NORTHERN TRUST CORPORATION BUSINESS OVERVIEWNorthern Trust Corporation (the Corporation) is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS ) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The Corporation conducts business through variousU.S. and non-U.S. subsidiaries, includingThe Northern Trust Company (the Bank). The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a global presence with offices in 21 U.S. states andWashington, D.C. , and across 22 locations inCanada ,Europe , theMiddle East and theAsia-Pacific region . Except where the context requires otherwise, the terms "Northern Trust ," "we," "us," "our" or similar terms refers to the Corporation and its subsidiaries on a consolidated basis. FINANCIAL OVERVIEW Net income decreased$64.2 million , or 4%, to$1.49 billion in 2019 from$1.56 billion in 2018. Earnings per diluted common share was$6.63 in 2019 compared to$6.64 in 2018. Return on average common equity decreased to 14.9% in 2019 from 16.2% in 2018. Revenue increased$112.8 million , or 2%, to$6.07 billion in 2019 from$5.96 billion in the prior year, primarily driven by an increase in trust, investment and other servicing fees of 3%, an increase in net interest income of 3%, and an increase in other operating income of 14%, partially offset by a decrease in foreign exchange trading income of 18%. Client assets under custody/administration (AUC/A) increased 19% from$10.13 trillion as ofDecember 31, 2018 to$12.05 trillion as ofDecember 31, 2019 . Client assets under custody, a component of AUC/A, increased 22% from$7.59 trillion as ofDecember 31, 2018 to$9.23 trillion as ofDecember 31, 2019 . Client assets under custody included$5.89 trillion of global custody assets as ofDecember 31, 2019 , which increased 25% from$4.70 trillion as ofDecember 31, 2018 . Client assets under management increased 15% to$1.23 trillion as ofDecember 31, 2019 from$1.07 trillion atDecember 31, 2018 . Trust, investment and other servicing fees, which represent the largest component of total revenue, increased 3% to$3.85 billion in 2019, from$3.75 billion in 2018, primarily due to new business and favorable markets, partially offset by unfavorable currency translation and lower securities lending revenue. Foreign exchange trading income of$250.9 million in 2019 decreased 18% from$307.2 million in 2018, primarily resulting from lower foreign exchange swap activity inTreasury . Other operating income of$145.5 million in 2019 increased 14% from$127.5 million in 2018, primarily due to income related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year impairment of a community development equity investment previously held at cost, partially offset by a charge related to the decision made in 2019 to sell substantially all of the lease portfolio. Net interest income on a fully taxable equivalent (FTE) basis of$1.71 billion in 2019, increased$46.8 million , or 3%, from$1.66 billion in 2018, due to an increased net interest margin, partially offset by lower levels of average earning assets. The net interest margin on an FTE basis increased to 1.60% in 2019 from 1.46% in 2018, primarily due to higher short-term interest rates and the impact of lower foreign exchange swap activity. The provision for credit losses in each of 2019 and 2018 was a credit provision of$14.5 million . The current-year credit provision reflected a decrease in the inherent reserve related to the residential real estate portfolio due to a reduction in outstanding loans and improved credit quality and reductions to the specific reserve related to the commercial and institutional and residential real estate portfolios, partially offset by an increase in the inherent reserve related to the private client portfolio due to an increase in outstanding loans and lower credit quality. The prior-year credit provision primarily reflected reductions in outstanding loans and undrawn loan commitments and standby letters of credit and improved credit quality across the portfolio. This was partially offset by increases in specific reserves primarily related to the commercial and institutional portfolio. Loans and leases of$31.4 billion as ofDecember 31, 2019 decreased from$32.5 billion as ofDecember 31, 2018 . Net recoveries for the year endedDecember 31, 2019 were$0.7 million , compared to net charge-offs of$1.1 million for the year endedDecember 31, 2018 . Nonperforming assets decreased to$86.8 million as ofDecember 31, 2019 from$117.7 million as ofDecember 31, 2018 . Noninterest expense of$4.14 billion in 2019 increased$126.6 million , or 3%, from$4.02 billion in 2018, primarily reflecting increased compensation, outside services, equipment and software expense, and occupancy expense. 32 2019 Annual Report |Northern Trust Corporation
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The provision for income taxes in 2019 totaled$451.9 million , representing an effective tax rate of 23.2%. The provision for income taxes in 2018 totaled$401.4 million , representing an effective tax rate of 20.5%. The increase in the provision for income taxes was primarily attributable to higherU.S. taxes payable on the income of the Corporation's non-U.S. branches in 2019 as well as income tax benefits recorded in 2018 associated with the timing of tax deductions for software development-related expenses and the implementation of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017.Northern Trust continued to maintain a strong capital position during 2019, with all capital ratios exceeding those required for classification as "well-capitalized" under federal bank regulatory capital requirements. Total stockholders' equity increased 6% from$10.5 billion in 2018 to$11.1 billion at year-end. During 2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Non-Cumulative Perpetual Preferred Stock for proceeds of$391.4 million , net of underwriting discounts, commissions, and other issuance costs. These proceeds were subsequently used to fund the redemption of all outstanding shares of the Corporation's Series C Non-Cumulative Perpetual Preferred Stock onJanuary 2, 2020 . During the year endedDecember 31, 2019 ,Northern Trust increased its quarterly common stock dividend to$0.70 per share and repurchased 11.8 million shares of common stock, returning$1.7 billion in capital to common stockholders, compared to$1.4 billion during the year endedDecember 31, 2018 . CONSOLIDATED RESULTS OF OPERATIONS The following information summarizes our consolidated results of operations for 2019 compared to 2018. For a discussion related to the consolidated results of operations for 2018 compared to 2017, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2018 (2018 Form 10-K), which was filed with theUnited States Securities and Exchange Commission onFebruary 26, 2019 . RevenueNorthern Trust generates the majority of its revenue from noninterest income that primarily consists of trust, investment and other servicing fees. Net interest income comprises the remainder of revenue and consists of interest income generated by earning assets, net of interest expense on deposits and borrowed funds. Revenue in 2019 of$6.07 billion increased 2% from$5.96 billion in 2018. Noninterest income represented 72% and 73% of total revenue in 2019 and 2018, respectively, and totaled$4.40 billion in 2019, which increased 1% from$4.34 billion in 2018. Noninterest income in 2019 increased primarily reflecting higher trust, investment and other servicing fees and other operating income, partially offset by lower foreign exchange trading income. Trust, investment and other servicing fees of$3.85 billion in 2019 increased$98.5 million , or 3%, from$3.75 billion in 2018, primarily due to new business and favorable markets, partially offset by unfavorable currency translation and lower securities lending revenue. Foreign exchange trading income in 2019 of$250.9 million decreased$56.3 million , or 18%, compared with$307.2 million in 2018, primarily resulting from lower foreign exchange swap activity inTreasury . Other operating income of$145.5 million in 2019 increased 14% from$127.5 million in the prior year, primarily due to income related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year impairment of a community development equity investment previously held at cost, partially offset by a charge related to the decision made in 2019 to sell substantially all of the lease portfolio. Net interest income on an FTE basis in 2019 of$1.71 billion increased$46.8 million , or 3%, from$1.66 billion in 2018, due to an increased net interest margin, partially offset by lower levels of average earning assets. The net interest margin on an FTE basis increased to 1.60% in 2019 from 1.46% in 2018, primarily due to higher short-term interest rates and the impact of lower foreign exchange swap activity. Average earning assets decreased$6.6 billion , or 6%, from$113.7 billion in 2018 to$107.1 billion in 2019, primarily reflecting lower levels of short-term interest bearing deposits and loans and leases.
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional information regarding
2019 TOTAL REVENUE OF$6.07 BILLION [[Image Removed: chart-bdefc99495b75ebb8c2.jpg]] n 63% Trust, Investment and Other Servicing Fees n 28% Net Interest Income n 5% Other Noninterest Income n 4% Foreign Exchange Trading Income Noninterest Income The components of noninterest income, and a discussion of significant changes during 2019 and 2018, are provided below. TABLE 3: NONINTEREST INCOME FOR THE YEAR ENDED DECEMBER 31, CHANGE ($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017 Trust, Investment and Other Servicing Fees$ 3,852.1 $ 3,753.7 $ 3,434.3 3 % 9 %
Foreign Exchange Trading Income 250.9 307.2 209.9
(18 ) 46
Treasury Management Fees 44.5 51.8 56.4 (14 ) (8 )
Security Commissions and Trading
Income 103.6 98.3 89.6 5 10
Other Operating Income 145.5 127.5 157.5 14 (19 )
Investment Security Losses, net (1.4 ) (1.0 ) (1.6 )
N/M N/M
Total Noninterest Income $ 4,395.2 $ 4,337.5 $ 3,946.1 1 % 10 %
Trust, Investment and Other Servicing Fees
Trust , investment and other servicing fees were $3.85 billion in 2019 compared
with $3.75 billion in 2018. Trust, investment and other servicing fees are based
primarily on the market value of assets held in custody, managed and serviced;
the volume of transactions; securities lending volume and spreads; and fees for
other services rendered. Certain market value calculations on which fees are
based are performed on a monthly or quarterly basis in arrears. For a more
detailed discussion of 2019 trust, investment and other servicing fees, refer to
the "Reporting Segments and Related Information" section.
The following tables present selected market indices and the percentage changes
year over year to provide context regarding equity and fixed income market
impacts on the Corporation's results.
TABLE 4: EQUITY MARKET INDICES
DAILY AVERAGES YEAR-END
2019 2018 CHANGE 2019 2018 CHANGE
S&P 500 2,912 2,746 6 % 3,231 2,507 29 %
MSCI EAFE (
TABLE 5: FIXED INCOME MARKET INDICES
AS OF DECEMBER 31,
2019 2018 CHANGE
Barclays Capital
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSETS UNDER CUSTODY/ADMINISTRATION AND ASSETS UNDER MANAGEMENT AUC/A and assets under management form the primary drivers of our trust, investment and other servicing fees. For the purposes of disclosing AUC/A, to the extent that both custody and administration services are provided, the value of the assets is included only once. AtDecember 31, 2019 , AUC/A of$12.05 trillion increased 19% from$10.13 trillion atDecember 31, 2018 . The increased AUC/A primarily reflected favorable markets and net client inflows. Assets under custody, a component of AUC/A, of$9.23 trillion atDecember 31, 2019 , increased 22% from$7.59 trillion atDecember 31, 2018 , and included$5.89 trillion of global custody assets, compared to$4.70 trillion atDecember 31, 2018 . The increased assets under custody primarily reflected favorable markets and net client inflows. Assets under management of$1.23 trillion at the end of 2019 increased 15% from$1.07 trillion at the end of 2018. The increase primarily reflected favorable markets and net inflows. AUC/A by reporting segment were as follows: TABLE 6: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT FIVE-YEAR COMPOUND GROWTH DECEMBER 31, CHANGE RATE ($ In Billions) 2019 2018 2017 2016 2015 2019 /2018 2018 /2017 Corporate & Institutional Services$ 11,311.6 $ 9,490.5 $ 10,066.8 $ 7,987.0 $ 7,279.7 19 % (6 )% 9 % Wealth Management 738.8 634.8 655.8 554.3 517.3 16 (3 ) 7 Total Assets Under$ 12,050.4 $ 10,125.3 $ 10,722.6 $ 8,541.3 $ 7,797.0 19 % (6 )% 9 %
Custody/Administration
Assets under custody by reporting segment were as follows:
TABLE 7: ASSETS UNDER CUSTODY BY REPORTING SEGMENT
FIVE-YEAR
COMPOUND
GROWTH
DECEMBER 31, CHANGE RATE
($ In Billions) 2019 2018 2017 2016 2015 2019 /2018 2018 / 2017
Corporate & 9 %
Institutional Services $ 8,497.8 $ 6,971.0 $ 7,439.1 $ 6,176.9 $ 5,565.8 22 % (6 )%
Wealth Management 735.7 622.9 645.5 543.6 506.3 18 (4 ) 8
Total Assets Under $ 9,233.5 $ 7,593.9 $ 8,084.6 $ 6,720.5 $ 6,072.1 22 % (6 )% 9 %
Custody
Assets under custody were invested as follows:
TABLE 8: ASSETS UNDER CUSTODY BY INVESTMENT TYPE
DECEMBER 31,
2019 2018 2017 2016 2015
Equities 46 % 45 % 47 % 46 % 44 %
Fixed Income Securities 35 37 35 36 37
Cash and Other Assets 17 16 16 17 17Securities Lending Collateral 2 2 2 1 2
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Assets under management by reporting segment were as follows:
TABLE 9: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT
FIVE-YEAR
COMPOUND
GROWTH
DECEMBER 31, CHANGE RATE
($ In Billions) 2019 2018 2017 2016 2015 2019 / 2018 2018 / 2017
Corporate & 7 %
Institutional Services
16 % (9 )%
Wealth Management 313.8 278.6 289.8 248.4 227.3 13 (4 ) 7
Total Assets Under
15 % (8 )% 7 %
Management
Assets under management were invested and managed as follows: TABLE 10: ASSETS UNDER MANAGEMENT BY PRODUCT
DECEMBER 31,
2019 2018 2017 2016 2015
Equities 53 % 50 % 51 % 51 % 51 %
Fixed Income Securities 16 17 16 17 17
Cash and Other Assets 18 19 19 20 20Securities Lending Collateral 13 14 14 12 12
TABLE 11: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE
DECEMBER 31,
2019 2018 2017 2016 2015
Index 51 % 49 % 46 % 47 % 47 %
Active 37 38 41 40 40
Multi-Manager 5 5 5 5 4
Other 7 8 8 8 9
Foreign Exchange Trading Income
Northern Trust provides foreign exchange services in the normal course of
business as an integral part of its global custody services. Active management
of currency positions, within conservative limits, also contributes to foreign
exchange trading income. Foreign exchange trading income in 2019 of $250.9
million decreased $56.3 million , or 18%, compared with $307.2 million in 2018,
primarily resulting from lower foreign exchange swap activity in Treasury .
