 | $ | 122.3 | $ | 40,480.6 | $ | 97.3 | ||||||||||
| Other Real Estate Owned | $ | 3.0 | ||||||||||||||||||||||||
| Total Nonaccrual Assets | $ | 125.3 |
| 118 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| ACCRUAL | NONACCRUAL WITH NO ALLOWANCE | |||||||||||||||||||||||||
| (In Millions) | CURRENT | 30 – 59 DAYS PAST DUE | 60 – 89 DAYS PAST DUE | 90 DAYS OR MORE PAST DUE | TOTAL ACCRUAL | NONACCRUAL | TOTAL LOANS AND LEASES | |||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||
| Commercial and Institutional | $ | 9,877.0 | $ | 153.7 | $ | 1.2 | $ | — | $ | 10,031.9 | $ | 26.4 | $ | 10,058.3 | $ | 9.1 | ||||||||||
| Commercial Real Estate | 3,516.2 | 2.0 | — | — | 3,518.2 | 40.2 | 3,558.4 | 32.3 | ||||||||||||||||||
| Non-U.S. | 1,345.7 | — | — | — | 1,345.7 | — | 1,345.7 | — | ||||||||||||||||||
| Lease Financing, net | 11.4 | — | — | — | 11.4 | — | 11.4 | — | ||||||||||||||||||
| Other | 288.2 | — | — | — | 288.2 | — | 288.2 | — | ||||||||||||||||||
| Total Commercial | 15,038.5 | 155.7 | 1.2 | — | 15,195.4 | 66.6 | 15,262.0 | 41.4 | ||||||||||||||||||
| Personal | ||||||||||||||||||||||||||
| Private Client | 11,765.4 | 29.1 | 9.9 | 7.8 | 11,812.2 | 2.9 | 11,815.1 | 2.9 | ||||||||||||||||||
| Residential Real Estate | 5,946.0 | 23.5 | 2.9 | 1.1 | 5,973.5 | 62.2 | 6,035.7 | 53.8 | ||||||||||||||||||
| Non-U.S | 596.7 | 1.2 | — | — | 597.9 | — | 597.9 | — | ||||||||||||||||||
| Other | 49.0 | — | — | — | 49.0 | — | 49.0 | — | ||||||||||||||||||
| Total Personal | 18,357.1 | 53.8 | 12.8 | 8.9 | 18,432.6 | 65.1 | 18,497.7 | 56.7 | ||||||||||||||||||
| Total Loans and Leases | $ | 33,395.6 | $ | 209.5 | $ | 14.0 | $ | 8.9 | $ | 33,628.0 | $ | 131.7 | $ | 33,759.7 | $ | 98.1 | ||||||||||
| Other Real Estate Owned | $ | 0.7 | ||||||||||||||||||||||||
| Total Nonaccrual Assets | $ | 132.4 |
Interest income that would have been recorded for nonaccrual loans and leases in accordance with their original terms was $4.6 million in 2021, $4.6 million in 2020, and $7.3 million in 2019.
Collateral Dependent Financial Assets. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Most of Northern Trust’s collateral dependent credit exposure relates to its residential real estate portfolio for which the collateral is usually the underlying real estate property. For collateral dependent financial assets, it is Northern Trust’s policy to reserve or charge-off the difference between the amortized cost basis of the loan and the value of the collateral. The collateral dependent financial asset balance as of December 31, 2021 was immaterial to Northern Trust’s financial statements.
Nonaccrual Loans and Troubled Debt Restructurings (TDRs). A loan that has been modified as a concession by Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties is referred to as a troubled debt restructuring. There were $76.7 million and $38.9 million of nonaccrual TDRs included within nonaccrual loans as of December 31, 2021 and 2020, respectively. There were $16.5 million and $29.3 million of accrual TDRs included within nonaccrual loans as of December 31, 2021 and 2020, respectively. There were $0.2 million and $10.4 million of aggregate undrawn loan commitments and standby letters of credit at December 31, 2021 and 2020, respectively, issued to borrowers with TDR modifications of loans.
| 2021 Annual Report | Northern Trust Corporation 119 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides, by segment and class, the number of TDR modifications of loans and leases during the years ended December 31, 2021, and 2020, and the recorded investments and unpaid principal balances as of December 31, 2021 and 2020.
TABLE 71: TROUBLED DEBT RESTRUCTURINGS
| ($ In Millions) | NUMBER OF LOANS AND LEASES | RECORDED INVESTMENT | UNPAID PRINCIPAL BALANCE | ||||||||
| December 31, 2021 | |||||||||||
| Commercial | |||||||||||
| Commercial and Institutional | 6 | $ | 19.6 | $ | 19.6 | ||||||
| Commercial Real Estate | 3 | 36.0 | 42.4 | ||||||||
| Total Commercial | 9 | 55.6 | 62.0 | ||||||||
| Personal | |||||||||||
| Residential Real Estate | 10 | 1.3 | 1.5 | ||||||||
| Total Personal | 10 | 1.3 | 1.5 | ||||||||
| Total Loans and Leases | 19 | $ | 56.9 | $ | 63.5 |
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, 2020 | |||||||||||
| Commercial | |||||||||||
| Commercial and Institutional | 3 | $ | 24.3 | $ | 24.5 | ||||||
| Total Commercial | 3 | 24.3 | 24.5 | ||||||||
| Personal | |||||||||||
| Residential Real Estate | 22 | 16.2 | 16.7 | ||||||||
| Total Personal | 22 | 16.2 | 16.7 | ||||||||
| Total Loans and Leases | 25 | $ | 40.5 | $ | 41.2 |
Note: Period-end balances reflect all paydowns and charge-offs during the year.
TDR modifications involve extensions of term, deferrals of principal, interest rate concessions, and other modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-troubled situations.
During the year ended December 31, 2021, the TDR modifications of loans within residential real estate were primarily deferrals of principal, extension of term, and other modifications. During the year ended December 31, 2021, TDR modifications of loans within commercial and institutional were deferrals of principal. During the year ended December 31, 2021, TDR modifications of loans within commercial real estate were primarily deferrals of principal, interest rate concessions, other modifications, and extension of term.
During the year ended December 31, 2020, the TDR modifications of loans within residential real estate were primarily extensions of term, other modifications, deferrals of principal, and interest rate concessions. During the year ended December 31, 2020, TDR modifications of loans within commercial and institutional were other modifications and extensions of term.
There were two loan or lease TDR modifications during the previous twelve-month period which subsequently had a payment default during the year ended December 31, 2021. The total recorded investment for these loans was approximately $5.6 million and the unpaid principal balance for these loans was approximately $5.6 million.
There were no loan or lease TDR modifications during the previous twelve-month period which subsequently had a payment default during the year ended December 31, 2020.
Northern Trust may obtain physical possession of real estate via foreclosure on an in-substance repossession. As of December 31, 2021 and 2020, Northern Trust held foreclosed real estate properties with a carrying value of $3.0 million and $0.7 million, respectively, as a result of obtaining physical possession. In addition, as of December 31, 2021 and 2020, Northern Trust had loans with a carrying value of $2.6 million and $7.9 million, respectively, for which formal foreclosure proceedings were in process.
TDR Relief — COVID-19. Due to the economic environment arising from the COVID-19 pandemic, there have been two forms of relief provided for classifying loans as TDRs: the Interagency Guidance (as defined below) and the CARES Act.
| 120 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Various banking regulators, including the Board of Governors of the Federal Reserve (Federal Reserve Board), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, issued guidance in the April 7, 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (revised) on loan modification treatment (Interagency Guidance) pursuant to which financial institutions can apply ASC 310-40 Receivables – Troubled Debt Restructurings by Creditors. In accordance with the Interagency Guidance, a loan modification is not considered a TDR if: (a) the modification is related to COVID-19; (b) the borrower had been current (not more than 29 days past due) when the modification program was implemented; and (c) the modification includes payment deferrals for not more than 6 months.
Under section 4013 of the CARES Act, relief provided to lenders exempting certain loan modifications which would otherwise be classified as TDRs from such classification applies for loans that were not more than 30 days past due as of December 31, 2019. The TDR relief under the CARES Act applies to COVID-19-related modifications that were made from March 1, 2020 until the earlier of (a) January 1, 2022 or (b) 60 days from the date the COVID-19 national emergency officially ends.
Financial institutions may account for eligible loan modifications under the Interagency Guidance and/or the CARES Act. Northern Trust elected to apply both the CARES Act and the Interagency Guidance, as applicable, in providing borrowers with loan modification relief in response to the COVID-19 pandemic. All other types of modifications which do not meet the CARES Act or Interagency Guidance requirements continue to be governed by existing regulations and accounting policies.
The following provides the number of total COVID-19-related loan modifications including the loan volume and deferred principal and interest balances as of December 31, 2021, for which Northern Trust applied an exemption from TDR classification that are in active deferral (loans currently in the deferral period) or completed deferral (loans that returned to their regular payment schedule). As of December 31, 2021, there were three residential real estate COVID-19-related loan modifications in active deferral status which totaled $2.0 million, with immaterial deferred principal and interest.
TABLE 72: COVID-19 LOAN MODIFICATIONS NOT CONSIDERED TDRS THAT HAVE COMPLETED DEFERRAL
| DECEMBER 31, 2021 | ||||||||||||||
| ($ In Millions) | NUMBER OF COVID-19 RELATED MODIFICATIONS | LOAN VOLUME | DEFERRED PRINCIPAL AMOUNT | DEFERRED INTEREST AMOUNT | ||||||||||
| Commercial | ||||||||||||||
| Commercial and Institutional | 73 | $ | 199.8 | $ | 0.1 | $ | 1.6 | |||||||
| Commercial Real Estate | 80 | 390.7 | — | 2.4 | ||||||||||
| Total Commercial | 153 | $ | 590.5 | $ | 0.1 | $ | 4.0 | |||||||
| Personal | ||||||||||||||
| Private Client | 29 | $ | 143.1 | $ | — | $ | 1.0 | |||||||
| Residential Real Estate | 208 | 102.0 | 1.1 | 1.3 | ||||||||||
| Total Personal | 237 | $ | 245.1 | $ | 1.1 | $ | 2.3 | |||||||
| Total Loans | 390 | $ | 835.6 | $ | 1.2 | $ | 6.3 |
Northern Trust continues to accrue and recognize interest income during the loan deferral period, and hence has not moved these loans to nonaccrual or reported them as past due. Further, these loan balances continue to be assessed on a collective basis for purposes of measuring an allowance for expected credit losses. While these loans are under the COVID-19 loan modification program, this may delay the recognition of nonaccruals and charge-offs. Loans which have exited the COVID-19 loan modification program may be placed on nonaccrual status or charged-off if borrowers were unable to resume their regular payment schedule.
During the year ended December 31, 2021, 148 loans with an aggregate principal amount of $209.4 million that had been granted payment deferrals were paid off. As of December 31, 2021, less than 10% of loans that had been granted payment deferrals were either past due or in nonaccrual status.
Note 7 – Allowance for Credit Losses
Allowance and Provision for Credit Losses. The allowance for credit losses—which represents management’s best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit exposures, and specific borrower relationships—is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A
| 2021 Annual Report | Northern Trust Corporation 121 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts. Northern Trust employs multiple scenarios over a reasonable and supportable period of currently two years to project future conditions. For periods beyond the reasonable and supportable period, Northern Trust reverts to its own historical loss experiences on a straight-line basis over four quarters. The primary forecast, consistent with Northern Trust’s economic outlook publications, assumes continued economic recovery from the challenges of COVID-19, with steady growth and a falling unemployment rate over the forecast horizon. An alternative scenario is also considered, which reflects a gradual and prolonged recession that incorporates the experiences of a wider set of historical economic cycles.
The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic Research group, and each of Northern Trust’s business units. The Credit Loss Reserve Committee determines the probability weights applied to each forecast approved by Northern Trust’s Macroeconomic Scenario Development Committee, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s qualitative adjustment framework.
The following table provides information regarding changes in the total allowance for credit losses.
TABLE 73: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES.
| 2021 | |||||||||||||||||
| (In Millions) | LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | HELD TO MATURITY DEBT SECURITIES | OTHER FINANCIAL ASSETS | TOTAL | ||||||||||||
| Balance at Beginning of Period | $ | 190.7 | $ | 61.1 | $ | 7.3 | $ | 0.8 | $ | 259.9 | |||||||
| Charge-Offs | (0.7) | — | — | — | (0.7) | ||||||||||||
| Recoveries | 7.0 | — | — | — | 7.0 | ||||||||||||
| Net Recoveries (Charge-Offs) | 6.3 | — | — | — | 6.3 | ||||||||||||
| Provision for Credit Losses | (58.6) | (27.0) | 3.9 | 0.2 | (81.5) | ||||||||||||
| Balance at End of Period | $ | 138.4 | $ | 34.1 | $ | 11.2 | $ | 1.0 | $ | 184.7 |
| 2020 | |||||||||||||||||
| (In Millions) | LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | HELD TO MATURITY DEBT SECURITIES | OTHER FINANCIAL ASSETS | TOTAL | ||||||||||||
| Balance at End of Prior Period | $ | 104.5 | $ | 19.9 | $ | — | $ | — | $ | 124.4 | |||||||
| Cumulative Effect Adjustment | (2.2) | 8.9 | 6.6 | 0.4 | 13.7 | ||||||||||||
| Balance at Beginning of Period | 102.3 | 28.8 | 6.6 | 0.4 | 138.1 | ||||||||||||
| Charge-Offs | (9.7) | — | — | — | (9.7) | ||||||||||||
| Recoveries | 6.5 | — | — | — | 6.5 | ||||||||||||
| Net Recoveries (Charge-Offs) | (3.2) | — | — | — | (3.2) | ||||||||||||
| Provision for Credit Losses | 91.6 | 32.3 | 0.7 | 0.4 | 125.0 | ||||||||||||
| Balance at End of Period | $ | 190.7 | $ | 61.1 | $ | 7.3 | $ | 0.8 | $ | 259.9 |
| 2019 | |||||||||||
| (In Millions) | LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | TOTAL | ||||||||
| Balance at Beginning of Period | $ | 112.6 | $ | 25.6 | $ | 138.2 | |||||
| Charge-Offs | (6.5) | — | (6.5) | ||||||||
| Recoveries | 7.2 | — | 7.2 | ||||||||
| Net Recoveries (Charge-Offs) | 0.7 | — | 0.7 | ||||||||
| Provision for Credit Losses | (8.8) | (5.7) | (14.5) | ||||||||
| Balance at End of Period | $ | 104.5 | $ | 19.9 | $ | 124.4 |
| 122 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There was a $81.5 million release of credit reserves for the year ended December 31, 2021, as compared to a $125.0 million provision for the year ended December 31, 2020. There were net recoveries of $6.3 million for the year ended December 31, 2021, as compared to net charge-offs of $3.2 million for the year ended December 31, 2020. The release of credit reserves during 2021 mostly related to loans and leases and undrawn loan commitments and standby letters of credit. For further detail, please see the following Allowance for the Loan and Lease Portfolio section.
For credit exposure and the associated allowance related to fee receivables, please refer to Note 18, “Revenue from Contracts with Clients.” For information related to the allowance for AFS debt securities, please refer to Note 4, “Securities.” For the allowance pertaining to all other financial assets recognized at amortized cost, which include Cash and Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, and Other Assets, please refer to the Allowance for Other Financial Assets section within this footnote.
Allowance for the Loan and Lease Portfolio. The following table provides information regarding changes in the total allowance for credit losses, including undrawn loan commitments and standby letters of credit, by segment.
TABLE 74: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO LOANS AND LEASES
| 2021 | ||||||||||||||||||||
| LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | |||||||||||||||||||
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL | ||||||||||||||
| Balance at Beginning of Period | $ | 142.2 | $ | 48.5 | $ | 190.7 | $ | 57.6 | $ | 3.5 | $ | 61.1 | ||||||||
| Charge-Offs | (0.3) | (0.4) | (0.7) | — | — | — | ||||||||||||||
| Recoveries | 0.9 | 6.1 | 7.0 | — | — | — | ||||||||||||||
| Net Recoveries (Charge-Offs) | 0.6 | 5.7 | 6.3 | — | — | — | ||||||||||||||
| Provision for Credit Losses | (37.2) | (21.4) | (58.6) | (26.2) | (0.8) | (27.0) | ||||||||||||||
| Balance at End of Period | $ | 105.6 | $ | 32.8 | $ | 138.4 | $ | 31.4 | $ | 2.7 | $ | 34.1 |
| 2020 | ||||||||||||||||||||
| LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | |||||||||||||||||||
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL | ||||||||||||||
| Balance at End of Prior Period | $ | 58.1 | $ | 46.4 | $ | 104.5 | $ | 15.8 | $ | 4.1 | $ | 19.9 | ||||||||
| Cumulative Effect Adjustment | (5.9) | 3.7 | (2.2) | 11.9 | (3.0) | 8.9 | ||||||||||||||
| Balance at Beginning of Period | $ | 52.2 | $ | 50.1 | $ | 102.3 | $ | 27.7 | $ | 1.1 | $ | 28.8 | ||||||||
| Charge-Offs | (6.3) | (3.4) | (9.7) | — | — | — | ||||||||||||||
| Recoveries | 2.4 | 4.1 | 6.5 | — | — | — | ||||||||||||||
| Net Recoveries (Charge-Offs) | (3.9) | 0.7 | (3.2) | — | — | — | ||||||||||||||
| Provision for Credit Losses | 93.9 | (2.3) | 91.6 | 29.9 | 2.4 | 32.3 | ||||||||||||||
| Balance at End of Period | $ | 142.2 | $ | 48.5 | $ | 190.7 | $ | 57.6 | $ | 3.5 | $ | 61.1 |
| 2019 | ||||||||||||||||||||
| LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | |||||||||||||||||||
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL | ||||||||||||||
| Balance at Beginning of Period | $ | 57.6 | $ | 55.0 | $ | 112.6 | $ | 21.1 | $ | 4.5 | $ | 25.6 | ||||||||
| Charge-Offs | (3.0) | (3.5) | (6.5) | — | — | — | ||||||||||||||
| Recoveries | 0.9 | 6.3 | 7.2 | — | — | — | ||||||||||||||
| Net Recoveries (Charge-Offs) | (2.1) | 2.8 | 0.7 | — | — | — | ||||||||||||||
| Provision for Credit Losses | 2.6 | (11.4) | (8.8) | (5.3) | (0.4) | (5.7) | ||||||||||||||
| Balance at End of Period | $ | 58.1 | $ | 46.4 | $ | 104.5 | $ | 15.8 | $ | 4.1 | $ | 19.9 |
The decrease to the allowance for both loans and leases and undrawn loan commitments and standby letters of credit for 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional portfolio.
| 2021 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 for loans and leases and undrawn loan commitments and standby letters of credit by segment as of December 31, 2021 and 2020.