Treasury Management Fees
Treasury management fees, generated from cash and treasury management products
and services provided to clients, of $44.5 million in 2019 decreased 14%, or
$7.3 million , from $51.8 million in 2018, primarily due to an increase in the
earnings credit rate applied to client balances and lower transaction based
volumes.
Security Commissions and Trading Income
Security commissions and trading income is generated primarily from securities
brokerage services provided by Northern Trust Securities, Inc. , and totaled
$103.6 million in 2019, which increased 5%, or $5.3 million , from $98.3 million
in 2018, primarily due to higher revenue from interest rate swaps and core
brokerage, partially offset by lower transition management revenue.
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operating Income The components of other operating income include:
TABLE 12: OTHER OPERATING INCOME
FOR THE YEAR ENDED DECEMBER 31 , CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017 Loan Service Fees$ 48.0 $ 48.9 $ 50.7 (2 )% (4 )% Banking Service Fees 45.6 46.4 48.6 (2 ) (5 ) Other Income 51.9 32.2 58.2 60 (44 )
Total Other Operating Income
14 % (19 )%
Other income of$51.9 million in 2019 increased$19.7 million or 60%, from$32.2 million in 2018, primarily due to income related to a bank-owned life insurance program implemented during 2019, higher miscellaneous income, and the prior-year impairment of a community development equity investment previously held at cost, partially offset by a charge related to the decision made in 2019 to sell substantially all of the lease portfolio. Investment Security Losses, Net Net investment security losses totaled$1.4 million and$1.0 million in 2019 and 2018, respectively. Losses in 2019 and 2018 include$0.3 million and$0.5 million of charges related to the other-than-temporary impairment (OTTI) of certain Community Reinvestment Act (CRA) eligible held-to-maturity securities, respectively. Net Interest Income Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Earning assets - including federal funds sold, securities purchased under agreements to resell, interest-bearing due from banks and interest-bearing deposits with banks,Federal Reserve and other central bank deposits and other, securities, and loans and leases - are financed by a large base of interest-bearing funds that include client deposits, short-term borrowings, senior notes and long-term debt. Earning assets also are funded by net noninterest-related funds, which include demand deposits, and stockholders' equity, reduced by nonearning assets such as noninterest-bearing cash and due from banks, items in process of collection, and buildings and equipment. Net interest income is subject to variations in the level and mix of earning assets and interest-bearing funds and their relative sensitivity to interest rates. In addition, the levels of nonperforming assets and client compensating deposit balances used to pay for services impact net interest income. Net interest income stated on an FTE basis is a non-GAAP financial measure that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income. A reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis is provided on page 89.
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables present an analysis of average balances and interest rates affecting net interest income and an analysis of net interest income changes.
TABLE 13: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)
2019 2018 2017
AVERAGE AVERAGE AVERAGE
($ In Millions) INTEREST BALANCE RATE(6) INTEREST BALANCE RATE(6) INTEREST BALANCE RATE(6)
AVERAGE EARNING ASSETS
Federal Reserve and Other Central Bank
Deposits and Other(1) $ 181.7 $ 18,527.7 0.98 % $ 207.1 $ 23,899.3 0.87 % $ 155.1 $ 23,903.9 0.65 %
Interest-Bearing Due from and Deposits
with
Banks(2) 72.4 5,996.7 1.21 70.0 6,022.8 1.16 63.8 7,143.3 0.89 Federal Funds Sold and Securities Purchased under Agreements to Resell 17.9 847.8 2.11
33.3 1,498.8 2.22 27.5 1,850.2 1.48
Securities
110.4 5,296.5 2.09 108.3 5,737.1 1.89 89.4 6,342.5 1.41
Obligations of States and Political
Subdivisions 24.4 980.5 2.49 13.9 725.2 1.91 13.1 887.3 1.48
Government Sponsored Agency 583.6 22,634.1 2.58 456.0 20,682.7 2.20 283.2 17,987.0 1.57
Other(3) 381.6 21,773.3 1.75 367.5 23,136.5 1.59 253.3 19,498.9 1.30
Total Securities 1,100.0 50,684.4 2.17 945.7 50,281.5 1.88 639.0 44,715.7 1.43
Loans and Leases(4) 1,160.7 31,052.8 3.74 1,106.5 32,028.6 3.45 929.8 33,565.2 2.77
Total Earning Assets 2,532.7 107,109.4 2.36 2,362.6 113,731.0 2.08 1,815.2 111,178.3 1.63 Allowance for Credit Losses Assigned to Loans and Leases
- (111.4 ) - - (126.3 ) - - (156.8 ) -
Cash and Due from Banks and Other
Central Bank Deposits (5) - 2,393.6 - - 2,534.3 - - 2,583.1 -
Buildings and Equipment - 425.6 - - 438.5 - - 466.0 -
Client Security Settlement Receivables - 1,070.4 - - 1,002.0 - - 891.6 -
Goodwill - 682.5 - - 642.5 - 544.0 -
Other Assets - 5,981.3 - - 4,724.6 - - 4,101.2 -
Total Assets $ - $ 117,551.4 - % $ - $ 122,946.6 - % $ - $ 119,607.4 - %
AVERAGE SOURCE OF FUNDS
Deposits
Savings, Money Market, and Other $ 160.8 $ 16,577.8 0.97 % $ 82.0 $ 15,149.3 0.54 % $ 24.3 $ 15,575.6 0.16 %
Savings Certificates and Other Time 16.2 867.5 1.86
7.8 870.6 0.90 9.4 1,273.4 0.74
Non-
294.8 58,556.6 0.50 148.4 56,583.2 0.26 Total Interest-Bearing Deposits
488.9 72,330.5 0.68 384.6 74,576.5 0.52 182.1 73,432.2 0.25
Short-Term Borrowings 214.0 9,358.9 2.29 208.2 10,783.5 1.93 67.1 6,696.0 1.00
Senior Notes 72.6 2,389.1 3.04 53.4 1,704.0 3.13 46.9 1,496.9 3.13
Long-Term Debt 38.3 1,139.0 3.36 45.0 1,296.8 3.47 39.2 1,519.4 2.58
Floating Rate Capital Debt 8.2 277.6 2.98 7.5 277.6 2.72 4.9 277.5 1.75
Total Interest-Related Funds 822.0 85,495.1 0.96 698.7 88,638.4 0.79 340.2 83,422.0 0.41
Interest Rate Spread - - 1.40 - - 1.29 - - 1.22
Demand and Other Noninterest-Bearing
Deposits - 17,455.5 - - 20,526.6 - - 23,072.6 -
Other Liabilities - 3,952.4 - - 3,552.7 - - 3,132.2 -
Stockholders' Equity - 10,648.4 - - 10,228.9 - - 9,980.6 -
Total Liabilities and Stockholders'
Equity $ - $ 117,551.4 -
% $ -
$ 1,710.7 $ - 1.60 %$ 1,663.9 $ - 1.46 %$ 1,475.0 $ - 1.33 % Net Interest Income/Margin (Unadjusted)$ 1,677.9 $ - 1.57 %$ 1,622.7 $ - 1.43 %$ 1,429.2 $ - 1.29 % Net Interest Income/Margin Components (FTE Adjusted) U.S.$ 1,127.3 $ 86,071.2 1.31 %$ 1,079.9 $ 88,717.0 1.22 %$ 1,076.4 $ 90,090.3 1.19 % Non-U.S. 583.4 21,038.2 2.77 584.0 25,014.0 2.33 398.6 21,088.0 1.89 Consolidated$ 1,710.7 $ 107,109.4 1.60 %$ 1,663.9 $ 113,731.0 1.46 %$ 1,475.0 $ 111,178.3 1.33 % Note: Net Interest Income (FTE Adjusted) includes adjustments to a fully taxable equivalent basis for loans and securities. Such adjustments are based on a blended federal and state tax rate of 24.8%. Total taxable equivalent interest adjustments amounted to$32.8 million in 2019,$41.2 million in 2018 and$45.8 million in 2017. Interest revenue on cash collateral positions is reported above within interest-bearing due from and deposits with banks and within loans and leases. Interest expense on cash collateral positions is reported above within non-U.S. offices interest-bearing deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract within Other Assets and Other Liabilities, respectively. (1)Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets in the consolidated balance sheets. (2) Interest-Bearing Due from and Deposits with Banks includes interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets. (3) Other securities include certain community development investments andFederal Home Loan Bank andFederal Reserve stock, which are classified in Other Assets in the consolidated balance sheets. (4) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income. (5) Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component ofFederal Reserve and Other Central Bank Deposits as presented on the consolidated balance sheets. (6) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheets with Analysis of Net Interest Income.
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 14: CHANGES IN NET INTEREST INCOME
(INTEREST AND RATE ON A FULLY
TAXABLE EQUIVALENT BASIS) 2019/2018 CHANGE DUE TO 2018/2017 CHANGE DUE TO
AVERAGE AVERAGE
(In Millions) BALANCE RATE TOTAL BALANCE RATE TOTAL
Increase (Decrease) in Interest
Income
Money Market Assets
Federal Reserve and Other
Central Bank Deposits and Other $ (58.1 ) $ 32.7 $ (25.4 ) $ - $ 52.0 $ 52.0
Interest-Bearing Due from and
Deposits with Banks (0.3 ) 2.7 2.4 (6.7 ) 12.9 6.2
Federal Funds Sold and
Securities Purchased under
Agreements to Resell (13.9 ) (1.5 ) (15.4 ) (3.5 ) 9.3 5.8
Securities
U.S. Government (5.4 ) 7.5 2.1 (7.3 ) 26.2 18.9
Obligations of States and
Political Subdivisions 5.7 4.8 10.5 (1.4 ) 2.2 0.8
Government Sponsored Agency 45.1 82.5 127.6 47.0 125.8 172.8
Other (20.0 ) 34.1 14.1 52.0 62.2 114.2
Loans and Leases (77.9 ) 132.1 54.2 (20.5 ) 197.2 176.7
Total $ (124.8 ) $ 294.9 $ 170.1 $ 59.6 $ 487.8 $ 547.4
Deposits
Savings and Money Market $ 8.3 $ 70.5 $ 78.8 $ (0.7 ) $ 58.4 $ 57.7
Savings Certificates and Other
Time - 8.4 8.4 (4.8 ) 3.2 (1.6 )
Non-U.S. Offices Time (13.9 ) 31.0 17.1 5.3 141.1 146.4
Short-Term Borrowings (14.1 ) 19.9 5.8 55.9 85.2 141.1
Senior Notes 20.6 (1.4 ) 19.2 6.5 - 6.5
Subordinated Notes
Long-Term Debt (5.5 ) (1.2 ) (6.7 ) (5.8 ) 11.6 5.8
Floating Rate Capital Debt - 0.7 0.7 - 2.6 2.6
Total $ (4.6 ) $ 127.9 $ 123.3 $ 56.4 $ 302.1 $ 358.5
(Decrease) Increase in Net
Interest Income $ (120.2 ) $ 167.0 $ 46.8 $
3.2
Note: Changes not due solely to average balance changes or rate changes are allocated proportionately to average balance and rate based on their relative absolute magnitudes.
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
An analysis of net interest income on an FTE basis, major balance sheet components impacting net interest income and related ratios are provided below.
TABLE 15: ANALYSIS OF NET INTEREST INCOME (FTE)
FOR THE YEAR ENDED DECEMBER 31, CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017
Interest Income - GAAP $ 2,499.9 $ 2,321.4 $ 1,769.4 8 % 31 %
FTE Adjustment 32.8 41.2 45.8 (20 ) (10 )
Interest Income - FTE 2,532.7 2,362.6 1,815.2 7 30
Interest Expense 822.0 698.7 340.2 18 105
Net Interest Income - FTE Adjusted 1,710.7 1,663.9 1,475.0
3 13
Net Interest Income - GAAP 1,677.9 1,622.7 1,429.2 3 14
AVERAGE BALANCE
Earning Assets $ 107,109.4 $ 113,731.0 $ 111,178.3 (6 )% 2 %
Interest-Related Funds 85,495.1 88,638.4 83,422.0 (4 ) 6Net Noninterest-Related Funds 21,614.3 25,092.6 27,756.3
(14 ) (10 )
CHANGE IN PERCENTAGE
AVERAGE RATE
Earning Assets 2.36 % 2.08 % 1.63 % 0.28 0.45
Interest-Related Funds 0.96 0.79 0.41 0.17 0.38
Interest Rate Spread 1.40 1.29 1.22 0.11 0.07
Total Source of Funds 0.77 0.62 0.31 0.15 0.31
Net Interest Margin - GAAP 1.57 % 1.43 % 1.29 % 0.14 0.14
Net Interest Margin - FTE 1.60 % 1.46 % 1.33 % 0.14 0.13
Refer to pages 38 and 39 for additional analysis of net interest income.
Net interest income in 2019 of$1.68 billion increased$55.2 million , or 3%, from$1.62 billion in 2018. Net interest income on an FTE basis for 2019 was$1.71 billion , which increased$46.8 million , or 3%, from$1.66 billion in 2018, due to an increased net interest margin, partially offset by lower levels of average earning assets. Average earning assets decreased$6.6 billion , or 6%, to$107.1 billion in 2019 from$113.7 billion in 2018. The net interest margin in 2019 was 1.57%, which increased from 1.43% in 2018. The net interest margin on an FTE basis in 2019 was 1.60%, which increased from 1.46% in 2018. Average earning assets decreased primarily reflecting lower levels of short-term interest bearing deposits and loans and leases.Federal Reserve and Other Central Bank Deposits and Other averaged$18.5 billion in 2019, which decreased$5.4 billion , or 22%, from$23.9 billion in 2018. Interest-Bearing Due From and Deposits with Banks averaged$6.0 billion in each of 2019 and 2018. Loans and leases averaged$31.1 billion , which decreased$975.8 million , or 3%, from$32.0 billion in 2018. Securities, inclusive ofFederal Reserve andFederal Home Loan Bank stock and certain community development investments which are classified in Other Assets in the consolidated balance sheets, averaged$50.7 billion , which increased$402.9 million , or 1%, from$50.3 billion in 2018. Funding of the balance sheet reflected lower levels of non-U.S. interest-bearing deposits and demand and other noninterest-bearing deposits, partially offset by increases inU.S. interest-bearing deposits. Average interest-bearing deposits decreased$2.3 billion , or 3%, to$72.3 billion in 2019 from$74.6 billion in 2018. Average demand and other noninterest-bearing deposits decreased$3.0 billion , or 15%, to$17.5 billion in 2019 from$20.5 billion in 2018. Stockholders' equity averaged$10.6 billion in 2019, compared with$10.2 billion in 2018. The increased stockholders' equity of$419.5 million , or 4%, was primarily attributable to current-year earnings, the issuance of preferred stock, and accumulated other comprehensive income since the prior-year period, partially offset by the repurchase of common stock pursuant to the Corporation's share repurchase program and dividend declarations. During the year endedDecember 31, 2019 , the Corporation increased its quarterly common stock dividend by 27% to$0.70 per share and repurchased 11.8 million shares, returning$1.7 billion in capital to common stockholders, compared to$1.4 billion in 2018. Under the Corporation's 2019 capital plan, which was reviewed without objection by theFederal Reserve , the Corporation may repurchase up to$828.5 million of common stock afterDecember 31, 2019 , throughJune 30, 2020 . 40 2019 Annual Report |Northern Trust Corporation
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Credit Losses The provision for credit losses was a credit provision of$14.5 million in each of 2019 and 2018. The current-year credit provision primarily reflected a decrease in the inherent reserve related to the residential real estate portfolio due to a reduction in outstanding loans and improved credit quality and reductions to the specific reserve related to the commercial and institutional and residential real estate portfolios, partially offset by an increase in the inherent reserve related to the private client portfolio due to an increase in outstanding loans and lower credit quality. The prior-year credit provision primarily reflected reductions in outstanding loans and undrawn loan commitments and standby letters of credit and improved credit quality across the portfolio. This was partially offset by increases in specific reserves primarily related to the commercial and institutional portfolio. Nonperforming assets atDecember 31, 2019 decreased 26% from the prior year-end. Residential real estate, commercial and institutional, commercial real estate, private client, and non-U.S. loans accounted for 85%, 9%, 4%, 1%, and 1% respectively, of nonperforming loans and leases atDecember 31, 2019 . For further discussion of the allowance and provision for credit losses, refer to the "Asset Quality" section. Noninterest Expense Noninterest expense for 2019 of$4.14 billion increased$126.6 million , or 3%, from$4.02 billion in 2018, primarily reflecting increased compensation, outside services, equipment and software expense, and occupancy expense.
The components of noninterest expense and a discussion of significant changes during 2019 and 2018 are provided below.
TABLE 16: NONINTEREST EXPENSE
FOR THE YEAR ENDED DECEMBER 31, CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017
Compensation $ 1,859.0 $ 1,806.9 $ 1,733.7 3 % 4 %
Employee Benefits 355.2 356.7 319.9 - 12
Outside Services 774.5 739.4 668.4 5 11
Equipment and Software 612.1 582.2 524.0 5 11
Occupancy 212.9 201.1 191.8 6 5
Other Operating Expense 329.8 330.6 331.6 - -
Total Noninterest Expense $ 4,143.5 $ 4,016.9 $ 3,769.4 3 % 7 %
Compensation
Compensation expense, the largest component of noninterest expense, of $1.86
billion in 2019 increased $52.1 million , or 3%, compared to $1.81 billion in
2018, primarily reflecting higher salary expense driven by staff growth and base
pay adjustments, partially offset by lower incentive expense. Staff on a
full-time equivalent basis totaled approximately 19,800 at December 31, 2019 , up
5% from approximately 18,800 at December 31, 2018 .
Employee Benefits
Employee benefits expense of $355.2 million in 2019 decreased slightly from
$356.7 million in 2018, primarily reflecting lower retirement plan and medical
expenses, partially offset by higher payroll taxes.
Outside Services
Outside services expense of $774.5 million in 2019 increased $35.1 million , or
5%, from $739.4 million in 2018, primarily due to higher technical services
costs as well as consulting and legal services, partially offset by lower
sub-custodian expenses.
Equipment and Software
Equipment and software expense of $612.1 million in 2019 increased $29.9
million , or 5%, compared to $582.2 million in 2018, primarily reflecting higher
software support costs, software disposition, depreciation and amortization, and
maintenance costs.
Occupancy
Occupancy expense of
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operating Expense Other operating expense of$329.8 million in 2019 decreased slightly from$330.6 million in 2018. The components of other operating expense are as follows:
TABLE 17: OTHER OPERATING EXPENSE
FOR THE YEAR ENDED DECEMBER 31, CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017
Business Promotion $ 104.2 $ 98.3 $ 95.4 6 % 3 %
FDIC Insurance Premiums 9.9 27.4 34.7 (64 ) (21 )
Staff Related 42.8 33.6 42.8 27 (22 )
Other Intangibles Amortization 16.6 17.4 11.4 (4 ) 52
Other Expenses 156.3 153.9 147.3 2 4
Total Other Operating Expense
- % - %
Other operating expense in the current year compared to the prior year primarily
reflects decreased
Provision for Income Taxes Provisions for income tax and effective tax rates are impacted by levels of pre-tax income as well as nonrecurring items such as the resolution of tax matters and changes in income tax rates and tax laws. The 2019 provision for income taxes was$451.9 million , representing an effective rate of 23.2%. This compares with a provision for income taxes of$401.4 million and an effective rate of 20.5% in 2018. The increase in the provision for income taxes was primarily attributable to higherU.S. taxes payable on the income of the Corporation's non-U.S. branches in 2019 as well as income tax benefits recorded in 2018 associated with the timing of tax deductions for software development-related expenses and the implementation of the Tax Cuts and Jobs Act (TCJA) enacted in the fourth quarter of 2017. The TCJA was enacted onDecember 22, 2017 , and reduced theU.S. federal corporate tax rate from 35% to 21%. It also required companies to pay a mandatory deemed repatriation tax on earnings of foreign subsidiaries that were previously tax deferred. AtDecember 31, 2017 ,Northern Trust made a reasonable estimate as to the impact of the TCJA. During 2018,Northern Trust completed the related calculations and additional analyses associated with the implementation of the TCJA, resulting in a number of adjustments to the 2018 tax provision as follows: TABLE 18: IMPACT OF TAX CUTS AND JOBS ACT (In Millions) 2018 2017
Federal Taxes on Mandatory Deemed Repatriation
(0.7 ) 6.9
Provision (Benefit) for Income Taxes $ (4.8 ) $ (53.1 )
Adjustments in the above table included a tax benefit of $16.8 million resulting
from an adjustment to the Corporation's 2017 income tax provision for mandatory
deemed repatriation with respect to the pre-2018 earnings of its non-U.S.
subsidiaries, offset by a $12.7 million net provision recorded associated with
the repricing of deferred taxes.
As a result of the TCJA, earnings which had been reinvested indefinitely outside
of the United States were deemed to have been repatriated to the United States
and were subject to a repatriation tax. As of December 31, 2018 , Northern
Trust's repatriation tax was $133.2 million .
See Note 22, "Income Taxes," to the consolidated financial statements provided
in Item 8, "Financial Statements and Supplementary Data," for more information
on income taxes.
REPORTING SEGMENTS AND RELATED INFORMATION
The following information summarizes our results of operations by reporting
segment for 2019 compared to 2018. For a discussion related to the results of
operations by reporting segment for 2018 compared to 2017, refer to Part II,
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations in our 2018 Form 10-K, which was filed with the United States
Securities and Exchange Commission on February 26, 2019 .
42 2019 Annual Report | Northern Trust Corporation --------------------------------------------------------------------------------
Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management. Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Equity is allocated to the reporting segments based on a variety of factors including, but not limited to, risk, regulatory considerations, and internal metrics. Allocations of capital and certain corporate expense may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements provided in Item 8, "Financial Statements and Supplementary Data." Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between reporting segments.Northern Trust's presentations are not necessarily consistent with similar information for other financial institutions. EffectiveJanuary 1, 2019 ,Northern Trust implemented several enhancements to its FTP methodology, including the allocation of contingent liquidity charges to C&IS and Wealth Management client instruments and products. These methodology enhancements affect the results of each reporting segment. Due to the lack of historical information, segment results for periods ended prior toJanuary 1, 2019 have not been revised to reflect the methodology enhancements. Also effectiveJanuary 1, 2019 , all revenues, expenses and average assets are allocated to C&IS and Wealth Management, with the exception of non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments not directly attributable to a specific reporting segment. For reporting periods ended prior toJanuary 1, 2019 , income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive-level compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and were reported inTreasury and Other. Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis. The following table reflects the earnings and average assets for the Corporation.