TABLE 75: RECORDED INVESTMENTS IN LOANS AND LEASES
| DECEMBER 31, 2021 | DECEMBER 31, 2020 | |||||||||||||||||||
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL | ||||||||||||||
| Loans and Leases | ||||||||||||||||||||
| Evaluated on an Individual Basis | $ | 92.1 | $ | 74.5 | $ | 166.6 | $ | 66.6 | $ | 65.1 | $ | 131.7 | ||||||||
| Evaluated on a Collective Basis | 18,395.3 | 21,918.7 | 40,314.0 | 15,195.4 | 18,432.6 | 33,628.0 | ||||||||||||||
| Total Loans and Leases | 18,487.4 | 21,993.2 | 40,480.6 | 15,262.0 | 18,497.7 | 33,759.7 | ||||||||||||||
| Allowance for Credit Losses on Credit Exposures | ||||||||||||||||||||
| Evaluated on an Individual Basis | 10.1 | — | 10.1 | 8.8 | 0.3 | 9.1 | ||||||||||||||
| Evaluated on a Collective Basis | 95.5 | 32.8 | 128.3 | 133.4 | 48.2 | 181.6 | ||||||||||||||
| Allowance Assigned to Loans and Leases | 105.6 | 32.8 | 138.4 | 142.2 | 48.5 | 190.7 | ||||||||||||||
| Allowance for Undrawn Loan Commitments and Standby Letters of Credit | ||||||||||||||||||||
| Evaluated on an Individual Basis | — | — | — | 1.6 | — | 1.6 | ||||||||||||||
| Evaluated on a Collective Basis | 31.4 | 2.7 | 34.1 | 56.0 | 3.5 | 59.5 | ||||||||||||||
| Allowance Assigned to Undrawn Loan Commitments and Standby Letters of Credit | 31.4 | 2.7 | 34.1 | 57.6 | 3.5 | 61.1 | ||||||||||||||
| Total Allowance Assigned to Loans and Leases and Undrawn Loan Commitments and Standby Letters of Credit | $ | 137.0 | $ | 35.5 | $ | 172.5 | $ | 199.8 | $ | 52.0 | $ | 251.8 |
Allowance for Held to Maturity Debt Securities Portfolio. The following table provides information regarding changes in the total allowance for credit losses for HTM debt securities during 2021 and 2020.
TABLE 76: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO HELD TO MATURITY DEBT SECURITIES
| 2021 | ||||||||||||||||||||
| (In Millions) | CORPORATE DEBT | NON-U.S. GOVERNMENT | SUB-SOVEREIGN, SUPRANATIONAL, AND NON-U.S. AGENCY BONDS | COVERED BONDS | OTHER | TOTAL | ||||||||||||||
| Balance at Beginning of Period | $ | 0.8 | $ | 0.2 | $ | 1.2 | $ | 0.1 | $ | 5.0 | $ | 7.3 | ||||||||
| Provision for Credit Losses | 0.6 | 1.7 | 1.8 | — | (0.2) | 3.9 | ||||||||||||||
| Balance at End of Period | $ | 1.4 | $ | 1.9 | $ | 3.0 | $ | 0.1 | $ | 4.8 | $ | 11.2 |
| 2020 | ||||||||||||||||||||
| (In Millions) | CORPORATE DEBT | NON-U.S. GOVERNMENT | SUB-SOVEREIGN, SUPRANATIONAL, AND NON-U.S. AGENCY BONDS | COVERED BONDS | OTHER | TOTAL | ||||||||||||||
| Balance at End of Prior Period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
| Cumulative Effect Adjustment | 0.8 | 0.3 | 0.9 | — | 4.6 | 6.6 | ||||||||||||||
| Balance at Beginning of Period | 0.8 | 0.3 | 0.9 | — | 4.6 | 6.6 | ||||||||||||||
| Provision for Credit Losses | — | (0.1) | 0.3 | 0.1 | 0.4 | 0.7 | ||||||||||||||
| Balance at End of Period | $ | 0.8 | $ | 0.2 | $ | 1.2 | $ | 0.1 | $ | 5.0 | $ | 7.3 |
Prior to the adoption of ASU 2016-13 on January 1, 2020, Northern Trust recognized $4.4 million of cumulative Other-Than-Temporary-Impairment (OTTI) losses on the debt securities classified as other as of December 31, 2019. For debt securities with previous OTTI losses recorded, Northern Trust applied ASU 2016-13 on a prospective basis whereby the amortized cost basis of the impaired security remains unchanged immediately before and after adopting ASU 2016-13. The allowance recorded at January 1, 2020 for HTM debt securities equals the difference between the calculated expected loss and the amount of OTTI loss previously recorded and represents the cumulative effect adjustment required upon the adoption of ASU 2016-13.
| 124 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The increase in the allowance attributable to HTM debt securities for 2021 was due to an increase in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by an increase in exposure.
Allowance for Other Financial Assets. The allowance for Other Financial Assets consists of the allowance for Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, and Other Assets. Northern Trust’s portfolio is composed mostly of institutions within the “1 to 3” internal borrower rating category and is expected to exhibit minimal to modest likelihood of loss. The allowance for credit losses related to Other Financial Assets was $1.0 million and $0.8 million as of December 31, 2021 and 2020, respectively.
Accrued Interest. Accrued interest balances are reported within Other Assets on the consolidated balance sheets. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables related to its loan and securities portfolios as its policy is to write-off uncollectible accrued interest receivable balances in a timely manner. Accrued interest is written off by reversing interest income during the period the financial asset is moved from an accrual to a nonaccrual status.
The following table provides the amount of accrued interest excluded from the amortized cost basis of the following portfolios.
TABLE 77: ACCRUED INTEREST
| (In Millions) | DECEMBER 31, 2021 | DECEMBER 31, 2020 | ||||||
| Loans and Leases | $ | 62.6 | $ | 55.3 | ||||
| Debt Securities | ||||||||
| Held to Maturity | 30.4 | 26.5 | ||||||
| Available for Sale | 129.7 | 153.6 | ||||||
| Other Financial Assets | 2.3 | 1.4 | ||||||
| Total | $ | 225.0 | $ | 236.8 |
The amount of accrued interest reversed through interest income for loans and leases was immaterial and there was no accrued interest reversed through interest income related to any other financial assets during the years ended 2021 and 2020.
Note 8 – Concentrations of Credit Risk
Concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The fact that a credit exposure falls into one of these groups does not necessarily indicate that the credit has a higher than normal degree of credit risk. These groups are: banks and bank holding companies, residential real estate, and commercial real estate.
Banks and Bank Holding Companies. At December 31, 2021, 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 $1.9 billion, demand balances maintained at correspondent banks of $3.0 billion, and Securities Purchased under Agreements to Resell of $686.4 million. At December 31, 2020, on-balance sheet credit risk to banks and bank holding companies, both U.S. and non-U.S., consisted primarily of Interest-Bearing Deposits with Banks of $4.4 billion, demand balances maintained at correspondent banks of $4.3 billion, and Securities Purchased under Agreements to Resell of $1.6 billion. Credit risk associated with U.S. and non-U.S. banks and bank holding companies deemed to be counterparties by Credit Risk Management is managed by the Capital Markets Credit Committee. Credit limits are established through a review process that includes an internally-prepared financial analysis, use of an internal risk rating system and consideration of external ratings from rating agencies. Northern Trust places deposits with banks that have strong internal and external credit ratings and the average life to maturity of deposits with banks is maintained on a short-term basis in order to respond quickly to changing credit conditions.
Residential Real Estate. Residential real estate loans totaled $6.3 billion at December 31, 2021 and $6.0 billion at December 31, 2020, representing 17% and 19%, respectively, of total U.S. loans and leases. Residential real estate loans consist of traditional first lien mortgages and equity credit lines, which generally require a loan-to-collateral value ratio of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties. Of
| 2021 Annual Report | Northern Trust Corporation 125 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the $6.3 billion residential real estate loans at December 31, 2021, $1.6 billion were in Florida, $1.4 billion were in California, and $0.7 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 $665.9 million and $676.1 million at December 31, 2021 and 2020, respectively.
Commercial Real Estate. In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower’s principal business activity is the acquisition or the development of real estate for commercial purposes; (2) the principal collateral is real estate held for commercial purposes, and loan repayment is expected to flow from the operation of the property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to experienced investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required. Commercial mortgage financing is provided for the acquisition or refinancing of income-producing properties. Cash flows from the properties generally are sufficient to amortize the loan. These loans are primarily located in the California, Illinois, Florida, Texas, and New York markets. Construction, acquisition and development loans provide financing for commercial real estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or refinance the loan through a commercial mortgage with Northern Trust or another financial institution upon completion. At December 31, 2021, legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $357.9 million and $30.0 million, respectively. At December 31, 2020, legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $252.3 million and $4.5 million, respectively.
The table below provides additional detail regarding commercial real estate loan types.
TABLE 78: COMMERCIAL REAL ESTATE LOANS
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Commercial Mortgages | ||||||||
| Office | $ | 1,011.4 | $ | 831.3 | ||||
| Apartment/ Multi-family | 1,288.8 | 906.8 | ||||||
| Retail | 601.8 | 561.3 | ||||||
| Industrial/ Warehouse | 442.9 | 344.2 | ||||||
| Other | 516.8 | 409.9 | ||||||
| Total Commercial Mortgages | 3,861.7 | 3,053.5 | ||||||
| Construction, Acquisition and Development Loans | 464.6 | 504.9 | ||||||
| Total Commercial Real Estate Loans | $ | 4,326.3 | $ | 3,558.4 |
| 126 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Buildings and Equipment
A summary of Buildings and Equipment is presented in the following table.
TABLE 79: BUILDINGS AND EQUIPMENT
| DECEMBER 31, 2021 | |||||||||||
| (In Millions) | ORIGINAL COST | ACCUMULATED DEPRECIATION | NET BOOK VALUE | ||||||||
| Land and Improvements | $ | 11.5 | $ | 0.3 | $ | 11.2 | |||||
| Buildings | 217.6 | 136.5 | 81.1 | ||||||||
| Equipment | 478.4 | 275.4 | 203.0 | ||||||||
| Leasehold Improvements | 513.6 | 320.2 | 193.4 | ||||||||
| Total Buildings and Equipment | $ | 1,221.1 | $ | 732.4 | $ | 488.7 |
| DECEMBER 31, 2020 | |||||||||||
| (In Millions) | ORIGINAL COST | ACCUMULATED DEPRECIATION | NET BOOK VALUE | ||||||||
| Land and Improvements | $ | 14.5 | $ | 0.5 | $ | 14.0 | |||||
| Buildings | 257.8 | 163.0 | 94.8 | ||||||||
| Equipment | 816.4 | 596.8 | 219.6 | ||||||||
| Leasehold Improvements | 523.9 | 337.4 | 186.5 | ||||||||
| Total Buildings and Equipment | $ | 1,612.6 | $ | 1,097.7 | $ | 514.9 |
The charge for depreciation amounted to $110.8 million in 2021, $116.5 million in 2020, and $103.2 million in 2019 on the consolidated statements of income.
Note 10 – Lease Commitments
At December 31, 2021, Northern Trust was obligated under a number of non-cancelable operating leases, primarily for real estate. Certain leases contain rent escalation clauses based on market indices, renewal option clauses calling for increased rentals, and rental payments based on usage. There are no restrictions imposed by any lease agreement regarding the payment of dividends, debt financing or Northern Trust entering into further lease agreements.
The components of lease costs for the years ended December 31, 2021 and 2020 were as follows.
TABLE 80: LEASE COST COMPONENTS
| (In Millions) | DECEMBER 31, 2021 | DECEMBER 31, 2020 | ||||||
| Operating Lease Cost | $ | 96.2 | $ | 119.4 | ||||
| Variable Lease Cost | 37.3 | 32.7 | ||||||
| Sublease Income | (4.5) | (4.8) | ||||||
| Total Lease Cost | $ | 129.0 | $ | 147.3 |
| 2021 Annual Report | Northern Trust Corporation 127 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a maturity analysis of lease liabilities as of December 31, 2021.
TABLE 81: MATURITY OF LEASE LIABILITIES
| (In Millions) | MATURITY OF LEASE LIABILITIES | ||||
| 2022 | $ | 93.2 | |||
| 2023 | 88.9 | ||||
| 2024 | 80.3 | ||||
| 2025 | 82.6 | ||||
| 2026 | 61.7 | ||||
| Later Years | 346.5 | ||||
| Total Lease Payments | 753.2 | ||||
| Less: Imputed Interest | (90.1) | ||||
| Present Value of Lease Liabilities | $ | 663.1 |
As of December 31, 2021, Northern Trust had commitments for operating leases in addition to the above that have not yet commenced for approximately $22 million. These operating leases are for the use of office space with lease terms of between 10 and 12 years and are expected to commence between the first half of 2022 and mid-year 2023.
Northern Trust uses its incremental borrowing rate to determine the present value of lease payments for operating leases. Operating lease right-of-use (ROU) assets and lease liabilities may include options to extend or terminate the lease only when it is reasonably certain that Northern Trust will exercise that option. Northern Trust elects not to separate lease and non-lease components of a contract for its real estate leases. The location and amount of ROU assets and lease liabilities recorded on the consolidated balance sheets as of December 31, 2021 and 2020 are presented in the following table.
TABLE 82: LOCATION AND AMOUNT OF LEASE ASSETS AND LIABILITIES
| (In Millions) | LOCATION OF LEASE ASSETS AND LEASE LIABILITIES ON THE BALANCE SHEET | DECEMBER 31, 2021 | DECEMBER 31, 2020 | ||||||||
| Assets | |||||||||||
| Operating Lease Right-of-Use Asset | Other Assets | $ | 531.2 | $ | 560.5 | ||||||
| Liabilities | |||||||||||
| Operating Lease Liability | Other Liabilities | $ | 663.1 | $ | 700.6 |
The weighted-average remaining lease term and weighted-average discount rate applied to leases as of December 31, 2021 and 2020 were as follows:
TABLE 83: WEIGHTED-AVERAGE REMAINING LEASE TERM AND DISCOUNT RATE
| DECEMBER 31, 2021 | DECEMBER 31, 2020 | |||||||
| Operating Leases | ||||||||
| Weighted-Average Remaining Lease Term | 9.6 years | 10.0 years | ||||||
| Weighted-Average Discount Rate | 2.4 | % | 2.5 | % |
The following table provides supplemental cash flow information related to leases for the years ended December 31, 2021 and 2020.
TABLE 84: SUPPLEMENTAL CASH FLOW INFORMATION
| (In Millions) | DECEMBER 31, 2021 | DECEMBER 31, 2020 | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities - operating cash flows | $ | 69.5 | $ | 107.9 | ||||
| Supplemental non-cash information | ||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 58.5 | $ | 164.8 |
| 128 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Goodwill and Other Intangibles
Goodwill. Changes by reporting segment in the carrying amount of Goodwill for the years ended December 31, 2021 and 2020, including the effect of foreign exchange rates on non-U.S.-dollar denominated balances, were as follows.
TABLE 85: GOODWILL
| (In Millions) | CORPORATE & INSTITUTIONAL SERVICES | WEALTH MANAGEMENT | TOTAL | ||||||||
| Balance at December 31, 2019(1) | $ | 616.4 | $ | 80.4 | $ | 696.8 | |||||
| Foreign Exchange Rates | 10.3 | 0.1 | 10.4 | ||||||||
| Balance at December 31, 2020 | $ | 626.7 | $ | 80.5 | $ | 707.2 | |||||
| Goodwill Acquired | 4.2 | — | 4.2 | ||||||||
| Foreign Exchange Rates | (5.2) | — | (5.2) | ||||||||
| Balance at December 31, 2021 | $ | 625.7 | $ | 80.5 | $ | 706.2 |
(1) $9.3 million of goodwill was moved from Corporate & Institutional Services to Wealth Management for reporting purposes, to better reflect the nature of the client base.
In the second quarter of 2021, Northern Trust finalized the acquisition of Parilux Investment Technology, LLC, a provider of middle office software solutions for multi-manager investors, completing the investment in the firm that was initiated in 2018. The purchase price recorded in connection with the closing of the acquisition totaled $17.6 million. Goodwill and developed technology associated with the acquisition totaled $4.2 million and $13.4 million, respectively.
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 2021 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 2021.
Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization as of December 31, 2021 and 2020 were as follows.
TABLE 86: OTHER INTANGIBLE ASSETS
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Gross Carrying Amount | $ | 206.4 | $ | 221.3 | ||||
| Less: Accumulated Amortization | 114.8 | 108.7 | ||||||
| Net Book Value | $ | 91.6 | $ | 112.6 |
Other intangible assets consist primarily of the value of acquired client relationships and are included in Other Assets on the consolidated balance sheets. Amortization expense related to other intangible assets was $14.8 million, $16.9 million, and $16.6 million for the years ended December 31, 2021, 2020, and 2019, respectively. Amortization for the years 2022, 2023, 2024, 2025, and 2026 is estimated to be $9.9 million, $9.6 million, $9.5 million, $8.9 million, and $8.6 million respectively.
Capitalized Software. The gross carrying amount and accumulated amortization of capitalized software as of December 31, 2021 and 2020 were as follows.
TABLE 87: CAPITALIZED SOFTWARE
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Gross Carrying Amount | $ | 2,982.1 | $ | 4,337.4 | ||||
| Less: Accumulated Amortization | 1,299.5 | 2,744.5 | ||||||
| Net Book Value | $ | 1,682.6 | $ | 1,592.9 |
Capitalized software, which is included in Other Assets on the consolidated balance sheets, consists primarily of purchased software, software licenses, and allowable internal costs, including compensation relating to software developed for internal use. Fees paid for the use of software licenses that are not hosted by Northern Trust are expensed as incurred.
| 2021 Annual Report | Northern Trust Corporation 129 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense, which is included in Equipment and Software on the consolidated statements of income, totaled $390.1 million in 2021, $366.9 million in 2020, and $339.1 million in 2019.
Note 12 – Deposits
The following table provides the scheduled maturity of total time deposits in denominations of $250,000 or greater at December 31, 2021.
TABLE 88: REMAINING MATURITY OF TIME DEPOSITS $250,000 OR MORE
| DECEMBER 31, 2021 | |||||||||||
| U.S. OFFICE | NON-U.S. OFFICES | ||||||||||
| (In Millions) | CERTIFICATES OF DEPOSIT | OTHER TIME | TOTAL | ||||||||
| 1 Year or Less | $ | 625.3 | $ | 383.5 | $ | 1,008.8 | |||||
| Over 1 Year to 2 Years | 13.8 | — | 13.8 | ||||||||
| Over 2 Years to 3 Years | 1.5 | — | 1.5 | ||||||||
| Over 3 Years to 4 Years | 0.3 | — | 0.3 | ||||||||
| Over 4 Years to 5 Years | 0.8 | — | 0.8 | ||||||||
| Over 5 Years | — | — | — | ||||||||
| Total | $ | 641.7 | $ | 383.5 | $ | 1,025.2 |
As of December 31, 2020, there were $906.8 million of time deposits in denominations of $250,000 or greater, of which $701.4 million were Certificates of Deposit and $205.4 million were non-U.S.
Note 13 – Senior Notes and Long-Term Debt
Senior Notes. A summary of Senior Notes outstanding at December 31, 2021 and 2020 is presented in the following table.