TABLE 19: CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED DECEMBER 31, CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017
Noninterest Income
Trust, Investment and Other
Servicing Fees $ 3,852.1 $ 3,753.7 $ 3,434.3 3 % 9 %Foreign Exchange Trading Income 250.9 307.2 209.9
(18 ) 46
Other Noninterest Income 292.2 276.6 301.9 6 (8 )
Total Noninterest Income 4,395.2 4,337.5 3,946.1 1 10
Net Interest Income (1) 1,710.7 1,663.9 1,475.0 3 13
Revenue (1) 6,105.9 6,001.4 5,421.1 2 11
Provision for Credit Losses (14.5 ) (14.5 ) (28.0 ) N/M N/M
Noninterest Expense 4,143.5 4,016.9 3,769.4 3 7
Income before Income Taxes (1) 1,976.9 1,999.0 1,679.7
(1 ) 19
Provision for Income Taxes (1) 484.7 442.6 480.7
10 (8 )
Net Income $ 1,492.2 $ 1,556.4 $ 1,199.0 (4 )% 30 %
Average Assets $ 117,551.4 $ 122,946.6 $ 119,607.4 (4 )% 3 %
(1) Stated on an FTE basis. The consolidated figures include
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Corporate & Institutional Services C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking and cash management. Client relationships are managed through the Bank and the Bank's and the Corporation's other subsidiaries, including support from locations inNorth America ,Europe , theMiddle East , and theAsia-Pacific region . The following table summarizes the results of operations of C&IS for the years endedDecember 31, 2019 , 2018, and 2017 on a management-reporting basis.
TABLE 20: C&IS RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017
Noninterest Income
Trust, Investment and Other
Servicing Fees $ 2,211.5 $ 2,173.1 $ 1,984.6 2 % 9 %Foreign Exchange Trading Income 232.2 233.4 197.9
(1 ) 18
Other Noninterest Income 178.2 183.0 176.1 (3 ) 4
Total Noninterest Income 2,621.9 2,589.5 2,358.6 1 10
Net Interest Income (1) 918.7 992.2 733.8 (7 ) 35
Revenue (1) 3,540.6 3,581.7 3,092.4 (1 ) 16
Provision for Credit Losses 1.9 1.9 3.4 - (44 )
Noninterest Expense 2,605.5 2,421.4 2,194.5 8 10
Income before Income Taxes (1) 933.2 1,158.4 894.5
(19 ) 30
Provision for Income Taxes (1) 219.4 255.3 279.5
(14 ) (9 )
Net Income $ 713.8 $ 903.1 $ 615.0 (21 )% 47 %
Percentage of Consolidated Net
Income 48 % 58 % 51 %
Average Assets $ 87,557.1 $ 82,996.5 $ 80,105.6 5 % 4 %
(1) Stated on an FTE basis.
C&
C&IS Trust , Investment and Other Servicing Fees C&IS trust, investment and other servicing fees are primarily attributable to services related to custody, fund administration, investment management, and securities lending. Custody and fund administration fees are driven primarily by values of client assets under custody/administration, transaction volumes, and number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment management fees, which are based generally on client assets under management, are based primarily on market values throughout a period. Securities lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. The other services fee category in C&IS includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee. 44 2019 Annual Report |Northern Trust Corporation
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Provided below are the components of C&
TABLE 21: C&IS TRUST, INVESTMENT AND OTHER SERVICING FEES
FOR THE YEAR ENDED DECEMBER 31 , CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017 Custody and Fund Administration$ 1,549.3 $ 1,501.1 $ 1,342.1 3 % 12 % Investment Management 445.7 436.8 403.5 2 8 Securities Lending 87.2 102.0 96.4 (15 ) 6 Other 129.3 133.2 142.6 (3 ) (7 )Total Trust , Investment and Other Servicing Fees$ 2,211.5 $ 2,173.1 $ 1,984.6 2 % 10 %
2019 C&IS TRUST, INVESTMENT, AND OTHER SERVICING FEES
[[Image Removed: chart-999274a84dd359beb1c.jpg]]
n 70%
n 20% Investment Management n 6% Other Services n 4% Securities Lending Custody and fund administration fees, the largest component of trust, investment and other servicing fees, increased$48.2 million , or 3%, from 2018 to 2019 primarily due to new business, partially offset by unfavorable currency translation and markets. Fees from investment management increased$8.9 million , or 2%, from 2018 to 2019 primarily due to new business and favorable markets. Securities lending revenue decreased$14.8 million , or 15% from 2018 to 2019, primarily driven by lower spreads and loan volumes. Provided below is a breakdown of the C&IS assets under custody and under management.
TABLE 22: C&IS ASSETS UNDER CUSTODY
DECEMBER 31, CHANGE
($ In Billions) 2019 2018 2017 2019 / 2018 2018 / 2017
North America $ 4,516.0 $ 3,693.4 $ 3,972.1 22 % (7 )%
Europe, Middle East, and Africa 2,998.5 2,538.6 2,602.4 18 (2 )
Asia Pacific 820.3 589.2 697.1 39 (15 )
Securities Lending 163.0 149.8 167.5 9 (11 )
Total Assets Under Custody $ 8,497.8 $ 6,971.0 $ 7,439.1 22 % (6 )%
2019 Annual Report | Northern Trust Corporation 45
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2019 C&IS ASSETS UNDER CUSTODY [[Image Removed: chart-69ece86afc0a56e5b12.jpg]] n 53%North America n 35%Europe ,Middle East , andAfrica n 10%Asia Pacific n 2% Securities Lending
TABLE 23: C&IS ASSETS UNDER MANAGEMENT
DECEMBER 31, CHANGE
($ In Billions) 2019 2018 2017 2019 / 2018 2018 / 2017
North America $ 588.4 $ 493.1 $ 533.5 19 % (8 )%
Europe, Middle East, and Africa 125.2 113.3 127.3 11 (11 )
Asia Pacific 40.9 34.6 42.9 18 (19 )
Securities Lending 163.0 149.8 167.5 9 (11 )
Total Assets Under Management $ 917.5 $ 790.8 $ 871.2 16 % (9 )%
2019 C&IS ASSETS UNDER MANAGEMENT
[[Image Removed: chart-2d8fe66c83e950e09cd.jpg]]
n 64% North America
n 18% Securities Lending
n 14% Europe , Middle East , and Africa
n 4% Asia Pacific 2019 C&IS ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE [[Image Removed: chart-509823f5b6005b5ea05.jpg]] n 53% Equities
n 18% Securities Lending n 17% Cash and Other Assets n 12%Fixed Income Securities C&IS assets under custody of$8.50 trillion atDecember 31, 2019 , increased 22% from$6.97 trillion atDecember 31, 2018 . Assets under management increased 16% to$917.5 billion atDecember 31, 2019 , from$790.8 billion atDecember 31, 2018 . 46 2019 Annual Report |Northern Trust Corporation
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed byNorthern Trust and are included in assets under custody and under management. This securities lending collateral totaled$163.0 billion and$149.8 billion atDecember 31, 2019 and 2018, respectively. C&IS Foreign Exchange Trading Income Foreign exchange trading income of$232.2 million in 2019, decreased$1.2 million , or 1%, from$233.4 million in 2018, primarily due to lower foreign exchange swap activity inTreasury , partially offset by the enhanced segment reporting methodology beginningJanuary 1, 2019 . C&IS Other Noninterest Income Other noninterest income for 2019 of$178.2 million decreased$4.8 million , or 3%, from$183.0 million in 2018, primarily due to a decrease in other operating income and treasury management fees, partially offset by the enhanced segment reporting methodology beginningJanuary 1, 2019 . C&IS Net Interest Income Net interest income on an FTE basis, inclusive of the FTP methodology enhancements described above, decreased$73.5 million , or 7%, in 2019 to$918.7 million from$992.2 million in 2018, primarily reflecting higher charges due to the FTP methodology enhancements and a decrease in the net interest margin, partially offset by an increase in average earning assets. Net interest margin on an FTE basis decreased to 1.26% from 1.29%. Average earning assets of$79.1 billion , increased$2.2 billion , or 3%, from$76.9 billion in the prior year. The earning assets in C&IS consisted primarily of intercompany assets and loans and leases. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged$54.9 billion in 2019, increased from$54.2 billion in 2018. C&IS Provision for Credit Losses The provision for credit losses was a provision of$1.9 million for both 2019 and 2018. The 2019 provision reflected an increase to the inherent reserve for outstanding loans due to lower credit quality, partially offset by a decrease to the specific reserve related to standby letters of credit and outstanding loans. The 2018 provision reflected increases to the specific reserve related to standby letters of credit, partially offset by reductions in standby letters of credit and undrawn loan commitments and improved credit quality resulting in a reduction of the inherent allowance. C&IS Noninterest Expense Total C&IS noninterest expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, of$2.61 billion in 2019, increased$184.1 million , or 8%, from$2.42 billion in 2018. The increase primarily reflects higher expense allocations, including those due to the enhanced segment reporting methodology beginningJanuary 1, 2019 , and higher compensation expense, partially offset by lower other operating expenses. Wealth Management Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. The business also includes the Global Family Office, which provides customized services to meet the complex financial needs of individuals and family offices inthe United States and throughout the world with assets typically exceeding$200 million . In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking. Wealth Management is one of the largest providers of advisory services inthe United States with assets under custody/administration, assets under custody, and assets under management of$738.8 billion ,$735.7 billion , and$313.8 billion , respectively, atDecember 31, 2019 . Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states andWashington, D.C. , as well as offices inLondon ,Guernsey , andAbu Dhabi .
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the results of operations of Wealth Management for the years endedDecember 31, 2019 , 2018, and 2017 on a management-reporting basis.
TABLE 24: WEALTH MANAGEMENT RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017
Noninterest Income
Trust, Investment and Other
Servicing Fees $ 1,640.6 $ 1,580.6 $ 1,449.7 4 % 9 %Foreign Exchange Trading Income 18.7 4.2 3.1
N/M 35
Other Noninterest Income 131.1 102.7 103.9 28 (1 )
Total Noninterest Income 1,790.4 1,687.5 1,556.7 6 8
Net Interest Income (1) 792.0 816.5 736.2 (3 ) 11
Revenue (1) 2,582.4 2,504.0 2,292.9 3 9
Provision for Credit Losses (16.4 ) (16.4 ) (31.4 ) N/M N/M
Noninterest Expense 1,531.6 1,460.0 1,405.3 5 4Income before Income Taxes (1) 1,067.2 1,060.4 919.0
1 15
Provision for Income Taxes (1) 271.1 262.1 347.2
3 (25 )
Net Income $ 796.1 $ 798.3 $ 571.8 - % 40 %
Percentage of Consolidated Net
Income 53 % 51 % 48 %
Average Assets $ 29,994.3 $ 26,163.7 $ 26,599.9 15 % (2 )%
(1) Stated on an FTE basis.
Wealth Management net income decreased slightly in 2019, primarily reflecting higher noninterest expense and lower net interest income, partially offset by higher trust, investment and other servicing fees, other noninterest income, and foreign exchange trading income.
TABLE 25: WEALTH MANAGEMENT TRUST, INVESTMENT AND OTHER SERVICING FEES
FOR THE YEAR ENDED DECEMBER 31, CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017
Central $ 619.3 $ 607.8 $ 575.5 2 % 6 %
East 422.2 401.7 356.2 5 13
West 330.9 320.0 291.7 3 10
Global Family Office 268.2 251.1 226.3 7 11
Total Trust , Investment and
Other Servicing Fees $ 1,640.6 $ 1,580.6 $ 1,449.7 4 % 9 %
2019 WEALTH MANAGEMENT FEES
[[Image Removed: chart-a18dc5bf54a95478b70.jpg]]
n 38% Central
n 26% East
n 20% West
n 16% Global Family Office
48 2019 Annual Report | Northern Trust Corporation
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TABLE 26: WEALTH MANAGEMENT ASSETS UNDER CUSTODY
DECEMBER 31, CHANGE
($ In Billions) 2019 2018 2017 2019 / 2018 2018 / 2017
Global Family Office $ 474.1 $ 405.5 $ 422.9 17 % (4 )%
Central 115.1 88.2 94.8 31 (7 )
East 81.7 72.7 70.5 12 3
West 64.8 56.5 57.3 15 (1 )
Total Assets Under Custody $ 735.7 $ 622.9 $ 645.5 18 % (4 )%
2019 WEALTH MANAGEMENT ASSETS UNDER CUSTODY [[Image Removed: chart-464fb0822ba256c6a4d.jpg]] n 64% Global Family Office n 16% Central n 11% East n 9% West
TABLE 27: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
DECEMBER 31, CHANGE
($ In Billions) 2019 2018 2017 2019 / 2018 2018 / 2017
Central $ 104.4 $ 96.2 $ 102.1 9 % (6 )%
Global Family Office 94.2 83.5 87.1 13 (4 )
East 66.8 57.0 57.0 17 -
West 48.4 41.9 43.6 16 (4 )
Total Assets Under Management $ 313.8 $ 278.6 $ 289.8 13 % (4 )%
2019 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
[[Image Removed: chart-e339603e71175933909.jpg]]
n 33% Central
n 30% Global Family Office
n 21% East
n 16% West
2019 Annual Report | Northern Trust Corporation 49
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019 WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE [[Image Removed: chart-b9aa39afdafe50f9bd1.jpg]] n 53% Equities
n 25%Fixed Income Securities n 22% Cash and Other Assets The Wealth Management regions shown above are comprised of the following: Central includesIllinois ,Michigan ,Minnesota ,Missouri ,Ohio andWisconsin ; East includesConnecticut ,Delaware ,Florida ,Georgia ,Massachusetts ,New York ,Pennsylvania , andWashington, D.C. ; West includesArizona ,California ,Colorado ,Nevada ,Texas andWashington . Global Family Office provides specialized asset management, investment consulting, global custody, fiduciary, and private banking services to ultra-wealthy domestic and international clients. Wealth Management fee income is calculated primarily based on market values. Wealth Management trust, investment and other servicing fees of$1.64 billion in 2019 increased$60.0 million , or 4%, from$1.58 billion in 2018. The results in 2019 benefited from new business and favorable markets. AtDecember 31, 2019 , assets under custody in Wealth Management were$735.7 billion compared with$622.9 billion atDecember 31, 2018 . Assets under management were$313.8 billion atDecember 31, 2019 compared to$278.6 billion at the previous year end. Wealth Management Foreign Exchange Trading Income Foreign exchange trading income of$18.7 million in 2019 increased$14.5 million from$4.2 million in 2018, primarily due to the enhanced segment reporting methodology beginningJanuary 1, 2019 . Wealth Management Other Noninterest Income Other noninterest income for 2019 of$131.1 million , increased$28.4 million , or 28%, from$102.7 million in 2018, primarily due to the enhanced segment reporting methodology beginningJanuary 1, 2019 . Wealth Management Net Interest Income Net interest income on an FTE basis, inclusive of the FTP methodology enhancements described above, of$792.0 million for 2019 decreased$24.5 million , or 3%, from$816.5 million in 2018, primarily attributable to a decrease in the net interest margin, partially offset by an increase in earning assets. Net interest margin on an FTE basis decreased to 3.06% from 3.16%, reflecting lower yields on earning assets. Average earning assets of$28.0 billion in 2019, increased$2.1 billion , or 8%, in the current year from$25.9 billion in 2018. Wealth Management Provision for Credit Losses The provision for credit losses was a credit provision of$16.4 million in both 2019 and 2018. The 2019 credit provision was primarily driven by a reduction in outstanding loans and improved credit quality in the residential real estate portfolio, which resulted in a reduction of the inherent allowance. The 2018 credit provision was primarily driven by improved credit quality and reductions in outstanding loans, standby letters of credit, and undrawn commitments, which resulted in a reduction of the inherent allowance. Wealth Management Noninterest Expense Total noninterest expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, of$1.53 billion in 2019 increased$71.6 million , or 5%, from$1.46 billion in the prior year. The increase primarily reflects higher expense allocations, including those due to the enhanced segment reporting methodology beginningJanuary 1, 2019 , increased compensation expense and outside services expense, partially offset by lower other operating expense. 50 2019 Annual Report |Northern Trust Corporation
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Treasury and Other BeginningJanuary 1, 2019 ,Treasury and Other includes income and expenses associated with non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments. For reporting periods ended prior toJanuary 1, 2019 , income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive-level compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and are reported inTreasury and Other.Treasury and Other information for 2019 is not directly comparable to prior period information due to the enhanced segment reporting methodology beginningJanuary 1, 2019 . The following table summarizes the results of operations ofTreasury and Other for the years endedDecember 31, 2019 , 2018, and 2017 on a management-reporting basis.
TABLE 28: TREASURY AND OTHER RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, CHANGE
($ In Millions) 2019 2018 2017 2019 / 2018 2018 / 2017
Noninterest Income $ (17.1 ) $ 60.5 $ 30.8 N/M 96 %
Net Interest Income (1) - (144.8 ) 5.0 N/M N/M
Revenue (1) (17.1 ) (84.3 ) 35.8 N/M N/M
Noninterest Expense 6.4 135.5 169.6 N/M (20 )
Income (Loss) before Income
Taxes (1) (23.5 ) (219.8 ) (133.8 ) N/M N/M
Provision (Benefit) for Income
Taxes (1) (5.8 ) (74.8 ) (146.0 ) N/M N/M
Net Income $ (17.7 ) $ (145.0 ) $ 12.2 N/M N/M
Percentage of Consolidated Net
Income (1 )% (9 )% 1 %
Average Assets $ - $ 13,786.4 $ 12,901.9 N/M 7 %
(1) Stated on an FTE basis.
Treasury and Other noninterest income in 2019 was an expense of $17.1 million ,
which decreased from $60.5 million in 2018 primarily due to the enhanced segment
reporting methodology beginning January 1, 2019 .
Beginning January 1, 2019 , net interest income and average assets are allocated
to the C&IS and Wealth Management reporting segments. Accordingly, net interest
income on an FTE basis in 2019 was zero, compared to net interest expense of
$144.8 million in 2018.
Treasury and Other noninterest expense in 2019 of $6.4 million decreased $129.1
million from $135.5 million in 2018 due to the enhanced segment reporting
methodology beginning January 1, 2019 .
Asset Management
Asset Management, through the Corporation's various subsidiaries, supports the
C&IS and Wealth Management reporting segments by providing a broad range of
asset management and related services and other products to clients around the
world. Investment solutions are delivered through separately managed accounts,
bank common and collective funds, registered investment companies, exchange
traded funds, non-U.S. collective investment funds, and unregistered private
investment funds. Asset Management's capabilities include active and passive
equity; active and passive fixed income; cash management; alternative asset
classes (such as private equity and hedge funds of funds); and multi-manager
advisory services and products. Asset Management's activities also include
overlay services and other risk management services. Asset Management operates
internationally through subsidiaries and distribution arrangements and its
revenue and expense are allocated fully to C&IS and Wealth Management.
2019 Annual Report |
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AtDecember 31, 2019 ,Northern Trust managed$1.23 trillion in assets for personal and institutional clients, including$917.5 billion for C&IS clients and$313.8 billion for Wealth Management clients. The following table presents consolidated assets under management as ofDecember 31, 2019 , 2018 and 2017 by investment type.
TABLE 29: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
DECEMBER 31, CHANGE
($ In Billions) 2019 2018 2017 2019 / 2018 2018 / 2017
Equities $ 650.8 $ 534.2 $ 592.3 22 % (10 )%
Fixed Income Securities 193.8 178.3 183.5 9 (3 )
Cash and Other Assets 223.6 207.0 217.5 8 (5 )
Securities Lending Collateral 163.1 149.9 167.7 9 (11 )
Total Assets Under Management $ 1,231.3 $ 1,069.4 $ 1,161.0 15 % (8 )%
Assets under management increased$161.9 billion , or 15%, to$1.23 trillion at year-end 2019 from$1.07 trillion at year-end 2018. The increase primarily reflected favorable markets and net inflows. The following table presents activity in consolidated assets under management by product during the years endedDecember 31, 2019 , 2018 and 2017. TABLE 30: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT ($ In Billions) 2019 2018 2017 Balance as of January 1,$ 1,069.4 $ 1,161.0 $ 942.4 Inflows by Product Equities 193.6 174.7 192.1 Fixed Income Securities 48.1 63.7 68.1 Cash and Other Assets 551.6 484.3 407.9 Securities Lending Collateral 260.5 165.6 132.4 Total Inflows 1,053.8 888.3 800.5 Outflows by Product Equities (205.5 ) (179.2 ) (185.7 ) Fixed Income Securities (49.7 ) (72.5 ) (57.2 ) Cash and Other Assets (541.0 ) (487.4 ) (384.0 ) Securities Lending Collateral (247.3 ) (183.3 ) (76.7 ) Total Outflows (1,043.5 ) (922.4 ) (703.6 ) Net Inflows (Outflows) 10.3 (34.1 ) 96.9
Market Performance, Currency and Other
Market Performance and Other 151.1 (49.3 ) 111.6
Currency 0.5 (8.2 ) 10.1
Total Market Performance, Currency and Other 151.6 (57.5 ) 121.7 Balance as of December 31,$ 1,231.3 $ 1,069.4 $ 1,161.0 CONSOLIDATED BALANCE SHEET REVIEW Total assets were$136.8 billion and$132.2 billion atDecember 31, 2019 and 2018, respectively, and averaged$117.6 billion in 2019 compared with$122.9 billion in 2018. Average balances are considered to be a better measure of balance sheet trends, as period-end balances can be impacted by the timing of deposit and withdrawal activity involving large client balances. Interest-bearing client deposits totaled$82.8 billion and$81.8 billion atDecember 31, 2019 and 2018, respectively, and averaged$72.3 billion in 2019 compared to$74.6 billion in 2018. Noninterest-bearing client deposits totaled$26.3 billion and$22.7 billion , respectively, and averaged$17.5 billion in 2019 compared with$20.5 billion in 2018. Total stockholders' equity was$11.1 billion and$10.5 billion atDecember 31, 2019 and 2018, respectively, and averaged$10.6 billion in 2019 compared with$10.2 billion in 2018. The increase in stockholders' equity was primarily attributable to earnings, the issuance of preferred stock, and accumulated other comprehensive income since the prior year, partially offset by the repurchase of common stock pursuant to the Corporation's share repurchase program and dividend declarations. During 52 2019 Annual Report | Northern Trust Corporation
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Non-Cumulative Perpetual Preferred Stock for proceeds of$391.4 million , net of underwriting discounts, commissions, and other issuance costs. These proceeds were subsequently used to fund the redemption of all outstanding shares of the Corporation's Series C Non-Cumulative Perpetual Preferred Stock onJanuary 2, 2020 . Asset Quality The following information summarizes our asset quality for 2019 compared to 2018. For a discussion related to our asset quality for 2018 compared to 2017, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Form 10-K, which was filed with theUnited States Securities and Exchange Commission onFebruary 26, 2019 . Securities Portfolio The following table presents the book values ofNorthern Trust's held to maturity, available for sale, and trading investment securities by type as ofDecember 31, 2019 , 2018 and 2017. For additional information relating to the securities portfolio, refer to Note 4, "Securities," provided in Item 8, "Financial Statements and Supplementary Data."