TABLE 89: SENIOR NOTES
| DECEMBER 31, | |||||||||||
| ($ In Millions) | RATE | 2021 | 2020 | ||||||||
| Corporation-Senior Notes(1) | |||||||||||
| Fixed Rate Due Aug. 2021(2) | 3.375 | % | $ | — | $ | 499.8 | |||||
| Fixed Rate Due Aug. 2022(2) | 2.375 | 499.8 | 499.6 | ||||||||
| Fixed Rate Due Aug. 2028(3)(4) | 3.65 | 548.5 | 584.4 | ||||||||
| Fixed Rate Due May 2029(3)(4) | 3.15 | 533.9 | 567.9 | ||||||||
| Fixed Rate Due May 2030(3)(4) | 1.95 | 923.3 | 970.7 | ||||||||
| Total Senior Notes | $ | 2,505.5 | $ | 3,122.4 |
(1) As of December 31, 2021, debt issuance costs of $2.9 million are included as a direct deduction from the carrying amount and amortized on a straight-line basis over the life of the Note.
(2) Not redeemable prior to maturity.
(3) Redeemable within three months of maturity.
(4) Interest rate swap contracts were entered into to modify the interest expense from fixed rates to floating rates. The swaps are recorded as fair value hedges and increases in the carrying values of senior notes outstanding of $12.5 million and $130.7 million were recorded as of December 31, 2021 and 2020, respectively. See further detail in Note 27, “Derivative Financial Instruments.”
| 130 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Debt. A summary of Long-Term Debt outstanding at December 31, 2021 and 2020 is presented in the following table.
TABLE 90: LONG-TERM DEBT
| DECEMBER 31, | |||||||||||
| ($ In Millions) | RATE | 2021 | 2020 | ||||||||
| Corporation-Subordinated Debt(1) | |||||||||||
| Fixed Rate Notes due Oct. 2025(2)(3) | 3.95 | % | $ | 796.2 | $ | 839.8 | |||||
| Fixed-to-Floating Rate Notes due May 2032(4) | 3.375 | 349.5 | 349.5 | ||||||||
| Total Long-Term Debt | $ | 1,145.7 | $ | 1,189.3 | |||||||
| Long-Term Debt Qualifying as Risk-Based Capital | $ | 799.8 | $ | 949.7 |
(1) As of December 31, 2021, debt issuance costs of $0.9 million are included as a direct deduction from the carrying amount and amortized on a straight-line basis over the life of the Note.
(2) Not redeemable prior to maturity.
(3) Interest rate swap contracts were entered into to modify the interest expense from fixed rates to floating rates. The swaps are recorded as fair value hedges and increases in the carrying values of the subordinated notes outstanding of $46.9 million and $90.8 million were recorded as of December 31, 2021 and 2020, respectively. See further detail in Note 27, “Derivative Financial Instruments.”
(4) The subordinated notes will bear interest from the date they were issued to, but excluding, May 8, 2027, at an annual rate of 3.375%, payable semi-annually in arrears. From, and including, May 8, 2027, the subordinated notes will bear interest at an annual rate equal to three-month LIBOR plus 1.131%, payable quarterly in arrears. The subordinated notes are unsecured and may be redeemed, in whole but not in part, on, and only on, May 8, 2027, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed, plus accrued and unpaid interest, if any, up to but excluding the redemption date.
Note 14 – Floating Rate Capital Debt
In January 1997, the Corporation issued $150 million of Floating Rate Capital Securities, Series A, through a statutory business trust wholly owned by the Corporation (NTC Capital I) due in January 2027. 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 due in April 2027. The sole assets of the trusts were subordinated debentures of the Corporation that had 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 LIBOR and the Series B securities were issued at a discount to yield 67.9 basis points above the three-month LIBOR. The holders of the Series A and B securities were 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 three-month LIBOR plus 52.0 basis points and 59.0 basis points, respectively.
On October 15, 2021, the Floating Rate Capital Securities Series A and Series B were redeemed at the principal amount plus accrued and unpaid interest and, concurrently with the redemption of the Floating Rate Capital Securities Series A and B, the corresponding subordinated debentures were fully redeemed for $278.8 million principal amount plus accrued and unpaid interest, with $154.9 million attributable to the Series A subordinated debentures and $123.9 million attributable to the Series B subordinated debentures.
The following table summarizes the book values of the outstanding subordinated debentures as of December 31, 2021 and 2020.
TABLE 91: SUBORDINATED DEBENTURES
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| NTC Capital I Subordinated Debentures | $ | — | $ | 154.3 | ||||
| NTC Capital II Subordinated Debentures | — | 123.5 | ||||||
| Total Subordinated Debentures | $ | — | $ | 277.8 |
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, 2021, 5,000 shares of Series D Non-Cumulative Perpetual Preferred Stock (the “Series D Preferred Stock”) and 16,000 shares of Series E Non-Cumulative Perpetual Preferred Stock (the “Series E Preferred Stock”) were outstanding.
Series D Preferred Stock. As of December 31, 2021, 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, 2021 and 2020 was $493.5 million. Shares of the Series D
| 2021 Annual Report | Northern Trust Corporation 131 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Stock have no par value and a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share).
Dividends on the Series D Preferred Stock, which are not mandatory, accrue and are payable on the liquidation preference amount, on a non-cumulative basis, at a rate per annum equal to (i) 4.60% from the original issue date of the Series D Preferred Stock to but excluding October 1, 2026; and (ii) a floating rate equal to three-month LIBOR plus 3.202% from and including October 1, 2026. Fixed rate dividends are payable in arrears on the first day of April and October of each year, through and including October 1, 2026, and floating rate dividends will be payable in arrears on the first day of January, April, July and October of each year, commencing on January 1, 2027.
The Series D Preferred Stock has no maturity date and is redeemable at the Corporation’s option in whole, or in part, on any dividend payment date on or after October 1, 2026. The Series D Preferred Stock is redeemable at the Corporation’s option in whole, but not in part, including prior to October 1, 2026, within 90 days of a regulatory capital treatment event, as described in the Series D Preferred Stock Certificate of Designation.
Shares of the Series D Preferred Stock rank senior to the Corporation’s common stock, and will rank at least equally with any other series of preferred stock it may issue (except for any senior series that may be issued with the requisite consent of the holders of the Series D Preferred Stock) and all other parity stock, with respect to the payment of dividends and distributions upon liquidation, dissolution or winding up.
Series E Preferred Stock. As of December 31, 2021, the Corporation had issued and outstanding 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Preferred Stock, issued in November 2019. Equity related to Series E Preferred Stock as of December 31, 2021 and 2020 was $391.4 million. Shares of the Series E Preferred Stock have no par value and a liquidation preference of $25,000 per share (equivalent to $25 per depositary share).
Dividends on the Series E Preferred Stock, which are not mandatory, accrue and are payable on the liquidation preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January, April, July and October of each year, at a rate per annum equal to 4.70%. On October 19, 2021, the Corporation declared a cash dividend of $293.75 per share of Series E Preferred Stock payable on January 1, 2022, to stockholders of record as of December 15, 2021.
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. During the year ended December 31, 2021, the Corporation repurchased 2,527,544 shares of common stock, including 394,326 shares withheld related to share-based compensation, at a total cost of $267.6 million. These repurchases were made pursuant to the repurchase program authorized by the Board of Directors in July 2018. In October 2021, this program was terminated and replaced with a new repurchase program, under which the Corporation’s Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. 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, thus the Corporation retains the ability to repurchase when circumstances warrant and applicable regulation permits.
The average price paid per share for common stock repurchased in 2021, 2020, and 2019 was $105.90, $91.49, and $93.40, respectively.
An analysis of changes in the number of shares of common stock outstanding follows:
TABLE 92: SHARES OF COMMON STOCK
| 2021 | 2020 | 2019 | |||||||||
| Balance at January 1 | 208,289,178 | 209,709,046 | 219,012,050 | ||||||||
| Incentive Plan and Awards | 1,162,484 | 1,512,035 | 1,688,931 | ||||||||
| Stock Options Exercised | 837,757 | 344,686 | 786,931 | ||||||||
| Treasury Stock Purchased | (2,527,544) | (3,276,589) | (11,778,866) | ||||||||
| Balance at December 31 | 207,761,875 | 208,289,178 | 209,709,046 |
| 132 2021 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, 2021, 2020, and 2019, and changes during the years then ended.
TABLE 93: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| (In Millions) | NET UNREALIZED GAINS (LOSSES) ON AVAILABLE FOR SALE DEBT SECURITIES (1) | NET UNREALIZED (LOSSES) GAINS ON CASH FLOW HEDGES | NET FOREIGN CURRENCY ADJUSTMENT | NET PENSION AND OTHER POSTRETIREMENT BENEFIT ADJUSTMENTS | TOTAL | ||||||||||||
| 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) | |||||||
| Net Change | 527.8 | 0.5 | 26.9 | 67.5 | 622.7 | ||||||||||||
| Balance at December 31, 2020 | $ | 641.8 | $ | (3.2) | $ | 144.7 | $ | (355.3) | $ | 428.0 | |||||||
| Net Change | (534.7) | 0.8 | 10.5 | 59.8 | (463.6) | ||||||||||||
| Balance at December 31, 2021 | $ | 107.1 | $ | (2.4) | $ | 155.2 | $ | (295.5) | $ | (35.6) |
(1) Includes net unrealized gains (losses) on debt securities transferred from AFS to HTM. Refer to Note 4, “Securities” for further information.
TABLE 94: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| FOR THE YEAR ENDED DECEMBER 31, | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||
| (In Millions) | BEFORE TAX | TAX EFFECT | AFTER TAX | BEFORE TAX | TAX EFFECT | AFTER TAX | BEFORE TAX | TAX EFFECT | AFTER TAX | ||||||||||||||||||||
| Unrealized Gains (Losses) on Available for Sale Debt Securities | |||||||||||||||||||||||||||||
| Unrealized Gains (Losses) on Available for Sale Debt Securities | $ | (685.0) | $ | 177.5 | $ | (507.5) | $ | 706.8 | $ | (179.3) | $ | 527.5 | $ | 306.1 | $ | (78.0) | $ | 228.1 | |||||||||||
| Reclassification Adjustments for Losses (Gains) Included in Net Income: | |||||||||||||||||||||||||||||
| Interest Income on Debt Securities(1) | (36.6) | 9.2 | (27.4) | — | — | — | — | — | — | ||||||||||||||||||||
| Net Losses on Debt Securities(2) | 0.3 | (0.1) | 0.2 | 0.4 | (0.1) | 0.3 | 1.1 | (0.3) | 0.8 | ||||||||||||||||||||
| Net Change | $ | (721.3) | $ | 186.6 | $ | (534.7) | $ | 707.2 | $ | (179.4) | $ | 527.8 | $ | 307.2 | $ | (78.3) | $ | 228.9 | |||||||||||
| Unrealized (Losses) Gains on Cash Flow Hedges | |||||||||||||||||||||||||||||
| Foreign Exchange Contracts | $ | 5.6 | $ | (1.4) | $ | 4.2 | $ | 28.9 | $ | (7.3) | $ | 21.6 | $ | 14.9 | $ | (3.7) | $ | 11.2 | |||||||||||
| Interest Rate Contracts | — | — | — | — | — | — | 1.5 | (0.3) | 1.2 | ||||||||||||||||||||
| Reclassification Adjustment for (Gains) Losses Included in Net Income(3) | (4.5) | 1.1 | (3.4) | (28.1) | 7.0 | (21.1) | (26.7) | 6.6 | (20.1) | ||||||||||||||||||||
| Net Change | $ | 1.1 | $ | (0.3) | $ | 0.8 | $ | 0.8 | $ | (0.3) | $ | 0.5 | $ | (10.3) | $ | 2.6 | $ | (7.7) | |||||||||||
| Foreign Currency Adjustments | |||||||||||||||||||||||||||||
| Foreign Currency Translation Adjustments | $ | (133.8) | $ | 4.1 | $ | (129.7) | $ | 169.1 | $ | (8.3) | $ | 160.8 | $ | 6.4 | $ | (1.6) | $ | 4.8 | |||||||||||
| Long-Term Intra-Entity Foreign Currency Transaction (Losses) Gains | 0.6 | (0.1) | 0.5 | 2.1 | (0.5) | 1.6 | (0.5) | 0.1 | (0.4) | ||||||||||||||||||||
| Net Investment Hedge Gains (Losses) | 186.6 | (46.9) | 139.7 | (178.7) | 43.2 | (135.5) | 59.7 | (14.2) | 45.5 | ||||||||||||||||||||
| Net Change | $ | 53.4 | $ | (42.9) | $ | 10.5 | $ | (7.5) | $ | 34.4 | $ | 26.9 | $ | 65.6 | $ | (15.7) | $ | 49.9 | |||||||||||
| Pension and Other Postretirement Benefit Adjustments | |||||||||||||||||||||||||||||
| Net Actuarial (Losses) Gains | $ | 7.9 | $ | 0.2 | $ | 8.1 | $ | 47.4 | $ | (12.3) | $ | 35.1 | $ | (36.8) | $ | 7.9 | $ | (28.9) | |||||||||||
| Reclassification Adjustment for Losses (Gains) Included in Net Income(4) | |||||||||||||||||||||||||||||
| Amortization of Net Actuarial Loss | 41.4 | (10.3) | 31.1 | 42.2 | (10.4) | 31.8 | 22.4 | (5.4) | 17.0 | ||||||||||||||||||||
| Amortization of Prior Service Cost (Credit) | (1.0) | 0.3 | (0.7) | (0.1) | — | (0.1) | (0.2) | — | (0.2) | ||||||||||||||||||||
| Settlement Loss(5) | 28.3 | (7.0) | 21.3 | 0.8 | (0.1) | 0.7 | — | — | — | ||||||||||||||||||||
| Net Change | $ | 76.6 | $ | (16.8) | $ | 59.8 | $ | 90.3 | $ | (22.8) | $ | 67.5 | $ | (14.6) | $ | 2.5 | $ | (12.1) | |||||||||||
| Total Net Change | $ | (590.2) | $ | 126.6 | $ | (463.6) | $ | 790.8 | $ | (168.1) | $ | 622.7 | $ | 347.9 | $ | (88.9) | $ | 259.0 |
(1) The before-tax reclassification adjustment out of AOCI is related to the amortization of unrealized gains (losses) on AFS debt securities that were transferred to HTM debt securities during the second quarter of 2021. Refer to Note 4, “Securities” for further information.
(2) The before-tax reclassification adjustment out of AOCI related to the realized gains (losses) on AFS debt securities is recorded in Investment Security Losses, net on the consolidated statements of income.
(3) See Note 27, "Derivative Financial Instruments" for the location of the reclassification adjustment related to cash flow hedges.
(4) The before-tax reclassification adjustment out of AOCI related to pension and other postretirement benefit adjustments is recorded in Employee Benefits expense on the consolidated statements of income.
(5) This line includes the before-tax $27.9 million U.S. Qualified Plan pension settlement charge in 2021. Refer to Note 23, “Employee Benefits” for further information.
| 2021 Annual Report | Northern Trust Corporation 133 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 – Net Income per Common Share
The computations of net income per common share are presented in the following table.
TABLE 95: NET INCOME PER COMMON SHARE
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| ($ In Millions Except Per Common Share Information) | 2021 | 2020 | 2019 | ||||||||
| BASIC NET INCOME PER COMMON SHARE | |||||||||||
| Average Number of Common Shares Outstanding | 208,075,522 | 208,319,412 | 214,525,547 | ||||||||
| Net Income | $ | 1,545.3 | $ | 1,209.3 | $ | 1,492.2 | |||||
| Less: Dividends on Preferred Stock | 41.8 | 56.2 | 46.4 | ||||||||
| Net Income Applicable to Common Stock | 1,503.5 | 1,153.1 | 1,445.8 | ||||||||
| Less: Earnings Allocated to Participating Securities | 12.9 | 12.1 | 16.9 | ||||||||
| Earnings Allocated to Common Shares Outstanding | $ | 1,490.6 | $ | 1,141.0 | $ | 1,428.9 | |||||
| Basic Net Income Per Common Share | 7.16 | 5.48 | 6.66 | ||||||||
| DILUTED NET INCOME PER COMMON SHARE | |||||||||||
| Average Number of Common Shares Outstanding | 208,075,522 | 208,319,412 | 214,525,547 | ||||||||
| Plus Dilutive Effect of Share-based Compensation | 823,708 | 688,574 | 1,075,602 | ||||||||
| Average Common and Potential Common Shares | 208,899,230 | 209,007,986 | 215,601,149 | ||||||||
| Earnings Allocated to Common and Potential Common Shares | $ | 1,490.6 | $ | 1,141.1 | $ | 1,428.9 | |||||
| Diluted Net Income Per Common Share | 7.14 | 5.46 | 6.63 |
Note: For the years ended December 31, 2021, 2020, and 2019, there were no common stock equivalents excluded in the computation of diluted net income per share.
Note 18 – Revenue from Contracts with Clients
Trust, Investment, and Other Servicing Fees. Custody and Fund Administration income is comprised of revenues received from our core asset servicing business for providing custody, fund administration, and middle-office-related services, primarily to C&IS clients. Investment Management and Advisory income contains revenue received from providing asset management and related services to Wealth Management and C&IS clients and to Northern Trust sponsored funds. Securities Lending income represents revenues generated from securities lending arrangements that Northern Trust enters into as agent, mainly with C&IS clients. Other income largely consists of revenues received from providing employee benefit, investment risk and analytic and other services to C&IS and Wealth Management clients.
Other Noninterest Income. Treasury management income represents revenues received from providing cash and liquidity management services to C&IS and Wealth Management clients. The portion of Security Commissions and Trading Income that relates to revenue from contracts with clients is primarily comprised of commissions earned from providing securities brokerage services to Wealth Management and C&IS clients. The portion of Other Operating Income that relates to revenue from contracts with clients is mainly comprised of service fees for banking-related services provided to Wealth Management and C&IS clients.
Performance Obligations. Clients are typically charged monthly or quarterly in arrears based on the fee arrangement agreed to with each client; payment terms will vary depending on the client and services offered.
Substantially all revenues generated from contracts with clients for asset servicing, asset management, securities lending, treasury management and banking-related services are recognized on an accrual basis, over the period in which services are provided. The nature of Northern Trust’s performance obligations is to provide a series of distinct services in which the customer simultaneously receives and consumes the benefits of the promised services as they are performed. Fee arrangements are mainly comprised of variable amounts based on market value of client assets managed and serviced, transaction volumes, number of accounts, and securities lending volume and spreads. Revenue is recognized using the output method in an amount that reflects the consideration to which Northern Trust expects to be entitled in exchange for providing each month or quarter of service. For contracts with multiple performance obligations, revenue is allocated to each performance obligation based on the price agreed to with the client, representing its relative standalone selling price.
Security brokerage revenue is primarily represented by securities commissions received in exchange of providing trade execution related services. Control is transferred at a point in time, on the trade date of the transaction, and fees are typically variable based on transaction volumes and security types.
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.
| 134 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenues disaggregated by major revenue source.