TABLE 31: SECURITIES PORTFOLIO
DECEMBER 31,
($ In Millions) 2019 2018 2017
Debt Securities Held to Maturity U.S. Government$ 138.8 $ 101.6 $
35.0
Obligations of States and Political Subdivisions 10.1 18.9
34.6 Government Sponsored Agency 4.1 4.5 5.8 Other 12,131.5 14,229.0 12,973.6 Total Debt Securities Held to Maturity 12,284.5 14,354.0
13,049.0
Debt Securities Available for Sale U.S. Government 4,549.1 5,185.3
5,700.3
Obligations of States and Political Subdivisions 1,615.3 655.9
746.4 Government Sponsored Agency 23,271.2 22,424.6 18,676.6 Asset-Backed 4,128.2 3,244.9 2,726.4 Auction Rate - - 4.3 Other 5,312.5 5,378.1 5,888.1 Total Debt Securities Available for Sale 38,876.3 36,888.8
33,742.1
Trading Account 0.3 0.3
0.5
Total Debt Securities at Year-End$ 51,161.1 $ 51,243.1 $ 46,791.6 Average Total Securities $ 50,684.4 $ 50,281.5 $ 44,715.7 2019 Annual Report |Northern Trust Corporation 53
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the remaining maturity and average yield of
TABLE 32: REMAINING MATURITY AND AVERAGE YIELD OF DEBT SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE
DECEMBER 31, 2019
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS AVERAGE
($ in Millions) BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD MATURITYDebt Securities Held to Maturity U.S. Government$ 138.8 1.52 % $ - - % $ - - % $ - - % 1 mo. Obligations of States and Political Subdivisions 8.1 4.71 2.0 5.47 - - - - 7 mos. Government Sponsored Agency 0.6 4.81 1.7 4.81 1.2 4.81 0.6 4.74 64 mos. Other - Fixed 3,843.7 0.99 5,771.5 0.80 62.0 1.92 102.6 1.79 20 mos. - Floating 563.1 0.94 1,534.5 1.33 254.1 1.04 - - 43 mos.Total Debt Securities Held to Maturity 4,554.3 1.00 7,309.7 0.92 317.3 1.22 103.2 1.81 24 mos. Debt Securities Available for Sale U.S. Government 1,898.4 1.53 2,098.3 1.75 552.4 1.78 - - 30 mos. Obligations of States and Political Subdivisions 80.1 1.49 85.4 2.73 1,449.8 2.60 - - 87 mos. Government Sponsored Agency 5,005.0 2.35 9,728.8 2.34 5,869.4 2.29 2,668.0 2.09 59 mos. Asset-Backed - Fixed 882.6 2.02 1,589.2 2.54 576.2 3.23 - - 34 mos. Asset-Backed - Floating 49.1 2.10 569.9 3.06 451.9 2.94 9.3 1.11 120 mos. Other - Fixed 549.8 2.05 3,328.8 2.49 40.8 2.02 - - 35 mos. - Floating 417.1 2.09 911.3 1.95 64.7 2.16 - - 25 mos.Total Debt Securities Available for Sale$ 8,882.1 2.10 %$ 18,311.7 2.32 % $
9,005.2 2.40 %
Note: Yield is calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates.
As ofDecember 31, 2019 ,Northern Trust had no holdings of the securities of any single issuer greater than 10% of stockholders' equity, except forU.S. government, government agencies, government corporations, government-sponsored agencies, and non-U.S. sovereign securities. See Note 4, "Securities," to the consolidated financial statements provided in Item 8, "Financial Statements and Supplementary Data," for more information on securities.Northern Trust maintains a high quality debt securities portfolio, with 81% of the combined available for sale, held to maturity, and trading account portfolios atDecember 31, 2019 composed ofU.S. Treasury and government-sponsored agency securities and triple-A rated corporate notes, asset-backed securities, covered bonds, sub-sovereign, supranational, sovereign & non-U.S. agency bonds, commercial mortgage-backed securities and obligations of states and political subdivisions. The remaining portfolio was composed of corporate notes, negotiable certificates of deposit, obligations of states and political subdivisions, and other securities, of which as a percentage of the total securities portfolio, 9% were rated double-A, 3% were rated below double-A, and 7% were not rated by Moody's Investors Service or Standard and Poor's. As ofDecember 31, 2019 , securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security. AtDecember 31, 2019 , 23% of corporate debt was rated triple-A, 32% was rated double-A, and 45% was rated below double-A or not rated. Securities classified as "other asset-backed" atDecember 31, 2019 had average lives of less than 5 years, and 100% were rated triple-A. Unrealized losses within the debt securities portfolio atDecember 31, 2019 were$189.5 million as compared to$357.1 million atDecember 31, 2018 , primarily reflecting higher market rates since purchase; 26% of the corporate debt portfolio is backed by guarantees provided byU.S. and non-U.S. governmental entities. There were$0.3 million and$0.5 million of losses recognized in 2019 and 2018, respectively, in connection with the write-down of CRA securities determined to be OTTI. Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It isNorthern Trust's policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until the repurchase. 54 2019 Annual Report |Northern Trust Corporation
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans and Leases During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the consistency of its reporting across various regulatory regimes. As a result, the loan and lease balances for periods ended prior toJanuary 1, 2017 below have been adjusted to conform to the presentation for periods ended after such date. The adjustments generally reflected reclassification of loans and leases from the commercial and institutional class to the residential real estate class. There was no impact on total loans and leases previously reported.
The following table presents the amounts outstanding of loans and leases by
segment and class as of
TABLE 33: COMPOSITION OF LOAN PORTFOLIO
DECEMBER 31,
($ In Millions) 2019 2018 2017 2016 2015
Commercial
Commercial and Institutional
$ 9,307.5 Commercial Real Estate 3,378.0 3,228.8 3,482.7 4,002.5 3,848.8 Non-U.S. 1,751.0 2,701.6 1,538.5 1,877.8 1,137.7 Lease Financing, net 65.6 90.7 229.2 293.9 544.4 Other 164.0 426.0 265.4 205.1 194.1 Total Commercial 14,274.2 15,175.2 14,558.0 15,666.7 15,032.5 Personal Private Client 11,068.7 10,733.3 10,753.1 10,052.0 9,136.4 Residential Real Estate 5,999.6 6,514.0 7,247.6 8,077.5 8,974.7 Other 67.1 67.5 33.5 25.9 37.3 Total Personal 17,135.4 17,314.8 18,034.2 18,155.4 18,148.4 Total Loans and Leases$ 31,409.6 $ 32,490.0 $ 32,592.2 $ 33,822.1 $ 33,180.9
The following table presents the amounts outstanding of non-
TABLE 34: DISTRIBUTION OF NON-
DECEMBER 31,
(In Millions) 2019 2018 2017 2016 2015
Commercial $ 183.5 $ 117.4 $ 289.5 $ 318.0 $ 335.2
Banks - - - 26.2 8.5
Other 1,567.5 2,584.2 1,249.0 1,533.6 794.0
Total $ 1,751.0 $ 2,701.6 $ 1,538.5 $ 1,877.8 $ 1,137.7 Note: Non-
2019 Annual Report |
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the remaining maturity of selected loans and leases
as of
TABLE 35: REMAINING MATURITY OF SELECTED LOANS AND LEASES
DECEMBER 31, 2019
ONE YEAR ONE TO FIVE OVER FIVE
(In Millions) TOTAL OR LESS YEARS YEARS
U.S. (Excluding Residential Real Estate
and Private Client Loans):
Commercial and Institutional $ 8,915.6 $ 2,096.7 $ 5,757.9 $ 1,061.0
Commercial Real Estate 3,378.0 540.2 2,171.7 666.1
Lease Financing, net 65.6 - 23.0 42.6
Other-Commercial 164.0 164.0 - -
Other-Personal 67.1 67.1 - -
Total U.S. 12,590.3 2,868.0 7,952.6 1,769.7
Non-U.S. 1,751.0 1,531.0 169.8 50.2
Total Selected Loans and Leases $ 14,341.3 $ 4,399.0 $ 8,122.4 $ 1,819.9
Interest Rate Sensitivity of Loans and
Leases:
Fixed Rate $ 7,127.0 $ 2,235.6 $ 3,757.7 $ 1,133.7
Variable Rate 7,214.3 2,163.4 4,364.7 686.2
Total $ 14,341.3 $ 4,399.0 $ 8,122.4 $ 1,819.9
Residential Real Estate
The residential real estate loan portfolio is primarily composed of mortgages
and home equity credit lines provided as an accommodation to clients.
Residential real estate loans totaled $6.0 billion at December 31, 2019 , or 20%
of total U.S. loans and leases, compared with $6.5 billion , or 22% of total U.S.
loans and leases, at December 31, 2018 . All residential real estate loans are
underwritten utilizing Northern Trust's credit policies, which do not support
the origination of loan types generally considered to be of high risk in nature,
such as option adjustable rate mortgage loans, subprime loans, loans with
initial "teaser" rates, and loans with excessively high loan-to-value ratios.
Residential real estate loans consist of traditional first lien mortgages and
equity credit lines that generally require a loan-to-collateral value of no more
than 65% to 80% at inception. Appraisals of supporting collateral for
residential real estate loans are obtained at loan origination and upon
refinancing or default or when otherwise considered warranted. Residential real
estate collateral appraisals are performed and reviewed by independent third
parties.
Of the total $6.0 billion in residential real estate loans at December 31, 2019 ,
$1.6 billion were in Florida , $1.2 billion were in California , and $1.0 billion
were in the greater Chicago area, with the remainder distributed throughout the
other geographic regions within the United States served by Northern Trust .
Legally binding undrawn commitments to extend residential real estate credit,
which are primarily equity credit lines, totaled $714.2 million and $824.0
million at December 31, 2019 and 2018, respectively.
Commercial Real Estate
In managing its credit exposure, management has defined a commercial real estate
loan as one where: (1) the borrower's principal business activity is the
acquisition or the development of real estate for commercial purposes; (2) the
principal collateral is real estate held for commercial purposes, and loan
repayment is expected to flow from the operation of the property; or (3) the
loan repayment is expected to flow from the sale or refinance of real estate as
a normal and ongoing part of the business. Unsecured lines of credit to firms or
individuals engaged in commercial real estate endeavors are included without
regard to the use of loan proceeds. The commercial real estate portfolio
consists of commercial mortgages and construction, acquisition and development
loans extended primarily to experienced investors well known to Northern Trust .
Underwriting standards generally reflect conservative loan-to-value ratios and
debt service coverage requirements. Recourse to owners through guarantees also
is commonly required.
Commercial mortgage financing is provided for the acquisition or refinancing of
income-producing properties. Cash flows from the properties generally are
sufficient to amortize the loan. These loans are primarily located in the
California , Illinois , Florida , Texas , and Arizona markets. Construction,
acquisition and development loans provide financing for commercial real estate
prior to rental income stabilization. The intent is generally that the borrower
will sell the project or refinance the loan through a commercial mortgage with
Northern Trust or another financial institution upon completion.
56 2019 Annual Report | Northern Trust Corporation
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides additional detail regarding commercial real estate loan types:
TABLE 36: COMMERCIAL REAL ESTATE LOANS
DECEMBER 31,
($ In Millions) 2019 2018
Commercial Mortgages:
Office $ 754.3 $ 811.2
Apartment/Multi-family 646.5 490.7
Retail 573.3 529.7
Industrial / Warehouse 278.0 254.9
Other 420.1 426.6
Total Commercial Mortgages 2,672.2 2,513.1
Construction, Acquisition and Development Loans 432.1 420.6
95.5 127.0
Other Commercial Real Estate Related 178.2 168.1
Total Commercial Real Estate Loans $ 3,378.0 $ 3,228.8
At December 31, 2019 , legally binding commitments to extend credit and standby
letters of credit to commercial real estate borrowers totaled $301.6 million and
$9.2 million , respectively. At December 31, 2018 , legally binding commitments to
extend credit and standby letters of credit to commercial real estate borrowers
totaled $331.4 million and $8.5 million , respectively.
Nonperforming Assets and 90 Days Past Due Loans
During 2017, the Corporation implemented a change in the classification of
certain loans and leases to enhance the consistency of its reporting across
various regulatory regimes. As a result, the loan and lease balances for periods
ended prior to January 1, 2017 below have been adjusted to conform to the
presentation for periods ended after such date. The adjustments generally
reflected reclassification of loans and leases from the commercial and
institutional class to the residential real estate class. There was no impact on
total loans and leases previously reported.
Nonperforming assets consist of nonperforming loans and leases and other real
estate owned (OREO). OREO is comprised of commercial and residential properties
acquired in partial or total satisfaction of loans. Loans that are delinquent 90
days or more and still accruing interest can fluctuate widely at any reporting
period based on the timing of cash collections, renegotiations and renewals. The
following table presents nonperforming assets and loans that were delinquent 90
days or more and still accruing at December 31, 2019 and each of the prior four
year-ends.