TABLE 96: REVENUE DISAGGREGATION
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Noninterest Income | |||||||||||
| Trust, Investment and Other Servicing Fees | |||||||||||
| Custody and Fund Administration | $ | 1,917.5 | $ | 1,674.3 | $ | 1,636.4 | |||||
| Investment Management and Advisory | 2,140.0 | 2,029.3 | 1,930.6 | ||||||||
| Securities Lending | 76.9 | 88.3 | 87.7 | ||||||||
| Other | 226.7 | 203.1 | 197.4 | ||||||||
| Total Trust, Investment and Other Servicing Fees | $ | 4,361.1 | $ | 3,995.0 | $ | 3,852.1 | |||||
| Other Noninterest Income | |||||||||||
| Foreign Exchange Trading Income | $ | 292.6 | $ | 290.4 | $ | 250.9 | |||||
| Treasury Management Fees | 44.3 | 45.4 | 44.5 | ||||||||
| Security Commissions and Trading Income | 140.2 | 133.2 | 103.6 | ||||||||
| Other Operating Income | 243.9 | 194.0 | 145.5 | ||||||||
| Investment Security Losses, net | (0.3) | (0.4) | (1.4) | ||||||||
| Total Other Noninterest Income | $ | 720.7 | $ | 662.6 | $ | 543.1 | |||||
| Total Noninterest Income | $ | 5,081.8 | $ | 4,657.6 | $ | 4,395.2 |
On the consolidated statements of income, Trust, Investment and Other Servicing Fees and Treasury Management Fees represent revenue from contracts with clients. For the year ended December 31, 2021, revenue from contracts with clients also includes $112.1 million of the $140.2 million total Security Commissions and Trading Income and $53.9 million of the $243.9 million total Other Operating Income. For the year ended December 31, 2020, revenue from contracts with clients also includes $102.4 million of the $133.2 million total Security Commissions and Trading Income and $42.8 million of the $194.0 million total Other Operating Income. For the year ended December 31, 2019, revenue from contracts with clients also includes $87.1 million of the $103.6 million total Security Commissions and Trading Income and $41.8 million of the $145.5 million total Other Operating Income.
Receivables Balances. The following table represents receivables balances from contracts with clients, which are included in Other Assets on the consolidated balance sheets, at December 31, 2021 and 2020.
TABLE 97: CLIENT RECEIVABLES
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Trust Fees Receivable, net(1) | $ | 925.2 | $ | 819.3 | ||||
| Other | 126.9 | 116.5 | ||||||
| Total Client Receivables | $ | 1,052.1 | $ | 935.8 |
(1) Trust Fees Receivable is net of a $10.9 million and $7.2 million fee receivable allowance as of December 31, 2021 and 2020, respectively.
| 2021 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 98: NET INTEREST INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Interest Income | |||||||||||
| Loans and Leases | $ | 713.5 | $ | 774.6 | $ | 1,153.4 | |||||
| Securities – Taxable | 667.6 | 812.4 | 1,070.7 | ||||||||
| – Non-Taxable(1) | 1.5 | 1.4 | 3.8 | ||||||||
| Interest-Bearing Due from and Deposits with Banks(2) | 9.1 | 22.4 | 72.4 | ||||||||
| Federal Reserve and Other Central Bank Deposits and Other | 14.8 | 32.7 | 199.6 | ||||||||
| Total Interest Income | $ | 1,406.5 | $ | 1,643.5 | $ | 2,499.9 | |||||
| Interest Expense | |||||||||||
| Deposits(3) | $ | (61.3) | $ | 48.4 | $ | 488.9 | |||||
| Federal Funds Purchased | (0.4) | 2.2 | 25.9 | ||||||||
| Securities Sold under Agreements to Repurchase | 0.2 | 1.0 | 6.4 | ||||||||
| Other Borrowings | 14.2 | 45.3 | 181.7 | ||||||||
| Senior Notes | 48.3 | 72.7 | 72.6 | ||||||||
| Long-Term Debt | 21.1 | 26.5 | 38.3 | ||||||||
| Floating Rate Capital Debt | 1.7 | 4.2 | 8.2 | ||||||||
| Total Interest Expense | $ | 23.8 | $ | 200.3 | $ | 822.0 | |||||
| Net Interest Income | $ | 1,382.7 | $ | 1,443.2 | $ | 1,677.9 |
(1) Non-Taxable Securities represent securities that are exempt from U.S. federal income taxes.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(3) Deposits were impacted by low and negative interest rates from Non-U.S. Offices Interest-Bearing Deposits, which was approximately 68% of total Interest-Bearing Deposits for the year ended December 31, 2021.
Note 20 – Other Operating Income
The components of Other Operating Income were as follows:
TABLE 99: OTHER OPERATING INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Loan Service Fees | $ | 66.6 | $ | 52.5 | $ | 48.0 | |||||
| Banking Service Fees | 50.9 | 46.1 | 45.6 | ||||||||
| Other Income | 126.4 | 95.4 | 51.9 | ||||||||
| Total Other Operating Income | $ | 243.9 | $ | 194.0 | $ | 145.5 |
Other Operating Income in 2021 increased from 2020, primarily due to higher banking and credit-related service charges, distributions from investments in community development projects and gains from property sales.
| 136 2021 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 100: OTHER OPERATING EXPENSE
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Business Promotion | $ | 65.5 | $ | 59.2 | $ | 104.2 | |||||
| Staff Related | 33.9 | 29.4 | 42.8 | ||||||||
| FDIC Insurance Premiums | 14.6 | 11.8 | 9.9 | ||||||||
| Other Intangibles Amortization | 14.8 | 16.9 | 16.6 | ||||||||
| Other Expenses | 170.3 | 229.4 | 156.3 | ||||||||
| Total Other Operating Expense | $ | 299.1 | $ | 346.7 | $ | 329.8 |
Other Operating Expense in 2021 decreased from 2020 primarily due to lower charges associated with account servicing activities and a decline in other miscellaneous expenses. The account servicing activities in the prior year included a $43.4 million charge related to a corporate action processing error.
Note 22 – Income Taxes
The following table reconciles the statutory federal tax rate with the effective tax rate for the periods presented below.
TABLE 101: INCOME TAXES
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| 2021 | 2020 | 2019 | |||||||||
| Statutory Federal Tax Rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||
| Tax Exempt Income | (0.6) | (0.9) | (0.6) | ||||||||
| Foreign Tax Rate Differential | 0.1 | 0.7 | 0.2 | ||||||||
| Excess Tax Benefit Related to Share-Based Compensation | (0.4) | (0.6) | (0.9) | ||||||||
| Tax Credits | (1.6) | (1.7) | (1.0) | ||||||||
| Reversal of Tax Benefits Previously Recognized through Earnings | — | 1.6 | — | ||||||||
| State Taxes, net | 3.4 | 3.2 | 2.8 | ||||||||
| Valuation Allowance | 0.6 | 1.6 | 1.5 | ||||||||
| Other | 0.6 | 0.8 | 0.2 | ||||||||
| Effective Tax Rate | 23.1 | % | 25.7 | % | 23.2 | % |
Income tax expense for the year ended December 31, 2021 and 2020 was $464.8 million and $418.3 million, representing an effective tax rate of 23.1% and 25.7%, respectively. For the year ended December 31, 2021, the decrease in the effective tax rate was primarily driven by the lower net tax impact from international operations and $26.8 million of prior-year tax expense related to the reversal of tax benefits previously recognized through earnings.
For the year ended December 31, 2020, the increase in the effective tax rate was primarily driven by $26.8 million of tax expense related to the reversal of tax benefits previously recognized through earnings and higher taxes payable on the income of the Corporation’s non-U.S. branches.
For the year ended December 31, 2019, the effective tax rate 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.
The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no longer subject to income tax examinations by U.S. federal authorities before 2013, U.S. state or local tax authorities for years before 2011, or non-U.S. tax authorities for years before 2013.
| 2021 Annual Report | Northern Trust Corporation 137 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in Other Liabilities on the consolidated balance sheets at December 31, 2021 and 2020 were $25.3 million and $22.4 million of unrecognized tax benefits, respectively. If recognized, the amounts would reduce 2021 and 2020 income tax expense by $23.9 million and $20.7 million, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows.
TABLE 102: UNRECOGNIZED TAX BENEFITS
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Balance at January 1 | $ | 22.4 | $ | 25.3 | $ | 21.9 | |||||
| Additions for Tax Positions Taken in the Current Year | 1.2 | 0.9 | 0.9 | ||||||||
| Additions for Tax Positions Taken in Prior Years | 4.2 | 0.4 | 4.0 | ||||||||
| Reductions for Tax Positions Taken in Prior Years | (2.5) | (4.2) | (1.5) | ||||||||
| Reductions Resulting from Expiration of Statutes | — | — | — | ||||||||
| Balance at December 31 | $ | 25.3 | $ | 22.4 | $ | 25.3 |
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 $0.4 million, net of tax, was included in the Provision for Income Taxes for the year ended December 31, 2021. This compares to a provision for interest and penalties of $1.2 million, net of tax, and a benefit of $1.3 million, net of tax, for the year ended December 31, 2020 and 2019, respectively. As of December 31, 2021 and 2020, the liability for the potential payment of interest and penalties totaled $9.2 million and $9.6 million, net of tax, respectively.
The components of the consolidated Provision for Income Taxes for each of the three years ended December 31 are as follows.
TABLE 103: PROVISION FOR INCOME TAXES
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Current Tax Provision: | |||||||||||
| Federal | $ | 241.5 | $ | 203.0 | $ | 216.4 | |||||
| State | 74.0 | 57.2 | 50.7 | ||||||||
| Non-U.S. | 147.3 | 141.7 | 150.5 | ||||||||
| Total | $ | 462.8 | $ | 401.9 | $ | 417.6 | |||||
| Deferred Tax Provision: | |||||||||||
| Federal | $ | (11.7) | $ | 8.8 | $ | 16.5 | |||||
| State | 12.0 | 5.4 | 16.5 | ||||||||
| Non-U.S. | 1.7 | 2.2 | 1.3 | ||||||||
| Total | $ | 2.0 | $ | 16.4 | $ | 34.3 | |||||
| Provision for Income Taxes | $ | 464.8 | $ | 418.3 | $ | 451.9 |
In addition to the amounts shown above, tax charges and benefits have been recorded directly to Stockholders’ Equity for the following.
TABLE 104: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Tax Effect of Other Comprehensive Income | $ | (126.6) | $ | 168.1 | $ | 88.9 |
Deferred taxes result from temporary differences between the amounts reported on the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax assets and liabilities have been computed as follows.
| 138 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 105: NET DEFERRED TAX LIABILITIES
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Deferred Tax Liabilities: | ||||||||
| Lease Financing | $ | 7.0 | $ | 9.0 | ||||
| Software Development | 271.8 | 268.1 | ||||||
| Depreciation and Amortization | 181.3 | 147.0 | ||||||
| Unrealized Gains on Securities, net | 82.8 | 247.6 | ||||||
| Compensation and Benefits | 65.6 | 43.8 | ||||||
| State Taxes, net | 76.3 | 67.4 | ||||||
| Other Liabilities | 23.3 | 18.7 | ||||||
| Gross Deferred Tax Liabilities | 708.1 | 801.6 | ||||||
| Deferred Tax Assets: | ||||||||
| Allowance for Credit Losses | 38.6 | 54.5 | ||||||
| Tax Credit and Loss Carryforwards | 68.2 | 55.2 | ||||||
| Other Assets | 85.4 | 38.4 | ||||||
| Gross Deferred Tax Assets | 192.2 | 148.1 | ||||||
| Valuation Reserve | (68.2) | (55.2) | ||||||
| Deferred Tax Assets, net of Valuation Reserve | 124.0 | 92.9 | ||||||
| Net Deferred Tax Liabilities | $ | 584.1 | $ | 708.7 |
The Corporation generated a foreign tax credit carryforward during the years ended December 31, 2021 and 2020, expiring in 2031 and 2030, respectively. A cumulative valuation allowance related to the credit carryforward of $67.8 million and $54.7 million was recorded at December 31, 2021 and 2020, respectively, as management believes the foreign tax credit carryforwards will not be fully realized.
Northern Trust had various state net operating loss carryforwards as of December 31, 2021 and 2020. The income tax benefits associated with these loss carryforwards were approximately $0.4 million as of December 31, 2021 and $0.5 million as of December 31, 2020. A valuation allowance related to the loss carryforwards of $0.4 million and $0.5 million was recorded at December 31, 2021 and 2020, respectively, as management believes the net operating losses will not be fully realized.
Note 23 – Employee Benefits
The Corporation and certain of its subsidiaries provide various benefit programs, including defined benefit pension, postretirement health care, and defined contribution plans. A description of each major plan and related disclosures are provided below.
Pension. A noncontributory qualified defined benefit pension plan covers substantially all U.S. employees of Northern Trust. Employees of certain European subsidiaries retain benefits in local defined benefit plans, although those plans are closed to new participants and to future benefit accruals. Employees continue to accrue benefits under the Swiss pension plan, which is accounted for as a defined benefit plan under U.S. GAAP.
Northern Trust also maintains a noncontributory supplemental pension plan for participants whose retirement benefits under the U.S. Qualified Plan are expected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified trust, referred to as a “Rabbi” Trust, used to hold assets designated for the funding of benefits in excess of those permitted in certain of its qualified retirement plans. This arrangement offers participants a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. As the “Rabbi” Trust assets remain subject to the claims of creditors and are not the property of the employees, they are accounted for as corporate assets and are included in Other Assets on the consolidated balance sheets. Total assets in the “Rabbi” Trust related to the nonqualified pension plan at December 31, 2021 and 2020 amounted to $117.8 million and $137.5 million, respectively. Contributions of $6.7 million and $10.6 million were made to the “Rabbi” Trust in 2021 and 2020, respectively.
The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. Qualified Plan, Non-U.S. Pension Plans, and U.S. Non-Qualified Plan for 2021, 2020, and 2019. Prior service credits are being amortized on a straight-line basis over 11 years for the U.S. Qualified Plan and prior service costs are being amortized on a straight-line basis over 10 years for the U.S. Non-Qualified Plan. Prior service credits will be amortized in full during the first half of 2022 for the U.S. Qualified Plan and prior service costs were amortized in full as of December 31, 2021 for the U.S. Non-Qualified Plan.
| 2021 Annual Report | Northern Trust Corporation 139 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 106: EMPLOYEE BENEFIT PLAN STATUS
| U.S. QUALIFIED PLAN (1) | NON-U.S. PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||||||||||||||
| ($ In Millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Accumulated Benefit Obligation | $ | 1,246.6 | $ | 1,312.9 | $ | 204.5 | $ | 228.5 | $ | 125.5 | $ | 139.8 | ||||||||
| Projected Benefit Obligation | $ | 1,401.3 | $ | 1,470.6 | $ | 210.1 | $ | 236.1 | $ | 147.7 | $ | 162.3 | ||||||||
| Plan Assets at Fair Value | 1,708.9 | 1,793.7 | 198.7 | 211.5 | — | — | ||||||||||||||
| Funded Status at December 31 | $ | 307.6 | $ | 323.1 | $ | (11.4) | $ | (24.6) | $ | (147.7) | $ | (162.3) | ||||||||
| Weighted-Average Assumptions: | ||||||||||||||||||||
| Discount Rates | 3.03 | % | 2.75 | % | 1.34 | % | 0.93 | % | 2.80 | % | 2.45 | % | ||||||||
| Rate of Increase in Compensation Level | 4.97 | 4.97 | 1.50 | 1.50 | 4.97 | 4.97 | ||||||||||||||
| Expected Long-Term Rate of Return on Assets | 5.25 | 5.25 | 1.79 | 1.28 | N/A | N/A |
(1) Discount rates of 3.05% and 3.06% and expected long-term rates of return on assets of 5.25% and 5.00% were utilized at the interim remeasurement dates as of June 30, 2021 and September 30, 2021, respectively.
TABLE 107: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
| U.S. QUALIFIED PLAN | NON-U.S. PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||||||||||||||
| (In Millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Net Actuarial Loss | $ | 273.8 | $ | 332.4 | $ | 40.4 | $ | 49.0 | $ | 86.6 | $ | 96.3 | ||||||||
| Prior Service (Credit) Cost | (0.1) | (0.6) | 0.6 | 2.2 | — | 0.1 | ||||||||||||||
| Gross Amount in Accumulated Other Comprehensive Income | 273.7 | 331.8 | 41.0 | 51.2 | 86.6 | 96.4 | ||||||||||||||
| Income Tax Effect | 68.7 | 82.1 | 5.2 | 6.4 | 21.7 | 23.9 | ||||||||||||||
| Net Amount in Accumulated Other Comprehensive Income | $ | 205.0 | $ | 249.7 | $ | 35.8 | $ | 44.8 | $ | 64.9 | $ | 72.5 |
TABLE 108: NET PERIODIC PENSION EXPENSE
| U.S. QUALIFIED PLAN (1) | NON-U.S. PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||||||||||||||||||||||||||
| ($ In Millions) | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Service Cost | $ | 52.3 | $ | 47.4 | $ | 41.6 | $ | 2.2 | $ | 1.9 | $ | 2.0 | $ | 5.3 | $ | 4.6 | $ | 4.1 | ||||||||||||||
| Interest Cost | 40.4 | 43.3 | 47.2 | 2.2 | 2.9 | 3.9 | 3.7 | 4.8 | 5.8 | |||||||||||||||||||||||
| Expected Return on Plan Assets | (79.0) | (76.8) | (86.9) | (3.2) | (3.1) | (4.4) | — | — | — | |||||||||||||||||||||||
| Amortization: | ||||||||||||||||||||||||||||||||
| Net Actuarial Loss | 32.4 | 35.0 | 17.2 | 1.0 | 0.8 | 0.6 | 8.2 | 7.0 | 5.6 | |||||||||||||||||||||||
| Prior Service (Credit) Cost | (0.4) | (0.4) | (0.4) | 0.2 | 0.4 | 0.3 | 0.1 | 0.2 | 0.2 | |||||||||||||||||||||||
| Net Periodic Pension Expense | $ | 45.7 | $ | 48.5 | $ | 18.7 | $ | 2.4 | $ | 2.9 | $ | 2.4 | $ | 17.3 | $ | 16.6 | $ | 15.7 | ||||||||||||||
| Settlement Expense | 27.9 | — | — | 0.4 | 0.8 | — | — | — | — | |||||||||||||||||||||||
| Total Pension Expense | $ | 73.6 | $ | 48.5 | $ | 18.7 | $ | 2.8 | $ | 3.7 | $ | 2.4 | $ | 17.3 | $ | 16.6 | $ | 15.7 | ||||||||||||||
| Weighted-Average Assumptions: | ||||||||||||||||||||||||||||||||
| Discount Rates | 2.75 | % | / 3.05 | % | 3.37% | 4.47% | 0.93% | 1.40% | 2.16% | 2.45% | 3.37% | 4.47% | ||||||||||||||||||||
| / 3.06 | % | / 3.03 | % | |||||||||||||||||||||||||||||
| Rate of Increase in Compensation Level | 4.97 | 4.97 | 4.39 | 1.50 | 1.50 | 1.75 | 4.97 | 4.97 | 4.39 | |||||||||||||||||||||||
| Expected Long-Term Rate of Return on Assets | 5.25 | / 5.00 | 5.25 | 6.00 | 1.28 | 1.72 | 2.39 | N/A | N/A | N/A |
(1) In determining the pension expense for the U.S. Qualified Plan for 2021, Northern Trust utilized a discount rate of 2.75% as of December 31, 2020, 3.05% as of June 30, 2021, 3.06% as of September 30, 2021, and 3.03% as of December 31, 2021 and an expected long-term rate of return of 5.25% as of both December 31, 2020 and June 30, 2021, and 5.00% as of September 30, 2021.