TABLE 37: NONPERFORMING ASSETS
DECEMBER 31,
($ In Millions) 2019 2018 2017 2016 2015
Nonperforming Loans and Leases
Commercial
Commercial and Institutional $ 7.6 $ 6.8 $ 26.0 $ 9.2 $ 18.1
Commercial Real Estate 3.6 6.9 8.3 11.6 16.7
Non-U.S. 0.5 0.4 - - -
Total Commercial 11.7 14.1 34.3 20.8 34.8
Personal
Residential Real Estate 71.4 95.0 116.4 139.1 144.9
Private Client 0.5 0.2 - 0.3 0.4
Total Personal 71.9 95.2 116.4 139.4 145.3
Total Nonperforming Loans and Leases 83.6 109.3 150.7 160.2 180.1
Other Real Estate Owned 3.2 8.4 4.6 5.2 8.2
Total Nonperforming Assets $ 86.8 $ 117.7 $ 155.3 $ 165.4 $ 188.3
90 Day Past Due Loans Still Accruing $ 7.4 $ 16.4 $ 8.0 $ 31.0 $ 7.1
Nonperforming Loans and Leases to Total
Loans and Leases 0.27 % 0.34 % 0.46 % 0.47 % 0.54 %
Allowance for Credit Losses Assigned to
Loans and Leases to Nonperforming Loans
and Leases 1.3 x 1.0 x 0.9 x 1.0 x 1.1 x
2019 Annual Report | Northern Trust Corporation 57
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming assets of$86.8 million as ofDecember 31, 2019 decreased$30.9 million , or 26% from$117.7 million atDecember 31, 2018 , reflecting decreases in the residential real estate portfolio driven by payoffs and payments, partially offset by new nonperforming assets. Changes in the level of nonperforming assets may be indicative of changes in the credit quality of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment of the specific allowance and the quantitative and qualitative factors used in the determination of the inherent allowance levels within the allowance for credit losses. 58 2019 Annual Report |Northern Trust Corporation
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance and Provision for Credit Losses During 2017, the Corporation implemented a change in the classification of certain loans and leases to enhance the consistency of its reporting across various regulatory regimes. The allowance for credit losses as of and prior toDecember 31, 2016 remains unadjusted, as the impact of the reclassification on the allowance was immaterial. TABLE 38: ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ($ in Millions) 2019 2018 2017 2016 2015 Balance at Beginning of Year$ 138.2 $ 153.8 $ 192.0 $ 233.3 $ 295.9 Charge-Offs Commercial Commercial and Institutional 2.9 0.1 10.3 15.8 9.2 Commercial Real Estate 0.1 0.8 1.1 0.8 3.9 Total Commercial 3.0 0.9 11.4 16.6 13.1 Personal Residential Real Estate 3.2 7.3 8.0 10.4 16.7 Private Client 0.3 1.9 2.1 0.3 0.9 Total Personal 3.5 9.2 10.1 10.7 17.6 Total Charge-Offs 6.5 10.1 21.5 27.3 30.7 Recoveries Commercial Commercial and Institutional 0.3 1.5 3.7 3.3 1.7 Commercial Real Estate 0.6 0.2 1.8 1.5 3.8 Total Commercial 0.9 1.7 5.5 4.8 5.5 Personal Residential Real Estate 5.7 6.7 5.4 6.6 4.5 Private Client 0.6 0.6 0.4 0.7 1.2 Total Personal 6.3 7.3 5.8 7.3 5.7 Total Recoveries 7.2 9.0 11.3 12.1 11.2 Net Charge-Offs (Recoveries) (0.7 ) 1.1 10.2 15.2 19.5 Provision for Credit Losses (14.5 ) (14.5 ) (28.0 ) (26.0 ) (43.0 ) Effect of Foreign Exchange Rates - - - (0.1 ) (0.1 ) Net Change in Allowance (13.8 ) (15.6 ) (38.2 ) (41.3 ) (62.6 ) Balance at End of Year$ 124.4 $ 138.2 $ 153.8 $ 192.0 $ 233.3 Allowance Assigned To: Loans and Leases$ 104.5 $ 112.6 $ 131.2 $ 161.0 $ 193.8 Undrawn Commitments and Standby Letters of Credit 19.9 25.6 22.6
31.0 39.5
Total Allowance for Credit Losses
Loans and Leases at Year-End
$ 33,822.1 $ 33,180.9 Average Total Loans and Leases$ 31,052.8 $ 32,028.6 $ 33,565.2 $ 34,043.5 $ 33,016.1 As a Percent of Year-End Loans and Leases Net Loan Charge-Offs - % - % 0.03 % 0.04 % 0.06 % Provision for Credit Losses (0.05 ) (0.04 ) (0.09 ) (0.08 ) (0.13 ) Allowance at Year-End Assigned to Loans and Leases 0.33 0.35 0.40 0.48 0.58 As a Percent of Average Loans and Leases Net Loan Charge-Offs - % - % 0.03 % 0.04 % 0.06 % Allowance at Year-End Assigned to Loans and Leases 0.34 0.35 0.39 0.47 0.59 2019 Annual Report |Northern Trust Corporation 59
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The provision for credit losses is the charge to current period earnings that is determined by management, through a disciplined credit review process, to be the amount needed to maintain the allowance for credit losses at an appropriate level to absorb probable credit losses that have been identified with specific borrower relationships (specific loss component) and for probable losses that are believed to be inherent in the loan and lease portfolios, undrawn commitments, and standby letters of credit (inherent loss component). TheSEC requires the disclosure of the allowance for credit losses that is applicable to international operations. The disclosure has been prepared in compliance with this disclosure requirement and is used in determining non-U.S. operating performance. The amounts disclosed should not be construed as being the only amounts that are available for non-U.S. loan charge-offs, since the entire allowance for credit losses assigned to loans and leases is available to absorb losses on bothU.S. and non-U.S. loans. In addition, these amounts are not intended to be indicative of future charge-off trends. There was no allowance for credit losses relating to non-U.S. operations for years 2016 through 2019. For 2015, there was a$3.3 million allowance for credit losses at the beginning of the year, a credit provision of$3.3 million during the year, and no allowance for credit losses as ofDecember 31, 2015 .
The following table shows the specific portion of the allowance and the
allocated inherent portion of the allowance and its components by loan category
at
TABLE 39: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
DECEMBER 31,
2019 2018 2017 2016 2015
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
LOANS LOANS LOANS LOANS LOANS
TO TO TO TO TO
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ($ In Millions)
AMOUNT LOANS AMOUNT LOANS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
Specific Allowance
5.4 - % $ 2.1 - % $ 3.1 - %
Allocated Inherent
Allowance
Commercial
Commercial and
Institutional 35.3 28 33.5 27
34.7 27 34.7 27 40.4 28
33.0 11 35.5 10 43.3 11 69.2 12 69.5 12 Lease Financing, net 0.1 -
0.1 - 0.2 1 0.4 1 1.9 2
Non-U.S. - 6 - 8 - 5 - 5 - 3
Other 0.2 1 2.7 2 1.5 1 0.6 1 - 1
Total Commercial 68.6 46 71.8 47 79.7 45 104.9 46 111.8 46
Personal
Residential Real
Estate 27.0 19 45.8 20 57.3 22 69.0 24 96.2 27 Private Client
20.5 35 9.2 33 9.5 33 13.8 30 19.7 27 Other
1.4 - 1.4 - 1.9 - 2.2 - 2.5 -
Total Personal 48.9 54 56.4 53 68.7 55 85.0 54 118.4 54
Total Allocated
Inherent Allowance $ 117.5 100 % $ 128.2 100 % $ 148.4 100 % $ 189.9 100 % $ 230.2 100 %
Total Allowance for
Credit Losses $ 124.4 100 % $ 138.2 100 % $ 153.8 100 % $ 192.0 100 % $ 233.3 100 %
Allowance Assigned
to:
Loans and Leases $ 104.5 $ 112.6 $ 131.2 $ 161.0 $ 193.8
Undrawn Commitments
and Standby Letters
of Credit 19.9 25.6 22.6 31.0 39.5
Total Allowance for
Credit Losses $ 124.4 $ 138.2 $ 153.8 $ 192.0 $ 233.3
Allowance Assigned to
Loans and Leases to
Total Loans and
Leases 0.33 % 0.35 % 0.40 % 0.48 % 0.58 %
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Specific Component of the Allowance: The amount of specific allowance is determined through an individual evaluation of loans and lending-related commitments considered impaired taking into consideration expected future cash flows, collateral value, and other factors that may impact the borrower's ability to pay. The specific allowance component decreased$3.1 million from$10.0 million atDecember 31, 2018 to$6.9 million atDecember 31, 2019 , primarily attributable to standby letters of credit and outstanding loans in the commercial and institutional portfolio and outstanding loans in the residential real estate portfolios. Inherent Component of the Allowance: The inherent component of the allowance addresses exposure relating to probable but unidentified credit-related losses. The inherent component of the allowance also covers the credit exposure associated with undrawn loan commitments and standby letters of credit. To estimate the allowance for credit losses on these instruments, management uses conversion rates to determine the estimated amount that will be drawn and assigns an allowance factor determined in accordance with the methodology utilized for outstanding loans. The inherent portion of the allowance decreased$10.7 million to$117.5 million atDecember 31, 2019 , compared with$128.2 million atDecember 31, 2018 , primarily due to a reduction in outstanding loans and improved credit quality within the residential real estate portfolio, partially offset by an increase in the inherent reserve related to the private client portfolio due to an increase in outstanding loans and lower credit quality. Overall Allowance: The evaluation of the specific component and the inherent component above resulted in a total allowance for credit losses of$124.4 million atDecember 31, 2019 , compared with$138.2 million at the end of 2018. The allowance of$104.5 million assigned to loans and leases, as a percentage of total loans and leases, was 0.33% atDecember 31, 2019 , which decreased from a$112.6 million allowance assigned to loans and leases, representing 0.35% of total loans and leases atDecember 31, 2018 . Allowances assigned to undrawn loan commitments and standby letters of credit totaled$19.9 million and$25.6 million atDecember 31, 2019 and 2018, respectively, and are included in Other Liabilities in the consolidated balance sheets.
Provision: The provision for credit losses was a credit provision of
Impaired Loans A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement or when its terms have been modified as a concession resulting from the debtor's financial difficulties, referred to as a troubled debt restructuring. As ofDecember 31, 2019 , impaired loans totaled$92.2 million and included$82.6 million of loans deemed troubled debt restructurings as compared to total impaired loans of$116.2 million atDecember 31, 2018 , which included$99.8 million of loans deemed troubled debt restructurings. Impaired loans had$5.0 million and$7.2 million of the allowance for credit losses allocated to them atDecember 31, 2019 , and 2018, respectively. Impaired loans are measured based upon the loan's market price, the present value of expected future cash flows, discounted at the loan's effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. If the loan valuation is less than the recorded value of the loan, dependent upon the level of certainty of loss, either a specific allowance is established or a charge-off is recorded for the difference. Smaller balance (individually less than$1 million as ofDecember 31, 2019 ) homogeneous loans are collectively evaluated for impairment and excluded from impaired loan disclosures as allowed under applicable accounting standards. Capital Expenditures Capital expenditures in 2019 included continued investments to enhanceNorthern Trust's software and hardware capabilities, the opening of new offices, and the expansion and renovation of several existing offices. Capital expenditures for 2019 totaled$599.8 million , of which$441.8 million was for software,$73.7 million was for computer hardware,$77.7 million was for building and leasehold improvements, and$6.6 million was for furnishings. These capital expenditures principally support, enhance, and protectNorthern Trust's investment management, asset servicing and asset management systems and capabilities, and deliver innovative solutions to better serve our clients. Additional capital expenditures committed for technology systems will result in future expense for the depreciation of hardware and amortization of software. Software amortization and depreciation on computer hardware and machinery are charged to equipment and software expense. Depreciation on building and leasehold improvements and on furnishings is charged to occupancy expense and equipment expense, respectively. Capital expenditures for 2018 totaled$506.0 million , of which$408.4 million was for software,$62.0 million was for computer hardware,$29.9 million was for building and leasehold improvements, and$5.7 million was for furnishings.