Northern Trust’s U.S. Qualified Plan provides participants the option to select lump-sum benefit payments upon retirement and termination of service. In the second quarter of 2021 it became probable that total lump-sum payments in 2021 would exceed the settlement threshold of the sum of annual service and interest cost. Northern Trust recognized settlement charges related to its U.S. Qualified Plan in the second, third, and fourth quarter of 2021, which required interim remeasurements of the U.S. Qualified Plan as of each respective quarter-end. The settlement charge represents the pro rata
| 140 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount of the net loss in AOCI that is charged to income based on the proportion of the Projected Benefit Obligation settled to the total Projected Benefit Obligation and amounted to a total of $27.9 million in 2021.
The components of net periodic pension expense are included in Employee Benefits expense on the consolidated statements of income.
TABLE 109: CHANGE IN PROJECTED BENEFIT OBLIGATION
| U.S. QUALIFIED PLAN | NON-U.S. PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||||||||||||||
| (In Millions) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Beginning Balance | $ | 1,470.6 | $ | 1,323.4 | $ | 236.1 | $ | 211.1 | $ | 162.3 | $ | 149.2 | ||||||||
| Service Cost | 52.3 | 47.4 | 2.2 | 1.9 | 5.3 | 4.6 | ||||||||||||||
| Interest Cost | 40.4 | 43.3 | 2.2 | 2.9 | 3.7 | 4.8 | ||||||||||||||
| Employee Contributions | — | — | 0.6 | 0.6 | — | — | ||||||||||||||
| Plan Amendment | — | — | (1.4) | (0.5) | — | — | ||||||||||||||
| Actuarial Loss (Gain) | (19.1) | 136.5 | (10.4) | 19.1 | (2.0) | 20.4 | ||||||||||||||
| Settlement | (132.1) | — | (9.4) | (5.4) | — | — | ||||||||||||||
| Benefits Paid | (10.8) | (80.0) | (5.5) | (4.1) | (21.6) | (16.7) | ||||||||||||||
| Foreign Exchange Rate Changes | — | — | (4.3) | 10.5 | — | — | ||||||||||||||
| Ending Balance | $ | 1,401.3 | $ | 1,470.6 | $ | 210.1 | $ | 236.1 | $ | 147.7 | $ | 162.3 |
Actuarial gains of $31.5 million in 2021 were primarily caused by increases in discount rates, while actuarial losses of $176.0 million in 2020 were primarily caused by decreases in discount rates.
TABLE 110: ESTIMATED FUTURE BENEFIT PAYMENTS
| (In Millions) | U.S. QUALIFIED PLAN | NON-U.S.PENSION PLANS | U.S. NON-QUALIFIED PLAN | ||||||||
| 2022 | $ | 85.6 | $ | 4.4 | $ | 20.0 | |||||
| 2023 | 94.2 | 4.6 | 18.3 | ||||||||
| 2024 | 95.1 | 4.7 | 11.7 | ||||||||
| 2025 | 99.0 | 4.8 | 12.3 | ||||||||
| 2026 | 97.8 | 5.6 | 13.3 | ||||||||
| 2027-2031 | 515.6 | 34.8 | 63.9 |
TABLE 111: CHANGE IN PLAN ASSETS
| U.S. QUALIFIED PLAN | NON-U.S PENSION PLANS | |||||||||||||
| (In Millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||
| Fair Value of Assets at Beginning of Period | $ | 1,793.7 | $ | 1,601.2 | $ | 211.5 | $ | 190.1 | ||||||
| Actual Return on Assets(1) | 58.1 | 272.5 | (0.8) | 17.9 | ||||||||||
| Employer Contributions | — | — | 4.5 | 5.0 | ||||||||||
| Employee Contributions | — | — | 0.6 | 0.6 | ||||||||||
| Settlement | (132.1) | — | (9.4) | (5.4) | ||||||||||
| Benefits Paid | (10.8) | (80.0) | (5.5) | (4.1) | ||||||||||
| Foreign Exchange Rate Changes | — | — | (2.2) | 7.4 | ||||||||||
| Fair Value of Assets at End of Period | $ | 1,708.9 | $ | 1,793.7 | $ | 198.7 | $ | 211.5 |
(1) The 2021 actual return on assets for the U.S. Qualified Plan includes a reimbursement of $0.1 million of historical investment expenses paid from the pension trust.
The minimum required and maximum remaining deductible contributions for the U.S. Qualified Plan in 2022 are estimated to be zero and $413.0 million, respectively.
The investment strategy employed for Northern Trust’s U.S. Qualified Plan utilizes 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-
| 2021 Annual Report | Northern Trust Corporation 141 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. During 2021, the funded ratio increased beyond the threshold and the asset allocation of the U.S. Qualified Plan was adjusted to the next stage of the glide path to allow for a greater component of liability-hedging assets.
Northern Trust utilizes an asset/liability methodology to determine the investment policies that will best meet its short and long-term objectives. The process is performed by modeling current and alternative strategies for asset allocation, funding policy and actuarial methods and assumptions. The financial modeling uses projections of expected capital market returns and expected volatility of those returns to determine alternative asset mixes having the greatest probability of meeting the U.S. Qualified Plan’s investment objectives. Risk tolerance is established through careful consideration of the U.S. Qualified Plan liabilities, funded status, and corporate financial condition. The intent of this strategy is to protect the U.S. Qualified Plan’s healthy funded status and generate returns, which in combination with minimal voluntary contributions are expected to outpace the U.S. Qualified Plan’s liability growth over the long run.
The target allocation of the U.S. Qualified Plan assets had been adjusted in March 2021 and consists of 55% U.S. long credit bonds, 15% global equities (developed and emerging markets), 10% custom completion, 5% private equity, 4% high yield bonds, 3% emerging market debt, 3% global listed infrastructure, 3% private real estate, and 2% hedge funds.
Global equity investments include common stocks that are listed on an exchange and investments in commingled funds that invest primarily in publicly traded equities. Equity investments are diversified across country, region, investment style and market capitalization. Fixed income securities held include U.S. treasury securities, corporate bonds, and investments in commingled funds that invest in a diversified blend of longer duration fixed income securities; the custom completion strategy uses U.S. treasury securities and interest rate futures (or similar instruments) to align more closely with the target hedge ratio across maturities. Diversifying investments, including private equity, hedge funds, private real estate, emerging market debt, high yield bonds, and global listed infrastructure, are used judiciously to enhance long-term returns while improving portfolio diversification. Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt positions. Direct or co-investment in non-public stock by the U.S. Qualified Plan is prohibited. The U.S. Qualified Plan’s private equity investments are limited to 20% of each of the total limited partnership or fund of funds and the maximum allowable loss cannot exceed the commitment amount. The U.S. Qualified Plan invests in one hedge fund of funds, which invests, either directly or indirectly, in diversified portfolios of funds or other pooled investment vehicles.
Investments in private real estate, high yield bonds, emerging market debt, and global listed infrastructure are designed to provide income and added diversification.
Derivatives may be used, depending on the nature of the asset class to which they relate, to gain market exposure in an efficient and timely manner, to hedge foreign currency exposure or interest rate risk, or to alter the duration of a portfolio. There were three and five derivatives held by the U.S. Qualified Plan at December 31, 2021 and 2020, respectively.
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 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 benchmark. Total U.S. Qualified Plan performance analysis includes an analysis of the market environment, asset allocation impact on performance, risk and return relative to other ERISA plans, and manager impacts upon U.S. Qualified Plan performance.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by Northern Trust for the U.S. Qualified Plan assets measured at fair value.
Level 1 – Quoted, active market prices for identical assets or liabilities. The U.S. Qualified Plan’s Level 1 assets are comprised primarily of mutual funds 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 collective trust funds, corporate bonds, government obligations, and municipal and provincial bonds. The investments in collective trust funds fair values are calculated on a scheduled basis using the closing market prices and accruals of securities in the funds (total value of the funds) divided by the number of fund shares currently issued and outstanding. Redemptions of the collective trust funds occur by contract at the respective fund’s redemption date net asset value (NAV).
Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The U.S. Qualified Plan did not hold Level 3 assets as of December 31, 2021 and 2020.
| 142 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets valued at fair value using NAV per share - The U.S. Qualified Plan’s assets valued at fair value using NAV per share include investments in private equity funds and a hedge fund, which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair value of the underlying investments of each fund, the fund’s investment manager or general partner takes into account the estimated value reported by the underlying funds as well as any other considerations that may, in their judgment, increase or decrease such estimated value. The investments in the private equity funds and a hedge fund are considered to be long-term investments. There are no capital withdrawal options related to the investments in the private equity funds. However, capital is occasionally distributed as underlying investments are sold. It is estimated that the current private equity investments would be liquidated over 1 to 15 years, depending on the vintage year of a particular fund. With sixty-days advance notice, the Plan’s investment in the hedge fund can be withdrawn at the next calendar quarter end.
The U.S. Qualified Plan’s assets valued at fair value using NAV per share also include investments in real estate funds, which invest in real estate assets. The investment in properties by the real estate funds are carried at fair value, which is estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date. The valuation plan for each real estate investment is subject to review on an annual basis which is based on either an external appraisal from appraisal firms or internal valuations prepared by the real estate fund’s investment advisor. The Plan’s investment in real estate funds are considered to be long-term investments and, with forty-five days advance notice, can be withdrawn at the next calendar quarter end to the extent the real estate funds have liquid assets.
As investments in the private equity funds, hedge fund, and real estate fund are valued at fair value using NAV per share, they are not required to be categorized within the fair value hierarchy.
While Northern Trust believes its valuation methods for U.S. Qualified Plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions could have a material effect on the computation of the estimated fair values.
The following table presents the fair values of Northern Trust’s U.S. Qualified Plan assets, by major asset category, and their level within the fair value hierarchy defined by GAAP as of December 31, 2021 and 2020.
TABLE 112: FAIR VALUE OF U.S. QUALIFIED PLAN ASSETS
| DECEMBER 31, 2021 | ||||||||||||||
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL | ||||||||||
| Domestic Common Stock | $ | 17.5 | $ | — | $ | — | $ | 17.5 | ||||||
| Foreign Common Stock | 0.3 | — | — | 0.3 | ||||||||||
| Domestic Corporate Bonds | — | 341.7 | — | 341.7 | ||||||||||
| Foreign Corporate Bonds | — | 60.9 | — | 60.9 | ||||||||||
| U.S. Government Obligations | — | 103.9 | — | 103.9 | ||||||||||
| Non-U.S. Government Obligations | — | 20.0 | — | 20.0 | ||||||||||
| Domestic Municipal and Provincial Bonds | — | 21.0 | — | 21.0 | ||||||||||
| Foreign Municipal and Provincial Bonds | — | 0.3 | — | 0.3 | ||||||||||
| Collective Trust Funds | — | 837.2 | — | 837.2 | ||||||||||
| Mutual Funds | 108.9 | — | — | 108.9 | ||||||||||
| Cash and Other | 46.7 | — | — | 46.7 | ||||||||||
| Total Assets at Fair Value in the Fair Value Hierarchy | $ | 173.4 | $ | 1,385.0 | $ | — | $ | 1,558.4 | ||||||
| Assets Valued at NAV per share | ||||||||||||||
| Northern Trust Private Equity Funds | 34.5 | |||||||||||||
| Northern Trust Hedge Fund | 36.7 | |||||||||||||
| Real Estate Funds | 79.3 | |||||||||||||
| Total Assets at Fair Value | $ | 1,708.9 |
| 2021 Annual Report | Northern Trust Corporation 143 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| DECEMBER 31, 2020 | ||||||||||||||
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | TOTAL | ||||||||||
| Domestic Common Stock | $ | 13.5 | $ | — | $ | — | $ | 13.5 | ||||||
| Domestic Corporate Bonds | — | 314.4 | — | 314.4 | ||||||||||
| Foreign Corporate Bonds | — | 43.6 | — | 43.6 | ||||||||||
| U.S. Government Obligations | 2.9 | 113.1 | — | 116.0 | ||||||||||
| Non-U.S. Government Obligations | — | 22.9 | — | 22.9 | ||||||||||
| Domestic Municipal and Provincial Bonds | — | 22.4 | — | 22.4 | ||||||||||
| Foreign Municipal and Provincial Bonds | — | 0.3 | — | 0.3 | ||||||||||
| Collective Trust Funds | — | 985.5 | — | 985.5 | ||||||||||
| Mutual Funds | 167.0 | — | — | 167.0 | ||||||||||
| Cash and Other | 7.5 | — | — | 7.5 | ||||||||||
| Total Assets at Fair Value in the Fair Value Hierarchy | $ | 190.9 | $ | 1,502.2 | $ | — | $ | 1,693.1 | ||||||
| Assets Valued at NAV per share | ||||||||||||||
| Northern Trust Private Equity Funds | 20.3 | |||||||||||||
| Northern Trust Hedge Fund | 34.2 | |||||||||||||
| Real Estate Funds | 46.1 | |||||||||||||
| Total Assets at Fair Value | $ | 1,793.7 |
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, 2021 measurement date was set at 5.25%.
Postretirement Health Care. Northern Trust maintains an unfunded postretirement health care plan under which those employees who retire at age 55 or older under the provisions of the U.S. defined benefit plan and had attained 15 years of service as of December 31, 2011 may be eligible for subsidized postretirement health care coverage. The provisions of this health care plan may be changed further at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time.
Northern Trust changed the plan design of its post-retirement health care plan as of January 1, 2021, which resulted in the recognition of a prior service credit of $12.7 million at the time these changes were communicated to participants in August 2020. Concurrently, a further shift in population from active to inactive participants required an adjustment to the amortization period from the average remaining service period of active participants to the average life expectancy of the inactive participants. Prior service credits are being amortized on a straight-line basis over 13.9 years.
The following tables set forth the postretirement health care plan status and amounts included in AOCI at December 31, 2021 and 2020, the net periodic postretirement benefit cost of the plan for 2021 and 2020, and the change in the accumulated postretirement benefit obligation during 2021 and 2020.
TABLE 113: POSTRETIREMENT HEALTH CARE PLAN STATUS
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Accumulated Postretirement Benefit Obligation at Measurement Date: | ||||||||
| Retirees and Dependents | $ | 8.7 | $ | 13.2 | ||||
| Actives Eligible for Benefits | 1.5 | 2.5 | ||||||
| Net Postretirement Benefit Obligation | $ | 10.2 | $ | 15.7 |
| 144 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 114: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Net Actuarial (Gain) Loss | $ | (5.3) | $ | (4.9) | ||||
| Prior Service (Credit) Cost | (11.5) | (12.4) | ||||||
| Gross Amount in Accumulated Other Comprehensive Income | (16.8) | (17.3) | ||||||
| Income Tax Effect | (4.2) | (4.3) | ||||||
| Net Amount in Accumulated Other Comprehensive Income | $ | (12.6) | $ | (13.0) |
TABLE 115: NET PERIODIC POSTRETIREMENT EXPENSE (BENEFIT)
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Service Cost | $ | — | $ | — | $ | — | |||||
| Interest Cost | 0.3 | 0.7 | 1.2 | ||||||||
| Expected Return on Plan Assets | — | — | — | ||||||||
| Amortization | |||||||||||
| Net Actuarial (Gain) | (0.2) | (0.6) | (1.1) | ||||||||
| Prior Service (Credit) Cost | (0.9) | (0.3) | — | ||||||||
| Net Periodic Postretirement Expense | $ | (0.8) | $ | (0.2) | $ | 0.1 |
TABLE 116: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION
| FOR THE YEAR ENDED DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Beginning Balance | $ | 15.7 | $ | 28.8 | ||||
| Service Cost | — | — | ||||||
| Interest Cost | 0.3 | 0.7 | ||||||
| Plan Amendment | — | (12.7) | ||||||
| Actuarial (Gain) | (3.3) | (0.1) | ||||||
| Net Claims Paid | (2.5) | (1.0) | ||||||
| Ending Balance | $ | 10.2 | $ | 15.7 |
Northern Trust uses the aggregate Pri-2012 mortality table with a 2012 base year and proposed future improvements under scale MP-2021, as released by the Society of Actuaries in October 2021. The assumption for future mortality improvements was updated at December 31, 2021 from the prior year’s improvement scale MP-2020.
TABLE 117: ESTIMATED FUTURE BENEFIT PAYMENTS
| (In Millions) | TOTAL POSTRETIREMENT MEDICAL BENEFITS | ||||
| 2022 | $ | 1.5 | |||
| 2023 | 1.4 | ||||
| 2024 | 1.3 | ||||
| 2025 | 1.2 | ||||
| 2026 | 1.1 | ||||
| 2027-2031 | 4.3 |
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 2.56% at December 31, 2021, and 2.16% at December 31, 2020. Due to the changes in the plan design as of January 1, 2021, the health care cost trend rate assumptions including the assumption for drug claims, are not currently impacting the measurement of the postretirement health care plan.
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
| 2021 Annual Report | Northern Trust Corporation 145 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
matching component. The expense associated with defined contribution plans is charged to Employee Benefits expense on the consolidated statements of income and totaled $65.3 million in 2021, $62.9 million in 2020, and $57.6 million in 2019.
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 118: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS TO EMPLOYEES
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Restricted Stock Unit Awards | $ | 78.2 | $ | 78.1 | $ | 81.4 | |||||
| Stock Options | — | 0.5 | 1.4 | ||||||||
| Performance Stock Units | 17.3 | 12.8 | 25.1 | ||||||||
| Total Share-Based Compensation Expense | $ | 95.5 | $ | 91.4 | $ | 107.9 | |||||
| Tax Benefits Recognized | $ | 24.0 | $ | 22.9 | $ | 26.7 |
As of December 31, 2021, there was $71.8 million of unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Corporation’s share-based compensation plans. That cost is expected to be recognized as expense over a weighted-average period of approximately three 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.
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, 2021, shares available for future grant under the 2017 Plan, including shares forfeited under the 2012 Plan and 2002 Plan, totaled 16,181,087.
The following describes Northern Trust’s share-based payment arrangements and applies to awards under the 2017 Plan, 2012 Plan and the 2002 Plan, as applicable.
Stock Options. Stock options consist of options to purchase common stock at prices not less than 100% of the fair value thereof on the date the options are granted. Options have a maximum 10 years life and generally vest and become exercisable in 1 year to 4 years after the date of grant. All options terminate at such time as determined by the Committee and as provided in the terms and conditions of the respective option grants. There were no options granted during the years ended December 31, 2021, 2020, and 2019.
| 146 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about stock options granted, vested, and exercised in the years ended December 31, 2021, 2020, and 2019.
TABLE 119: STOCK OPTIONS GRANTED, VESTED, AND EXERCISED
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions, Except Per Share Information) | 2021 | 2020 | 2019 | ||||||||
| Grant-Date Fair Value of Stock Options Vested | $ | 2.2 | $ | 4.5 | $ | 6.6 | |||||
| Stock Options Exercised | |||||||||||
| Intrinsic Value as of Exercise Date | 41.3 | 13.6 | 35.4 | ||||||||
| Cash Received | 53.8 | 19.5 | 44.0 | ||||||||
| Tax Deduction Benefits Realized | 41.3 | 13.4 | 35.2 |
The following is a summary of changes in nonvested stock options for the year ended December 31, 2021.
TABLE 120: CHANGES IN NONVESTED STOCK OPTIONS
| NONVESTED OPTIONS | SHARES | WEIGHTED- AVERAGE GRANT-DATE FAIR VALUE PER SHARE | ||||||
| Nonvested at December 31, 2020 | 114,829 | $ | 19.18 | |||||
| Granted | — | — | ||||||
| Vested | (114,829) | 19.18 | ||||||
| Forfeited or Cancelled | — | — | ||||||
| Nonvested at December 31, 2021 | — | $ | — |
A summary of the status of stock options at December 31, 2021, and changes during the year then ended, are presented in the following table.
TABLE 121: 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, 2020 | 1,349,925 | $ | 66.87 | |||||||||||
| Granted | — | — | ||||||||||||
| Exercised | (837,757) | 64.16 | ||||||||||||
| Forfeited, Expired or Cancelled | (2,280) | 52.64 | ||||||||||||
| Options Outstanding, December 31, 2021 | 509,888 | $ | 71.39 | 3.4 | $ | 24.6 | ||||||||
| Options Exercisable, December 31, 2021 | 509,888 | $ | 71.39 | 3.4 | $ | 24.6 |
Restricted Stock Unit Awards. Restricted stock units may be granted to participants and entitles 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 2021 predominately vest at a rate equal to 25% per year for four years on the first day of the month following the month in which the grant date falls. Restricted stock unit grants totaled 846,433, 772,848, and 855,112, with weighted average grant-date fair values of $99.31, $99.58, and $91.89 per share, for the years ended December 31, 2021, 2020, and 2019, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2021, 2020, and 2019, was $89.4 million, $100.2 million, and $89.3 million, respectively.
A summary of the status of outstanding restricted stock unit awards at December 31, 2021, and changes during the year then ended, is presented in the following table.
| 2021 Annual Report | Northern Trust Corporation 147 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 122: OUTSTANDING RESTRICTED STOCK UNIT AWARDS
| ($ In Millions) | NUMBER | AGGREGATE INTRINSIC VALUE | ||||||
| Restricted Stock Unit Awards Outstanding, December 31, 2020 | 2,145,651 | $ | 199.8 | |||||
| Granted | 846,433 | |||||||
| Distributed | (944,393) | |||||||
| Forfeited | (46,175) | |||||||
| Restricted Stock Unit Awards Outstanding, December 31, 2021 | 2,001,516 | $ | 239.4 | |||||
| Units Convertible, December 31, 2021 | 19,526 | $ | 2.3 |
The following is a summary of nonvested restricted stock unit awards at December 31, 2021, and changes during the year then ended.
TABLE 123: 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, 2020 | 2,125,881 | $ | 95.61 | 2.1 | |||||||
| Granted | 846,433 | 99.31 | |||||||||
| Vested | (944,149) | 94.70 | |||||||||
| Forfeited | (46,175) | 98.31 | |||||||||
| Nonvested at December 31, 2021 | 1,981,990 | $ | 97.56 | 2.3 |
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 based on the attainment of certain performance criteria over a three-year period. For performance stock unit awards granted in 2019, the number of units that will vest are based on the attainment of specified performance targets that are a function of average return on equity goals over a three-year period. For performance stock unit awards granted in 2020 and 2021, the number of units that will vest are subject to the attainment of specified performance targets that are a function of average return on equity goals and average return on equity performance relative to that of a performance peer group, each measured over a three-year period. For performance stock units outstanding as of December 31, 2021, the number of performance stock units that will vest ranges from 0% to 150% of the original award granted based on the achievement of both absolute and relative return on equity goals over a three-year period compared to performance targets. Distribution of the shares is then made after vesting.
Performance stock unit grants totaled 204,539, 205,847, and 213,044 for the years ended December 31, 2021, 2020, and 2019, respectively, with weighted average grant-date fair values of $97.77, $100.83, and $93.00. Performance stock units outstanding at target level performance totaled 622,817, 660,510, and 667,741 at December 31, 2021, 2020, and 2019, respectively. Performance stock units had aggregate intrinsic values of $74.5 million, $61.5 million, and $70.9 million, and weighted average remaining vesting terms of 1.0 year each at December 31, 2021, 2020, and 2019, respectively.
Non-employee Director Stock Awards. Stock units with total values of $1.5 million (13,968 units), $1.5 million (20,148 units), and $1.3 million (14,232 units) were granted to non-employee directors in 2021, 2020, and 2019, respectively, which vest or vested on the date of the annual meeting of the Corporation’s stockholders in the following years. Total expense recognized on these grants was $1.6 million, $1.6 million, and $1.4 million in 2021, 2020, and 2019, 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.
| 148 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25 – Cash-Based Compensation Plans
Various incentive plans provide for cash incentives and bonuses to selected employees based upon accomplishment of corporate net income objectives, goals of the reporting segments and support functions, and individual performance. The provision for awards under these plans is charged to Compensation expense and totaled $377.1 million in 2021, $296.2 million in 2020, and $326.1 million in 2019.
Note 26 – Commitments and Contingent Liabilities
Off-Balance Sheet Financial Instruments, Guarantees and Other Commitments. Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the maximum potential credit exposure should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. Northern Trust does not believe the total contractual amount of these instruments to be representative of its future credit exposure or funding requirements.
The following table provides details of Northern Trust's off-balance sheet financial instruments as of December 31, 2021 and 2020.
TABLE 124: SUMMARY OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
| DECEMBER 31, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| ($ In Millions) | ONE YEAR AND LESS | OVER ONE YEAR | TOTAL | ONE YEAR AND LESS | OVER ONE YEAR | TOTAL | ||||||||||||||
| Undrawn Commitments(1) | $ | 9,567.0 | $ | 17,855.2 | $ | 27,422.2 | $ | 11,260.5 | $ | 17,678.0 | $ | 28,938.5 | ||||||||
| Standby Letters of Credit and Financial Guarantees(2)(3) | 3,485.6 | 553.9 | 4,039.5 | 1,228.1 | 763.5 | 1,991.6 | ||||||||||||||
| Commercial Letters of Credit | 68.5 | 1.1 | 69.6 | 54.6 | — | 54.6 | ||||||||||||||
| Custody Securities Lent with Indemnification | 170,445.3 | — | 170,445.3 | 157,478.0 | — | 157,478.0 | ||||||||||||||
| Total Off-Balance Sheet Financial Instruments | $ | 183,566.4 | $ | 18,410.2 | $ | 201,976.6 | $ | 170,021.2 | $ | 18,441.5 | $ | 188,462.7 |
(1) These amounts exclude $366.6 million and $384.7 million of commitments participated to others at December 31, 2021 and 2020, respectively.
(2) These amounts include $30.5 million and $24.2 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2021 and 2020, respectively.
(3) This amount includes a $2,309.6 million guarantee to the Fixed Income Clearing Corporation (FICC) under the sponsored member program, without taking into consideration the related collateral, as of December 31, 2021. As of December 31, 2020, there was no guarantee to the FICC as Northern Trust became a sponsored member during the third quarter of 2021.
Undrawn Commitments 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, 2021 and 2020 subject to indemnification was $170.4 billion and $157.5 billion, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and no liability was recorded at December 31, 2021, or 2020 related to these indemnifications.
| 2021 Annual Report | Northern Trust Corporation 149 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unsettled Repurchase and Reverse Repurchase Agreements**.** Northern Trust enters into repurchase agreements and reverse repurchase agreements which may settle at a future date. In repurchase agreements, Northern Trust receives cash from and provides securities as collateral to a counterparty. In reverse repurchase agreements, Northern Trust advances cash to and receives securities as collateral from a counterparty. These transactions are recorded on the consolidated balance sheets on the settlement date. As of December 31, 2021 and 2020, there were no unsettled repurchase or reverse repurchase agreements.
Sponsored Member Program. Effective during the third quarter of 2021, Northern Trust became an approved Government Securities Division (GSD) netting and sponsoring member in the FICC sponsored member program, through which Northern Trust submits eligible repurchase and reverse repurchase transactions in U.S. Government securities between Northern Trust and its sponsored member clients for novation and clearing. Northern Trust may sponsor clients to clear their eligible repurchase transactions with the FICC. As a sponsoring member, Northern Trust guarantees to the FICC the prompt and full payment and performance of its sponsored member clients’ respective obligations under the FICC GSD’s rules. To mitigate Northern Trust’s credit exposure under this guarantee, Northern Trust obtains a security interest in its sponsored member clients’ collateral. Please refer to Note 28, “Offsetting of Assets and Liabilities” for additional information on Northern Trust’s repurchase and reverse repurchase agreements.
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.
Certain of these industry clearing and settlement exchanges require their members to guarantee their obligations and liabilities and/or to provide liquidity support in the event other members do not honor their obligations as stipulated in each clearing organization’s membership agreement. Exposure related to these agreements varies, primarily as a result of fluctuations in the volume of transactions cleared through the organizations. At December 31, 2021 and 2020, Northern Trust has not recorded any material liabilities under these arrangements as Northern Trust believes the likelihood that a clearing or settlement exchange (of which Northern Trust is a member) would become insolvent is remote. Controls related to these clearing transactions are closely monitored by management to protect the assets of Northern Trust and its clients.
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
| 150 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of December 31, 2021, the Corporation has estimated the range of reasonably possible loss for these matters to be from zero to approximately $20 million in the aggregate. The Corporation’s estimate with respect to the aggregate range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.
In certain other pending matters, there may be a range of reasonably possible loss (including reasonably possible loss in excess of amounts accrued) that cannot be reasonably estimated for the reasons described above. Such matters are not included in the estimated range of reasonably possible loss discussed above.
In 2015, Northern Trust Fiduciary Services (Guernsey) Limited (NTFS), an indirect subsidiary of the Corporation, was charged by a French investigating magistrate judge with complicity in estate tax fraud in connection with the administration of two trusts for which it serves as trustee. Charges also were brought against a number of other persons and entities related to this matter. In 2017, a French court found no estate tax fraud had occurred and NTFS and all other persons and entities charged were acquitted. The Public Prosecutor’s Office of France appealed the court decision and in June 2018 a French appellate court issued its opinion on the matter, acquitting all persons and entities charged, including NTFS. In January 2021, the Cour de Cassation, the highest court in France, reversed the June 2018 appellate court ruling, requiring a re-trial at the appellate court level. The re-trial proceedings in the appellate court have not yet been scheduled. As trustee, NTFS provided no tax advice and had no involvement in the preparation or filing of the challenged estate tax filings.
Visa Class B Common Shares. Northern Trust, as a member of Visa U.S.A. Inc. (Visa U.S.A.) and in connection with the 2007 restructuring of Visa U.S.A. and its affiliates and the 2008 initial public offering of Visa Inc. (Visa), received certain Visa Class B common shares. The Visa Class B common shares are subject to certain selling restrictions until the final resolution of certain litigation related to interchange fees involving Visa (the covered litigation), at which time the shares are convertible into Visa Class A common shares based on a conversion rate dependent upon the ultimate cost of resolving the covered litigation. On June 28, 2018, September 27, 2019 and December 29, 2021, Visa deposited an additional $600 million, $300 million, and $250 million, respectively, into an escrow account previously established with respect to the covered litigation. As a result of the additional contributions to the escrow account, the rate at which Visa Class B common shares will convert into Visa Class A common shares was reduced.
In September 2018, Visa reached a proposed class settlement agreement covering damage claims but not injunctive relief claims regarding the covered litigation. In December 2019, the district court granted final approval for the proposed class settlement agreement. Certain merchants have opted out of the class settlement and are pursuing claims separately, 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, 2021 and 2020.
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
| 2021 Annual Report | Northern Trust Corporation 151 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 primarily 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.
The following table shows the notional and fair values of all derivative financial instruments as of December 31, 2021 and 2020.
TABLE 125: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
| DECEMBER 31, 2021 | DECEMBER 31, 2020 | |||||||||||||||||||
| 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 | $ | 4,430.5 | $ | 7.6 | $ | 8.7 | $ | 4,717.6 | $ | 8.2 | $ | 10.2 | ||||||||
| Cash Flow Hedges | — | — | — | 50.0 | 0.1 | — | ||||||||||||||
| Foreign Exchange Contracts | ||||||||||||||||||||
| Cash Flow Hedges | 3,697.9 | 61.8 | 12.6 | 6,554.4 | 15.4 | 104.0 | ||||||||||||||
| Net Investment Hedges | 4,161.8 | 183.3 | 12.3 | 3,480.3 | 0.1 | 207.7 | ||||||||||||||
| Total Derivatives Designated as Hedging under GAAP | $ | 12,290.2 | $ | 252.7 | $ | 33.6 | $ | 14,802.3 | $ | 23.8 | $ | 321.9 | ||||||||
| Derivatives Not Designated as Hedging under GAAP | ||||||||||||||||||||
| Non-Designated Risk Management Derivatives | ||||||||||||||||||||
| Foreign Exchange Contracts | $ | 109.9 | $ | 0.2 | $ | 0.6 | $ | 67.7 | $ | 0.1 | $ | 0.1 | ||||||||
| Other Financial Derivatives(3) | 738.5 | — | 37.5 | 745.4 | — | 35.3 | ||||||||||||||
| Total Non-Designated Risk Management Derivatives | $ | 848.4 | $ | 0.2 | $ | 38.1 | $ | 813.1 | $ | 0.1 | $ | 35.4 | ||||||||
| Client-Related and Trading Derivatives | ||||||||||||||||||||
| Foreign Exchange Contracts | $ | 315,532.3 | $ | 1,962.1 | $ | 1,973.3 | $ | 320,563.4 | $ | 4,245.1 | $ | 4,410.7 | ||||||||
| Interest Rate Contracts | 11,570.1 | 132.4 | 90.2 | 10,573.3 | 289.2 | 114.8 | ||||||||||||||
| Total Client-Related and Trading Derivatives | $ | 327,102.4 | $ | 2,094.5 | $ | 2,063.5 | $ | 331,136.7 | $ | 4,534.3 | $ | 4,525.5 | ||||||||
| Total Derivatives Not Designated as Hedging under GAAP | $ | 327,950.8 | $ | 2,094.7 | $ | 2,101.6 | $ | 331,949.8 | $ | 4,534.4 | $ | 4,560.9 | ||||||||
| Total Gross Derivatives | $ | 340,241.0 | $ | 2,347.4 | $ | 2,135.2 | $ | 346,752.1 | $ | 4,558.2 | $ | 4,882.8 | ||||||||
| Less: Netting(4) | 1,533.8 | 1,283.5 | 3,507.8 | 2,817.1 | ||||||||||||||||
| Total Derivative Financial Instruments | $ | 813.6 | $ | 851.7 | $ | 1,050.4 | $ | 2,065.7 |
(1) Derivative assets are reported in Other Assets on the consolidated balance sheets.
(2) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets.
(3) This line includes swaps related to sales of certain Visa Class B common shares.
(4) See further detail in Note 28, "Offsetting of Assets and Liabilities."
Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded on the consolidated balance sheets. They are used merely to express the volume of this activity. Northern Trust’s credit-related risk of loss is limited to the positive fair value of the derivative instrument, net of any collateral received, which is significantly less than the notional amount.
Hedging Derivative Instruments Designated under GAAP. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, and equity price. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value, cash flow or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and changes in fair value are recognized currently in Other Operating Income within the consolidated statements of income (see below section “Derivative Instruments Not Designated as Hedging under GAAP”).
Fair Value Hedges. Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates.
| 152 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2021, 2020, and 2019 as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated that net losses of $4.3 million and net gains of $52.7 million will be reclassified into net income within the next twelve months relating to cash flow hedges of foreign-currency-denominated transactions and cash flow hedges of foreign-currency-denominated debt securities, respectively. As of December 31, 2021, 20 months was the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign-currency-denominated transactions was being hedged.
The following table provides fair value and cash flow hedge derivative gains and losses recognized in income during the years ended December 31, 2021, 2020 and 2019.
TABLE 126: LOCATION AND AMOUNT OF FAIR VALUE AND CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECORDED IN INCOME
| (in Millions) | INTEREST INCOME | INTEREST EXPENSE | OTHER OPERATING INCOME | ||||||||||||||||||||||||||
| For the Year Ended December 31, | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Total amounts on the consolidated statements of income | $ | 1,406.5 | $ | 1,643.5 | $ | 2,499.9 | $ | 23.8 | $ | 200.3 | $ | 822.0 | $ | 243.9 | $ | 194.0 | $ | 145.5 | |||||||||||
| Gains (Losses) on fair value hedges recognized on | |||||||||||||||||||||||||||||
| Interest Rate Contracts | |||||||||||||||||||||||||||||
| Recognized on derivatives | 39.1 | (66.3) | (95.9) | (161.6) | 100.2 | 99.4 | — | — | — | ||||||||||||||||||||
| Recognized on hedged items | (39.1) | 66.3 | 95.9 | 161.6 | (100.2) | (99.4) | — | — | — | ||||||||||||||||||||
| Amounts related to interest settlements on derivatives | (16.2) | (13.2) | 21.2 | 57.1 | 29.9 | 5.2 | — | — | — | ||||||||||||||||||||
| Total gains (losses) recognized on fair value hedges | $ | (16.2) | $ | (13.2) | $ | 21.2 | $ | 57.1 | $ | 29.9 | $ | 5.2 | $ | — | $ | — | $ | — | |||||||||||
| Gains (Losses) on cash flow hedges recognized on | |||||||||||||||||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||||||||||||||||
| Net gains (losses) reclassified from AOCI to net income | 10.5 | 27.4 | 26.4 | — | — | — | (6.0) | 0.2 | 0.8 | ||||||||||||||||||||
| Interest Rate Contracts | |||||||||||||||||||||||||||||
| Net gains (losses) reclassified from AOCI to net income | — | 0.5 | (0.5) | — | — | — | — | — | — | ||||||||||||||||||||
| Total gains (losses) reclassified from AOCI to net income on cash flow hedges | $ | 10.5 | $ | 27.9 | $ | 25.9 | $ | — | $ | — | $ | — | $ | (6.0) | $ | 0.2 | $ | 0.8 |
The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged items as of December 31, 2021 and 2020.
TABLE 127: HEDGED ITEMS IN FAIR VALUE HEDGES
| DECEMBER 31, 2021 | DECEMBER 31, 2020 | |||||||||||||
| (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) | $ | 1,677.4 | $ | 11.1 | $ | 2,075.1 | $ | 48.8 | ||||||
| Senior Notes and Long-Term Subordinated Debt | 2,745.6 | 59.5 | 2,745.1 | 221.5 | ||||||||||
| Total | $ | 4,423.0 | $ | 70.6 | $ | 4,820.2 | $ | 270.3 |
(1) The cumulative hedge accounting basis adjustment includes $9.6 million related to discontinued hedging relationships of AFS debt securities as of December 31, 2021. 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, 2021.
(2) The cumulative hedge accounting basis adjustment includes $10.4 million related to discontinued hedging relationships of AFS debt securities as of December 31, 2020. There were no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31, 2020.
(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 $186.6 million and losses of $178.7 million were recognized in AOCI related to foreign exchange contracts for the years ended December 31, 2021 and 2020, respectively.
| 2021 Annual Report | Northern Trust Corporation 153 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on the consolidated statements of income for the years ended December 31, 2021, 2020, and 2019 for derivative instruments not designated as hedges under GAAP.
TABLE 128: 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 | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||
| Non-designated risk management derivatives | ||||||||||||||
| Foreign Exchange Contracts | Other Operating Income | $ | 1.2 | $ | 6.4 | $ | (1.6) | |||||||
| Other Financial Derivatives(1) | Other Operating Income | (21.3) | (18.3) | (20.0) | ||||||||||
| Gains (Losses) from non-designated risk management derivatives | $ | (20.1) | $ | (11.9) | $ | (21.6) | ||||||||
| Client-related and trading derivatives | ||||||||||||||
| Foreign Exchange Contracts | Foreign Exchange Trading Income | $ | 292.6 | $ | 290.4 | $ | 250.9 | |||||||
| Interest Rate Contracts | Security Commissions and Trading Income | 15.7 | 22.4 | 12.9 | ||||||||||
| Gains (Losses) from client-related and trading derivatives | $ | 308.3 | $ | 312.8 | $ | 263.8 | ||||||||
| Total gains (losses) from derivatives not designated as hedging under GAAP | $ | 288.2 | $ | 300.9 | $ | 242.2 |
(1) This line includes swaps related to the sale of certain Visa Class B common shares and total return swap contracts.
| 154 2021 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, 2021 and 2020.
TABLE 129: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
| DECEMBER 31, 2021 | |||||||||||||||||
| (In Millions) | GROSS RECOGNIZED ASSETS | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET**(3)** | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET**(4)** | NET AMOUNT**(5)** | ||||||||||||
| Derivative Assets(1) | |||||||||||||||||
| Foreign Exchange Contracts Over the Counter (OTC) | $ | 1,762.7 | $ | 1,530.7 | $ | 232.0 | $ | 2.8 | $ | 229.2 | |||||||
| Interest Rate Swaps OTC | 140.0 | 3.1 | 136.9 | — | 136.9 | ||||||||||||
| Total Derivatives Subject to a Master Netting Arrangement | 1,902.7 | 1,533.8 | 368.9 | 2.8 | 366.1 | ||||||||||||
| Total Derivatives Not Subject to a Master Netting Arrangement | 444.7 | — | 444.7 | — | 444.7 | ||||||||||||
| Total Derivatives | 2,347.4 | 1,533.8 | 813.6 | 2.8 | 810.8 | ||||||||||||
| Securities Purchased under Agreements to Resell(2) | $ | 2,078.9 | $ | 1,392.5 | $ | 686.4 | $ | 686.4 | $ | — |
| DECEMBER 31, 2020 | |||||||||||||||||
| (In Millions) | GROSS RECOGNIZED ASSETS | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) | NET AMOUNT(5) | ||||||||||||
| Derivative Assets(1) | |||||||||||||||||
| Foreign Exchange Contracts OTC | $ | 3,799.7 | $ | 3,505.3 | $ | 294.4 | $ | 0.9 | $ | 293.5 | |||||||
| Interest Rate Swaps OTC | 295.9 | 2.5 | 293.4 | — | 293.4 | ||||||||||||
| Interest Rate Swaps Exchange Cleared | 1.6 | — | 1.6 | — | 1.6 | ||||||||||||
| Total Derivatives Subject to a Master Netting Arrangement | 4,097.2 | 3,507.8 | 589.4 | 0.9 | 588.5 | ||||||||||||
| Total Derivatives Not Subject to a Master Netting Arrangement | 461.0 | — | 461.0 | — | 461.0 | ||||||||||||
| Total Derivatives | 4,558.2 | 3,507.8 | 1,050.4 | 0.9 | 1,049.5 | ||||||||||||
| Securities Purchased under Agreements to Resell | $ | 1,596.5 | $ | — | $ | 1,596.5 | $ | 1,596.5 | $ | — |
(1) Derivative assets are reported in Other Assets on the consolidated balance sheets. Other Assets (excluding derivative assets) totaled $7.8 billion and $7.3 billion as of December 31, 2021 and 2020, respectively.
(2) Offsetting of Securities Purchased under Agreements to Resell primarily relates to our involvement in FICC.
(3) Including cash collateral received from counterparties.
(4) Including financial assets accepted as collateral which are received from counterparties.
(5) Northern Trust did not possess any cash collateral that was not offset on the consolidated balance sheets that could have been used to offset the net amounts presented on the consolidated balance sheets as of December 31, 2021 and 2020.
| 2021 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, 2021 and 2020.
TABLE 130: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
| DECEMBER 31, 2021 | |||||||||||||||||
| (In Millions) | GROSS RECOGNIZED LIABILITIES | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET**(3)** | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET**(4)** | NET AMOUNT**(5)** | ||||||||||||
| Derivative Liabilities(1) | |||||||||||||||||
| Foreign Exchange Contracts OTC | $ | 1,430.1 | $ | 1,234.5 | $ | 195.6 | $ | — | $ | 195.6 | |||||||
| Interest Rate Swaps OTC | 98.7 | 48.1 | 50.6 | — | 50.6 | ||||||||||||
| Interest Rate Swaps Exchange Cleared | 0.2 | — | 0.2 | — | 0.2 | ||||||||||||
| Other Financial Derivatives | 37.5 | 0.9 | 36.6 | — | 36.6 | ||||||||||||
| Total Derivatives Subject to a Master Netting Arrangement | 1,566.5 | 1,283.5 | 283.0 | — | 283.0 | ||||||||||||
| Total Derivatives Not Subject to a Master Netting Arrangement | 568.7 | — | 568.7 | — | 568.7 | ||||||||||||
| Total Derivatives | 2,135.2 | 1,283.5 | 851.7 | — | 851.7 | ||||||||||||
| Securities Sold under Agreements to Repurchase(2) | $ | 1,924.4 | $ | 1,392.5 | $ | 531.9 | $ | 531.9 | $ | — |
| DECEMBER 31, 2020 | |||||||||||||||||
| (In Millions) | GROSS RECOGNIZED LIABILITIES | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) | NET AMOUNT(5) | ||||||||||||
| Derivative Liabilities(1) | |||||||||||||||||
| Foreign Exchange Contracts OTC | $ | 3,577.7 | $ | 2,718.6 | $ | 859.1 | $ | 0.5 | $ | 858.6 | |||||||
| Interest Rate Swaps OTC | 125.0 | 98.5 | 26.5 | — | 26.5 | ||||||||||||
| Other Financial Derivatives | 35.3 | — | 35.3 | — | 35.3 | ||||||||||||
| Total Derivatives Subject to a Master Netting Arrangement | 3,738.0 | 2,817.1 | 920.9 | 0.5 | 920.4 | ||||||||||||
| Total Derivatives Not Subject to a Master Netting Arrangement | 1,144.8 | — | 1,144.8 | — | 1,144.8 | ||||||||||||
| Total Derivatives | 4,882.8 | 2,817.1 | 2,065.7 | 0.5 | 2,065.2 | ||||||||||||
| Securities Sold under Agreements to Repurchase | $ | 39.8 | $ | — | $ | 39.8 | $ | 39.8 | $ | — |
(1) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets. Other Liabilities (excluding derivative liabilities) totaled $3.3 billion and $3.5 billion as of December 31, 2021 and 2020, respectively.
(2) Offsetting of Securities Sold under Agreements to Repurchase primarily relates to our involvement in FICC.
(3) Including cash collateral deposited with counterparties.
(4) Including financial assets accepted as collateral which are deposited with counterparties.
(5) Northern Trust did not place any cash collateral with counterparties that was not offset on the consolidated balance sheets that could have been used to offset the net amounts presented on the consolidated balance sheets as of December 31, 2021 and 2020.
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. Northern Trust’s repurchase agreements and reverse repurchase agreements, other than those in which the counterparty is FICC, do not meet the requirements to net under GAAP.
Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally enforceable master netting arrangements or similar agreements exist. Derivative assets and liabilities can be further offset by cash collateral received from, and deposited with, the transacting counterparty. The basis for this view is that, upon termination of transactions subject to a master netting arrangement or similar agreement, the individual derivative receivables do not represent resources to which general creditors have rights and individual derivative payables do not represent claims that are equivalent to the claims of general creditors.
Credit risk associated with derivative instruments relates to the failure of the counterparty and the failure of Northern Trust to pay based on the contractual terms of the agreement, and is generally limited to the unrealized fair value gains and
| 156 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
losses on these instruments, net of any collateral received or deposited. The amount of credit risk will increase or decrease during the lives of the instruments as interest rates, foreign exchange rates, or equity prices fluctuate. Northern Trust’s risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Credit Support Annexes and other similar agreements are currently in place with a number of Northern Trust’s counterparties which mitigate the aforementioned credit risk associated with derivative activity conducted with those counterparties by requiring that significant net unrealized fair value gains be supported by collateral placed with Northern Trust.
Additional cash collateral received from and deposited with derivative counterparties totaling $93.5 million and $43.4 million, respectively, as of December 31, 2021, and $111.0 million and $49.0 million, respectively, as of December 31, 2020, 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 $111.5 million and $1,648.2 million at December 31, 2021 and 2020, respectively. Cash collateral amounts deposited with derivative counterparties on those dates included $84.2 million and $1,044.0 million, respectively, posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required at December 31, 2021 and 2020 of $27.3 million and $604.2 million, respectively. Accelerated settlement of these liabilities would not have a material effect on the consolidated financial position or liquidity of Northern Trust.
Note 29 – Variable Interest Entities
Variable Interest Entities (VIEs) are defined within GAAP as entities which either (1) lack sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support, (2) have equity investors that lack attributes typical of an equity investor, such as the ability to make significant decisions through voting rights affecting the entity’s operations, or the obligation to absorb expected losses or the right to receive residual returns of the entity, or (3) are structured with voting rights that are disproportionate to the equity investor’s obligation to absorb losses or right to receive returns, and substantially all of the activities are conducted on behalf of the holder of the equity investment at risk with disproportionately few voting rights. Investors that finance a VIE through debt or equity interests are variable interest holders in the entity and the variable interest holder, if any, that has both the power to direct the activities that most significantly impact the entity’s economic performance and, through its variable interest, the obligation to absorb losses or the right to receive returns that could potentially be significant to the entity is deemed to be the VIE’s primary beneficiary and is required to consolidate the VIE.
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, 2021 and 2020, the carrying amounts of these investments in community development projects that generate tax credits, included in Other Assets on the consolidated balance sheets, totaled $959.6 million and $919.6 million, respectively, of which $922.8 million and $874.0 million are VIEs as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, liabilities related to unfunded commitments on investments in tax credit community development projects, included in Other Liabilities on the consolidated balance sheets, totaled $289.3 million and $351.6 million, respectively, of which $280.5 million and $335.9 million related to undrawn commitments on VIEs as of December 31, 2021 and 2020, respectively.
| 2021 Annual Report | Northern Trust Corporation 157 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $87.2 million and $78.9 million, respectively, as of December 31, 2021 and 2020.
Investment Funds. Northern Trust acts as asset manager for various funds in which clients of Northern Trust are investors. As an asset manager of funds, Northern Trust earns a competitively priced fee that is based on assets managed and varies with each fund’s investment objective. Based on its analysis, Northern Trust has determined that it is not the primary beneficiary of these VIEs under GAAP.
Some of the funds for which Northern Trust acts as asset manager comply or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds and therefore the funds are exempt from the consolidation requirements in ASC 810-10. Northern Trust voluntarily waived $287.8 million of money market mutual fund fees for the year ended December 31, 2021 related to the low-interest-rate environment and certain competitive factors. Northern Trust waived $36.4 million of money market mutual fund fees for the year ended December 31, 2020. Northern Trust does not have any contractual obligations to provide financial support to the funds. Any potential future support of the funds will be at the discretion of Northern Trust after an evaluation of the specific facts and circumstances.
Periodically, Northern Trust makes seed capital investments to certain funds. As of December 31, 2021 and 2020, Northern Trust had no seed capital investments and no unfunded commitments related to seed capital investments.
Note 30 – Pledged and Restricted Assets
Pledged Assets. Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements and borrowings, as well as for other purposes, including support for securities settlement, primarily related to client activities, and for derivative contracts.
The following table presents Northern Trust’s pledged assets.
TABLE 131: TYPE OF PLEDGED ASSETS
| FOR THE YEAR ENDED DECEMBER 31, | ||||||||
| (In Billions) | 2021 | 2020 | ||||||
| Securities | ||||||||
| Obligations of States and Political Subdivisions | $ | 3.7 | $ | 2.9 | ||||
| Government Sponsored Agency and Other Securities | 35.6 | 32.5 | ||||||
| Loans | 15.3 | 12.1 | ||||||
| Total Pledged Assets | $ | 54.6 | $ | 47.5 |
Collateral required for these purposes totaled $5.6 billion and $5.7 billion at December 31, 2021 and 2020, respectively.
The following table presents the AFS debt securities pledged as collateral that are included in pledged assets.
TABLE 132: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES INCLUDED IN PLEDGED ASSETS
| SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE | DERIVATIVE CONTRACTS | |||||||||||||
| (In Millions) | DECEMBER 31, 2021 | DECEMBER 31, 2020 | DECEMBER 31, 2021 | DECEMBER 31, 2020 | ||||||||||
| Debt Securities | ||||||||||||||
| Available for Sale | $ | 524.1 | $ | 33.0 | $ | 17.6 | $ | 27.1 |
The secured parties to these transactions have the right to repledge or sell the securities as it relates to $524.1 million and $33.5 million of the pledged collateral as of December 31, 2021 and 2020, respectively.
Northern Trust accepts financial assets as collateral that it may, in some instances, be permitted to repledge or sell. The collateral is generally obtained under certain reverse repurchase agreements and derivative contracts.
| 158 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value of securities accepted as collateral.
TABLE 133: ACCEPTED COLLATERAL
| FOR THE YEAR ENDED DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| Collateral that may be repledged or sold | ||||||||
| Reverse repurchase agreements(1) | $ | 1,457.0 | $ | 1,179.8 | ||||
| Derivative contracts | 2.8 | 0.9 | ||||||
| Collateral that may not be repledged or sold | ||||||||
| Reverse repurchase agreements | 650.0 | 500.0 | ||||||
| Total Collateral Accepted | $ | 2,109.8 | $ | 1,680.7 |
(1) The fair value of securities collateral that was repledged or sold totaled $1,419.0 million at December 31, 2021. There was no repledged or sold collateral as of December 31, 2020.
Restricted Assets. As a result of the economic environment arising from the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement to zero percent on March 26, 2020. Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $0.4 billion in 2020.
Note 31 – Restrictions on Subsidiary Dividends and Loans or Advances
Various federal and state statutory provisions limit the amount of dividends the Bank can pay to the Corporation without regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state-chartered bank that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would exceed the total of its retained net income (as defined by regulatory agencies) for that year combined with its retained net income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its “undivided profits,” as defined, without regulatory and stockholder approval.
Under Illinois law, an Illinois state bank, prior to paying a dividend, must carry over to surplus at least one-tenth of its net profits since the date of the declaration of the last preceding dividend, until the bank’s surplus is equal to its capital. In 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 Act and Basel III impose additional restrictions on the ability of banking institutions to pay dividends (e.g., the Corporation may pay dividends only in accordance with the capital plan rules and capital adequacy standards of the Federal Reserve).
Under federal law, financial transactions by the Bank, the Corporation’s insured banking subsidiary, with the Corporation and its affiliates that are in the form of loans or extensions of credit, investments, guarantees, derivative transactions, repurchase agreements, securities lending transactions or purchases of assets, are restricted. These transactions must be on terms and conditions that are, or in good faith would be, offered to non-affiliated companies (i.e. on terms not less favorable to the Bank than market terms). Further, extensions of credit must be secured fully with qualifying collateral and are limited to 10% of the Bank’s capital and surplus for transactions with a single affiliate and to 20% of the Bank’s capital and surplus with all affiliates. Other state and federal laws may limit the transfer of funds by the Corporation’s banking subsidiaries to the Corporation and certain of its affiliates.
Note 32 – Reporting Segments and Related Information
Segment Information. Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management.
Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Additionally, segment information is presented on an FTE
| 2021 Annual Report | Northern Trust Corporation 159 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
basis as management believes an FTE presentation provides a clearer indication of net interest income. The adjustment to an FTE basis has no impact on Net Income.
Equity is allocated to the reporting segments based on a variety of factors including, but not limited to, risk, regulatory considerations, and internal metrics. Allocations of capital and certain corporate expense may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1, “Summary of Significant Accounting Policies.” Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between reporting segments. Northern Trust’s presentations are not necessarily consistent with similar information for other financial institutions.
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, which are reported within the Other segment.
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.
Effective January 1, 2021, Northern Trust implemented enhancements to its FTP methodology, including enhancements impacting the allocation of net interest income between C&IS and Wealth Management. These methodology enhancements affect the results of each of these reporting segments. Due to the lack of historical information, segment results for periods ended prior to January 1, 2021 have not been revised to reflect the methodology enhancements.
Corporate & Institutional Services. C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking; and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region.
Wealth Management. Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. 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 also includes Global Family Office, which provides customized services, including but not limited to: investment consulting; global custody; fiduciary; and private banking to meet the complex financial needs of ultra-high-net-worth individuals and family offices across the globe. 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.
Other**.** Income and expenses associated with non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments are included within Other.
The following tables reflect the earnings contribution and average assets of Northern Trust’s reporting segments for the years ended December 31, 2021, 2020, and 2019.
| 160 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 134: CORPORATE & INSTITUTIONAL SERVICES RESULTS OF OPERATIONS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| ($ In Millions) | 2021 | 2020 | 2019 | ||||||||
| Noninterest Income | |||||||||||
| Trust, Investment and Other Servicing Fees | $ | 2,487.3 | $ | 2,321.6 | $ | 2,211.5 | |||||
| Foreign Exchange Trading Income | 279.0 | 276.3 | 232.2 | ||||||||
| Other Noninterest Income | 261.2 | 222.5 | 178.2 | ||||||||
| Total Noninterest Income | 3,027.5 | 2,820.4 | 2,621.9 | ||||||||
| Net Interest Income(1) | 637.2 | 665.5 | 918.7 | ||||||||
| Revenue(1) | 3,664.7 | 3,485.9 | 3,540.6 | ||||||||
| Provision for Credit Losses | (33.8) | 38.1 | 1.9 | ||||||||
| Noninterest Expense | 2,863.0 | 2,752.7 | 2,605.5 | ||||||||
| Income before Income Taxes(1) | 835.5 | 695.1 | 933.2 | ||||||||
| Provision for Income Taxes(1) | 194.1 | 174.4 | 219.4 | ||||||||
| Net Income | $ | 641.4 | $ | 520.7 | $ | 713.8 | |||||
| Percentage of Consolidated Net Income | 41 | % | 43 | % | 48 | % | |||||
| Average Assets | $ | 120,883.2 | $ | 104,790.6 | $ | 87,557.1 |
(1) Financial measures stated on an FTE basis.
TABLE 135: WEALTH MANAGEMENT RESULTS OF OPERATIONS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| ($ In Millions) | 2021 | 2020 | 2019 | ||||||||
| Noninterest Income | |||||||||||
| Trust, Investment and Other Servicing Fees | $ | 1,873.8 | $ | 1,673.4 | $ | 1,640.6 | |||||
| Foreign Exchange Trading Income | 13.6 | 14.1 | 18.7 | ||||||||
| Other Noninterest Income | 188.2 | 168.0 | 131.1 | ||||||||
| Total Noninterest Income | 2,075.6 | 1,855.5 | 1,790.4 | ||||||||
| Net Interest Income(1) | 781.1 | 812.1 | 792.0 | ||||||||
| Revenue(1) | 2,856.7 | 2,667.6 | 2,582.4 | ||||||||
| Provision for Credit Losses | (47.7) | 86.9 | (16.4) | ||||||||
| Noninterest Expense | 1,651.1 | 1,559.7 | 1,531.6 | ||||||||
| Income before Income Taxes(1) | 1,253.3 | 1,021.0 | 1,067.2 | ||||||||
| Provision for Income Taxes(1) | 317.0 | 291.8 | 271.1 | ||||||||
| Net Income | $ | 936.3 | $ | 729.2 | $ | 796.1 | |||||
| Percentage of Consolidated Net Income | 61 | % | 60 | % | 53 | % | |||||
| Average Assets | $ | 35,480.0 | $ | 32,020.5 | $ | 29,994.3 |
(1) Financial measures stated on an FTE basis.
TABLE 136: OTHER RESULTS OF OPERATIONS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| ($ In Millions) | 2021 | 2020 | 2019 | ||||||||
| Noninterest Income | $ | (21.3) | $ | (18.3) | $ | (17.1) | |||||
| Net Interest Income(1) | — | — | — | ||||||||
| Revenue(1) | (21.3) | (18.3) | (17.1) | ||||||||
| Noninterest Expense | 21.8 | 35.8 | 6.4 | ||||||||
| Income (Loss) before Income Taxes(1) | (43.1) | (54.1) | (23.5) | ||||||||
| Provision (Benefit) for Income Taxes(1) | (10.7) | (13.5) | (5.8) | ||||||||
| Net Income | $ | (32.4) | $ | (40.6) | $ | (17.7) | |||||
| Percentage of Consolidated Net Income | (2) | % | (3) | % | (1) | % | |||||
| Average Assets | $ | — | $ | — | $ | — |
(1) Financial measures stated on an FTE basis.
| 2021 Annual Report | Northern Trust Corporation 161 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 137: CONSOLIDATED FINANCIAL INFORMATION
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| Noninterest Income | |||||||||||
| Trust, Investment and Other Servicing Fees | $ | 4,361.1 | $ | 3,995.0 | $ | 3,852.1 | |||||
| Foreign Exchange Trading Income | 292.6 | 290.4 | 250.9 | ||||||||
| Other Noninterest Income | 428.1 | 372.2 | 292.2 | ||||||||
| Total Noninterest Income | 5,081.8 | 4,657.6 | 4,395.2 | ||||||||
| Net Interest Income(1) | 1,418.3 | 1,477.6 | 1,710.7 | ||||||||
| Revenue(1) | 6,500.1 | 6,135.2 | 6,105.9 | ||||||||
| Provision for Credit Losses | (81.5) | 125.0 | (14.5) | ||||||||
| Noninterest Expense | 4,535.9 | 4,348.2 | 4,143.5 | ||||||||
| Income before Income Taxes(1) | 2,045.7 | 1,662.0 | 1,976.9 | ||||||||
| Provision for Income Taxes(1) | 500.4 | 452.7 | 484.7 | ||||||||
| Net Income | $ | 1,545.3 | $ | 1,209.3 | $ | 1,492.2 | |||||
| Average Assets | $ | 156,363.2 | $ | 136,811.1 | $ | 117,551.4 |
(1) Financial measures stated on an FTE basis. The consolidated figures include $35.6 million, $34.4 million, and $32.8 million, of FTE adjustments for 2021, 2020, and 2019, respectively.
Geographic Area Information. Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source income and assets. Non-U.S. source income and assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision revenues, expenses and assets between U.S. and non-U.S.-domiciled customers. Therefore, certain subjective estimates and assumptions have been made to allocate revenues, expenses and assets between U.S. and non-U.S. operations.
For purposes of this disclosure, all foreign exchange trading income has been allocated to non-U.S. operations. Interest expense is allocated to non-U.S. operations based on specifically matched or pooled funding. Allocations of indirect noninterest expenses, when made, are based on various methods such as time, space, and number of employees.
The following table summarizes Northern Trust’s performance based on the allocation process described above without regard to guarantors or the location of collateral.
TABLE 138: DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE
| (In Millions) | TOTAL ASSETS | TOTAL REVENUE**(1)** | INCOME BEFORE INCOME TAXES | NET INCOME | ||||||||||
| 2021 | ||||||||||||||
| Non-U.S. | $ | 38,555.3 | $ | 2,017.5 | $ | 569.4 | $ | 426.7 | ||||||
| U.S. | 145,334.5 | 4,447.0 | 1,440.7 | 1,118.6 | ||||||||||
| Total | $ | 183,889.8 | $ | 6,464.5 | $ | 2,010.1 | $ | 1,545.3 | ||||||
| 2020 | ||||||||||||||
| Non-U.S. | $ | 38,393.8 | $ | 1,737.6 | $ | 404.0 | $ | 302.6 | ||||||
| U.S. | 131,610.1 | 4,363.2 | 1,223.6 | 906.7 | ||||||||||
| Total | $ | 170,003.9 | $ | 6,100.8 | $ | 1,627.6 | $ | 1,209.3 | ||||||
| 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 |
(1) Total revenue is comprised of net interest income and noninterest income.
| 162 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 33 – Regulatory Capital Requirements
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal bank regulatory authorities. Under these requirements, banks must maintain specific risk-based and leverage ratios in order to be classified as “well-capitalized.” The regulatory capital requirements impose certain restrictions upon banks that meet minimum capital requirements but are not “well-capitalized” and obligate the federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not maintain such minimum ratios. Such prompt corrective action could have a direct material effect on a bank’s financial statements.
As of December 31, 2021 and 2020, the Bank had capital ratios above the levels required for classification as a “well-capitalized” institution and had not received any regulatory notification of a lower classification. As a result of the stress test results published by the Federal Reserve Board on June 25, 2020, Northern Trust’s stress capital buffer requirement for the 2020 Capital Plan cycle was set at 2.5%. The 2020 stress capital buffer became effective October 1, 2020, and resulted in a Common Equity Tier 1 capital ratio minimum requirement of 7.0% inclusive of this buffer. The results of the 2021 stress test, published by the Federal Reserve Board on June 24, 2021, resulted in Northern Trust’s stress capital buffer and effective Common Equity Tier 1 capital ratio minimum requirement remaining in effect for the 2021 Capital Plan cycle, which began on October 1, 2021.
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, 2021 and 2020, 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, 2021, that management believes have adversely affected the capital categorization of any Northern Trust subsidiary bank.
| 2021 Annual Report | Northern Trust Corporation 163 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides capital ratios for the Corporation and the Bank determined by Basel III phased in requirements.
TABLE 139: RISK-BASED AND LEVERAGE CAPITAL AMOUNTS AND RATIOS
| DECEMBER 31, 2021 | DECEMBER 31, 2020 | |||||||||||||||||||||||||
| ($ 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 | $ | 10,277.1 | 11.9 | % | $ | 10,277.1 | 13.2 | % | $ | 9,962.2 | 12.8 | % | $ | 9,962.2 | 13.4 | % | ||||||||||
| The Northern Trust Company | 10,315.7 | 12.0 | 10,315.7 | 13.5 | 10,003.3 | 13.0 | 10,003.3 | 13.8 | ||||||||||||||||||
| 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 | 5,578.7 | 6.5 | 4,964.5 | 6.5 | 4,994.4 | 6.5 | 4,717.1 | 6.5 | ||||||||||||||||||
| Tier 1 Capital | ||||||||||||||||||||||||||
| Northern Trust Corporation | 11,142.2 | 12.9 | 11,142.2 | 14.3 | 10,822.2 | 13.9 | 10,822.2 | 14.5 | ||||||||||||||||||
| The Northern Trust Company | 10,315.7 | 12.0 | 10,315.7 | 13.5 | 10,003.3 | 13.0 | 10,003.3 | 13.8 | ||||||||||||||||||
| Minimum to qualify as well-capitalized: | ||||||||||||||||||||||||||
| Northern Trust Corporation | 5,177.6 | 6.0 | 4,668.4 | 6.0 | 4,659.7 | 6.0 | 4,467.6 | 6.0 | ||||||||||||||||||
| The Northern Trust Company | 6,866.1 | 8.0 | 6,110.2 | 8.0 | 6,147.0 | 8.0 | 5,805.6 | 8.0 | ||||||||||||||||||
| Total Capital | ||||||||||||||||||||||||||
| Northern Trust Corporation | 12,126.8 | 14.1 | 11,942.0 | 15.3 | 12,085.7 | 15.6 | 11,825.8 | 15.9 | ||||||||||||||||||
| The Northern Trust Company | 11,158.4 | 13.0 | 10,973.7 | 14.4 | 11,123.1 | 14.5 | 10,863.3 | 15.0 | ||||||||||||||||||
| Minimum to qualify as well-capitalized: | ||||||||||||||||||||||||||
| Northern Trust Corporation | 8,629.3 | 10.0 | 7,780.7 | 10.0 | 7,766.2 | 10.0 | 7,446.0 | 10.0 | ||||||||||||||||||
| The Northern Trust Company | 8,582.6 | 10.0 | 7,637.8 | 10.0 | 7,683.7 | 10.0 | 7,257.0 | 10.0 | ||||||||||||||||||
| Tier 1 Leverage | ||||||||||||||||||||||||||
| Northern Trust Corporation | 11,142.2 | 6.9 | 11,142.2 | 6.9 | 10,822.2 | 7.6 | 10,822.2 | 7.6 | ||||||||||||||||||
| The Northern Trust Company | 10,315.7 | 6.4 | 10,315.7 | 6.4 | 10,003.3 | 7.0 | 10,003.3 | 7.0 | ||||||||||||||||||
| 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 | 8,019.5 | 5.0 | 8,019.5 | 5.0 | 7,105.0 | 5.0 | 7,105.0 | 5.0 | ||||||||||||||||||
| Supplementary Leverage**(1)** | ||||||||||||||||||||||||||
| Northern Trust Corporation | N/A | N/A | 11,142.2 | 8.2 | N/A | N/A | 10,822.2 | 8.6 | ||||||||||||||||||
| The Northern Trust Company | N/A | N/A | 10,315.7 | 7.6 | N/A | N/A | 10,003.3 | 7.7 | ||||||||||||||||||
| 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 | 4,081.7 | 3.0 | N/A | N/A | 3,883.4 | 3.0 |
(1) In November 2019, the Federal Reserve Board and other U.S. federal banking agencies adopted a final rule that established a deduction for central bank deposits from the total leverage exposures of custodial banking organizations, including the Corporation and the Bank, equal to the lesser of (i) the total amount of funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. The rule became effective on April 1, 2020.
Further, on April 1, 2020, the Federal Reserve Board issued an interim final rule that requires bank holding companies, including the Corporation, to deduct, on a temporary basis, deposits with the Federal Reserve Board and investments in U.S. Treasury securities from their total leverage exposure. The U.S. Treasury securities deduction is applied in addition to the central bank deposits relief referred to above. This rule became effective on April 1, 2020 and expired on April 1, 2021.
On May 15, 2020, the U.S. federal banking agencies released an interim final rule that permits insured depository institutions of bank holding companies also to temporarily exclude deposits with the Federal Reserve Board and investments in U.S. Treasury securities from their total leverage exposure. The Bank did not elect to take this deduction.
The supplementary leverage ratios at December 31, 2021 and December 31, 2020 for the Corporation and the Bank reflect the impact of these final rules.
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.
| 164 2021 Annual Report | Northern Trust Corporation |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 34 – Northern Trust Corporation (Corporation only)
Condensed financial information is presented in the following tables. Investments in wholly-owned subsidiaries are carried on the equity method of accounting.
TABLE 140: CONDENSED BALANCE SHEETS
| DECEMBER 31, | ||||||||
| (In Millions) | 2021 | 2020 | ||||||
| ASSETS | ||||||||
| Cash on Deposit with Subsidiary Bank | $ | 1,731.7 | $ | 2,516.0 | ||||
| Advances to Wholly-Owned Subsidiaries – Banks | 2,810.0 | 2,670.0 | ||||||
| Investments in Wholly-Owned Subsidiaries – Banks | 11,120.9 | 10,799.9 | ||||||
| – Nonbank | 185.3 | 172.8 | ||||||
| Other Assets | 890.2 | 900.9 | ||||||
| Total Assets | $ | 16,738.1 | $ | 17,059.6 | ||||
| LIABILITIES | ||||||||
| Senior Notes | $ | 2,505.5 | $ | 3,122.4 | ||||
| Long-Term Debt | 1,145.7 | 1,189.3 | ||||||
| Floating Rate Capital Debt | — | 277.8 | ||||||
| Other Liabilities | 1,070.1 | 781.8 | ||||||
| Total Liabilities | 4,721.3 | 5,371.3 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred Stock | 884.9 | 884.9 | ||||||
| Common Stock | 408.6 | 408.6 | ||||||
| Additional Paid-in Capital | 939.3 | 963.6 | ||||||
| Retained Earnings | 13,117.3 | 12,207.7 | ||||||
| Accumulated Other Comprehensive Income (Loss) | (35.6) | 428.0 | ||||||
| Treasury Stock | (3,297.7) | (3,204.5) | ||||||
| Total Stockholders’ Equity | 12,016.8 | 11,688.3 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 16,738.1 | $ | 17,059.6 |
TABLE 141: CONDENSED STATEMENTS OF INCOME
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| OPERATING INCOME | |||||||||||
| Dividends – Bank Subsidiaries | $ | 751.1 | $ | 900.0 | $ | 2,024.1 | |||||
| – Nonbank Subsidiaries | 8.3 | — | 0.4 | ||||||||
| Intercompany Interest and Other Charges | 20.1 | 46.5 | 115.1 | ||||||||
| Interest and Other Income | 32.3 | 19.1 | 20.2 | ||||||||
| Total Operating Income | 811.8 | 965.6 | 2,159.8 | ||||||||
| OPERATING EXPENSES | |||||||||||
| Interest Expense | 71.3 | 104.2 | 121.6 | ||||||||
| Other Operating Expenses | 36.7 | 26.2 | 28.6 | ||||||||
| Total Operating Expenses | 108.0 | 130.4 | 150.2 | ||||||||
| Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries | 703.8 | 835.2 | 2,009.6 | ||||||||
| Benefit for Income Taxes | 25.7 | 28.2 | 24.3 | ||||||||
| Income before Equity in Undistributed Net Income of Subsidiaries | 729.5 | 863.4 | 2,033.9 | ||||||||
| Equity in Undistributed Net Income of Subsidiaries – Banks | 803.3 | 326.0 | (559.9) | ||||||||
| – Nonbank | 12.5 | 19.9 | 18.2 | ||||||||
| Net Income | $ | 1,545.3 | $ | 1,209.3 | $ | 1,492.2 | |||||
| Preferred Stock Dividends | 41.8 | 56.2 | 46.4 | ||||||||
| Net Income Applicable to Common Stock | $ | 1,503.5 | $ | 1,153.1 | $ | 1,445.8 |
| 2021 Annual Report | Northern Trust Corporation 165 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE 142: CONDENSED STATEMENTS OF CASH FLOWS
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||
| (In Millions) | 2021 | 2020 | 2019 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net Income | $ | 1,545.3 | $ | 1,209.3 | $ | 1,492.2 | |||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | |||||||||||
| Equity in Undistributed Net Income of Subsidiaries | (815.8) | (345.9) | 541.7 | ||||||||
| Change in Prepaid Expenses | 0.1 | 398.5 | (400.4) | ||||||||
| Change in Accrued Income Taxes | 2.2 | 3.7 | 114.1 | ||||||||
| Other Operating Activities, net | 236.6 | 300.3 | 141.9 | ||||||||
| Net Cash Provided by Operating Activities | 968.4 | 1,565.9 | 1,889.5 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Proceeds from Sale, Maturity and Redemption of Available for Sale Debt Securities | — | — | — | ||||||||
| Investments in and Advances to Subsidiaries, net | (140.0) | (800.0) | 540.0 | ||||||||
| Acquisition of a Business, Net of Cash Received | — | — | — | ||||||||
| Other Investing Activities, net | 5.1 | 1.8 | 3.7 | ||||||||
| Net Cash (Used in) Provided by Investing Activities | (134.9) | (798.2) | 543.7 | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from Senior Notes | — | 993.2 | 498.0 | ||||||||
| Repayments of Senior Notes | (500.0) | (508.6) | — | ||||||||
| Repayment of Floating Rate Capital Debt | (278.8) | — | — | ||||||||
| Redemption of Preferred Stock - Series C | — | (400.0) | — | ||||||||
| Proceeds from Issuance of Preferred Stock - Series E | — | — | 392.5 | ||||||||
| Treasury Stock Purchased | (267.6) | (299.8) | (1,100.2) | ||||||||
| Net Proceeds from Stock Options | 53.8 | 19.5 | 44.0 | ||||||||
| Cash Dividends Paid on Common Stock | (583.3) | (584.6) | (529.7) | ||||||||
| Cash Dividends Paid on Preferred Stock | (41.8) | (45.9) | (46.4) | ||||||||
| Other Financing Activities, net | (0.1) | 15.4 | 0.9 | ||||||||
| Net Cash Used In Financing Activities | (1,617.8) | (810.8) | (740.9) | ||||||||
| Net Change in Cash on Deposit with Subsidiary Bank | (784.3) | (43.1) | 1,692.3 | ||||||||
| Cash on Deposit with Subsidiary Bank at Beginning of Year | 2,516.0 | 2,559.1 | 866.8 | ||||||||
| Cash on Deposit with Subsidiary Bank at End of Year | $ | 1,731.7 | $ | 2,516.0 | $ | 2,559.1 |
| 166 2021 Annual Report | Northern Trust Corporation |
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