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposits
The following tables present deposit information as of
TABLE 40: AVERAGE DEPOSITS BY TYPE
DECEMBER 31,
(In Millions) 2019 2018 2017
U.S. Offices Demand and Noninterest-Bearing Individuals, Partnerships, Corporations, and Other$ 11,890.4 $ 14,303.4 $ 16,412.0 Correspondent Banks 29.9 58.2
60.3
Total Demand and Noninterest-Bearing 11,920.3 14,361.6
16,472.3
Interest-Bearing
Savings, Money Market, and Other 16,577.8 15,149.3
15,575.6
Savings Certificates less than$100,000 96.5 109.3
130.1
Savings Certificates$100,000 and more 445.1 434.2 717.3 Other 325.9 327.1 426.0 Total Interest-Bearing 17,445.3 16,019.9 16,849.0 Total U.S. Offices 29,365.6 30,381.5 33,321.3 Non-U.S. Offices Noninterest-Bearing 5,535.2 6,165.0 6,600.3 Interest-Bearing 54,885.2 58,556.6 56,583.2 Total Non-U.S. Offices 60,420.4 64,721.6 63,183.5 Total Deposits$ 89,786.0 $ 95,103.1 $ 96,504.8
TABLE 41: DISTRIBUTION OF NON-
DECEMBER 31,
(In Millions) 2019 2018 2017
Commercial $ 66,265.7 $ 69,899.2 $ 70,987.1
Non-U.S. Governments and Official Institutions 6,081.8 4,612.7 4,246.0
Banks 126.7 161.9 305.5
Other Time - - 6.3
Other Demand 103.5 14.3 6.1
Total $ 72,577.7 $ 74,688.1 $ 75,551.0 TABLE 42: REMAINING MATURITY OF TIME DEPOSITS
DECEMBER 31, 2019
U.S. OFFICE NON-U.S. OFFICES
(In Millions) CERTIFICATES OF DEPOSIT OTHER TIME TOTAL
3 Months or Less $ 320.6 $ 1,008.1 $ 1,328.7
Over 3 Months through 6 Months 132.9 10.8 143.7
Over 6 Months through 12 Months 220.1 - 220.1
Over 12 Months 212.9 - 212.9
Total $ 886.5 $ 1,018.9 $ 1,905.4
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TABLE 43: AVERAGE RATES PAID ON INTEREST-RELATED DEPOSITS BY TYPE
DECEMBER 31,
2019 2018 2017
Interest-Related Deposits - U.S. Offices
Savings, Money Market, and Other 0.97 % 0.54 % 0.16 %
Savings Certificates less than
1.55 0.76 0.46
Other Time 2.59 1.80 1.38
Total
0.68 0.52 0.25
Short-Term Borrowings
The following tables present short-term borrowing information as of December 31,
2019 , 2018 and 2017. For additional information relating to short-term
borrowings, refer to Note 5, "Securities Purchased Under Agreements to Resell
and Securities Sold Under Agreements to Repurchase," provided in Item 8,
"Financial Statements and Supplementary Data."
TABLE 44: PURCHASED FUNDS
Federal Funds Purchased
(Overnight Borrowings)
DECEMBER 31,
(In Millions) 2019 2018 2017
Balance on
- Average Rate 2.05 % 1.82 % 0.95 % Average Rate at Year-End 0.77 % 2.25 % 1.17 %
Securities Sold under Agreements to Repurchase
DECEMBER 31,
(In Millions) 2019 2018 2017
Balance on
- Average Rate 1.89 % 1.48 % 0.81 % Average Rate at Year-End 1.43 % 2.32 % 1.29 %
Other Borrowings
(Includes Treasury Investment Program Balances, Term Federal Funds Purchased and
Other Short-Term Borrowings)
DECEMBER 31,
(In Millions) 2019 2018 2017
Balance on
- Average Rate 2.34 % 2.00 % 1.04 %
Average Rate at Year-End 1.68 % 2.38 % 1.38 %
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OPERATIONS
Total Purchased Funds
DECEMBER 31,
(In Millions) 2019 2018 2017
Balance on
- Average Rate 2.29 % 1.93 % 1.00 %
Geographic Area InformationNorthern 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 ofNorthern Trust are managed on a reporting segment basis and include components of bothU.S and non-U.S. source assets. Non-U.S. source assets are not separately identified inNorthern 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 ofNorthern Trust's activities, it is difficult to segregate with precision assets betweenU.S. and non-U.S. -domiciled customers. Therefore, certain subjective estimates and assumptions have been made to allocate assets betweenU.S. and non-U.S. operations. The following tables present selected average assets and liabilities attributable to non-U.S. operations (based on the obligor's domicile) and the percent of those balances to total consolidated average assets. See also Note 33, "Reporting Segments and Related Information," provided in Item 8, "Financial Statements and Supplementary Data." TABLE 45: SELECTED AVERAGE ASSETS AND LIABILITIES ATTRIBUTABLE TO NON-U.S. OPERATIONS (In Millions) 2019 2018 2017 2016 2015 Total Assets$ 27,240.7 $ 30,781.3 $ 26,510.1 $ 24,031.0 $ 29,411.2 Time Deposits with Banks 3,896.5 3,943.2 5,013.4 6,331.3 13,712.9 Loans 1,721.1 2,054.6 2,014.8 1,894.3 1,759.4 Non-U.S. Investments 15,420.6 19,016.1 14,047.8 10,255.7 8,590.8 Total Liabilities 62,110.3 66,008.5 64,267.3 57,270.0 54,521.0 Deposits 60,419.7 64,721.6 63,183.5 56,139.8 52,981.2
TABLE 46: PERCENT OF NON-
2019 2018 2017 2016 2015
Assets 23 % 25 % 22 % 21 % 27 %
Liabilities 53 % 54 % 54 % 50 % 49 %
NON-U.S. OUTSTANDINGS
As used in this discussion and the following table, non-U.S. outstandings are
cross-border outstandings as defined by the SEC . They consist of loans,
securities, interest-bearing deposits with financial institutions, accrued
interest and other monetary assets. Not included are letters of credit, loan
commitments, and non-U.S. office local currency claims on residents. Non-U.S.
outstandings related to a country are net of guarantees given by third parties
resident outside the country and the value of tangible, liquid collateral
realizable outside the country. However, transactions with branches of non-U.S.
banks are included in these outstandings and are classified according to the
country location of the non-U.S. bank's head office.
Short-term interbank time deposits with non-U.S. banks represent the largest
category of non-U.S. outstandings. Northern Trust actively participates in the
interbank market with U.S. and non-U.S. banks.
Northern Trust places deposits with non-U.S. counterparties that have strong
internal (Northern Trust ) risk ratings and external credit ratings. These
non-U.S. banks are approved and monitored by Northern Trust's Capital Markets
Credit Committee, which has credit authority for exposure to all non-U.S. banks
and approves credit limits. This process includes financial analysis of the
non-U.S. banks, use of an internal risk rating system and consideration of
external market indicators. Each counterparty is reviewed at least annually and
potentially more frequently based on credit fundamentals or general market
conditions. Separate from the entity-specific review process, the average life
to maturity of deposits with non-U.S. banks is deliberately maintained on a
short-term basis in order to respond quickly to changing credit conditions.
Northern Trust also utilizes certain risk mitigation tools and agreements that
may reduce exposures through use of collateral and/or balance sheet netting.
Additionally, the Capital Market Credit Committee oversees country-risk analyses
and imposes limits to country exposure.
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The following table provides information on non-
TABLE 47: NON-
COMMERCIAL
(In Millions) BANKS AND OTHER TOTAL
AT DECEMBER 31, 2019
Japan $ 1,300 $ 2,334 $ 3,634
Canada 1,079 337 1,416
Germany 429 1,120 1,549
AT DECEMBER 31, 2018
Japan $ 391 $ 4,858 $ 5,249
Canada 1,328 359 1,687
France 1,470 468 $ 1,938
AT DECEMBER 31, 2017
Japan $ 510 $ 3,375 $ 3,885
Canada 1,437 196 1,633
Note: Countries whose aggregate outstandings totaled between 0.75% and 1.00% of
total assets were as follows: France with aggregate outstandings of $1.2 billion
at December 31, 2019 ; Germany with aggregate outstandings of $1.2 billion and
Australia with aggregate outstandings of $1.3 billion at December 31, 2018 ;
Germany with aggregate outstandings of $1.3 billion and France with aggregate
outstandings of $1.3 billion at December 31, 2017 .
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
As the Corporation's principal subsidiary encompassing all of Northern Trust's
banking activities, the Bank centrally manages liquidity for all U.S. and
international banking operations. Liquidity is provided by a variety of sources,
including client deposits (institutional and personal) from the C&IS and Wealth
Management businesses, wholesale funding from the capital markets, maturities of
short-term investments, Federal Home Loan Bank advances, and unencumbered liquid
assets that can be sold or pledged to secure additional funds. While management
does not view central bank discount windows as primary sources of liquidity, at
December 31, 2019 , the Bank had over $38.0 billion of securities and loans
readily available as collateral to support discount window borrowings. The Bank
also is active in the U.S. interbank funding market, providing an important
source of additional liquidity and low-cost funds. Liquidity supports a variety
of activities, including client withdrawals, purchases of securities, net loan
growth, and draws on commitments to extend credit. Northern Trust maintains a
very liquid balance sheet, with cash and due from banks, deposits with the
Federal Reserve and other central banks, short-term money market assets and
investment securities in aggregate representing 69% of total assets as of
December 31, 2019 . The market value of unencumbered securities at the Bank,
which include those placed at the Federal Reserve discount window, totaled $46.7
billion at December 31, 2019 . The Corporation and the Bank each satisfied the
U.S. liquidity coverage ratio requirements during 2019.
The liquidity of the Corporation is managed separately from that of the Bank.
The primary sources of cash for the Corporation are issuances of debt or equity,
dividend payments from the Bank, and interest earned on investment securities
and money market assets. On May 3, 2019 , the Corporation issued $500
million of 3.15% senior notes, due May 3, 2029 . The Corporation also received
$2.0 billion of dividends from the Bank in 2019. Dividends from the Bank are
subject to certain restrictions, as discussed in further detail in Note 32,
"Restrictions on Subsidiary Dividends and Loans or Advances," to the
consolidated financial statements provided in Item 8, "Financial Statements and
Supplementary Data."
The Corporation's uses of cash consist mainly of dividend payments to the
Corporation's stockholders; the payment of principal and interest to note
holders; repurchases of its common stock; and investments in, or loans to, its
subsidiaries. The most significant uses of cash by the Corporation during 2019
were $1.1 billion of common stock repurchases and $529.7 million of common
stock dividends.
The Corporation's liquidity, defined as the amount of cash and highly marketable
assets, was $2.6 billion and $866.8 million at December 31, 2019 and 2018,
respectively. During, and at year-end, 2019 and 2018, these assets were
comprised almost entirely of cash in a demand deposit account at the Bank or
overnight money market placements, both of which were fully available to the
Corporation to support its own cash flow requirements or those of its
subsidiaries, as needed. Average liquidity during 2019 and 2018 was $1.96
billion and $887.0 million , respectively. The cash flows of the Corporation are
shown in Note 35, "Northern Trust Corporation (Corporation only)," to the
consolidated financial statements provided in Item 8, "Financial Statements and
Supplementary Data."
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A significant source of liquidity for both the Corporation and the Bank is the ability to draw funding from capital markets globally. The credit ratings of the Corporation and the Bank as ofDecember 31, 2019 , provided below, allowNorthern Trust to access capital markets on favorable terms.
TABLE 48: NORTHERN TRUST CREDIT RATINGS AS OF
CREDIT RATING
STANDARD &
POOR'S MOODY'S FITCH RATINGS
Northern Trust Corporation :
Senior Debt A+ A2 AA-
Subordinated Debt A A2 A+
Preferred Stock BBB+ Baa1 BBB
Trust Preferred Capital Securities BBB+ A3 BBB+
Outlook Stable Stable Stable
The Northern Trust Company :
Short-Term Deposit A-1+ P-1 F1+
Long-Term Deposit AA- Aa2 AA
Subordinated Debt A+ A2 A+
Outlook Stable Stable Stable
A significant downgrade in one or more of these ratings could limit Northern
Trust's access to capital markets and/or increase the rates paid for short-term
borrowings, including deposits, and future long-term debt issuances. The size of
these rate increases would depend on multiple factors, including the extent of
the downgrade, Northern Trust's relative debt rating compared to other financial
institutions, current market conditions, and other factors. In addition, as
discussed in Note 28, "Offsetting of Assets and Liabilities," to the
consolidated financial statements provided in Item 8, "Financial Statements and
Supplementary Data," Northern Trust enters into certain master netting
arrangements with derivative counterparties that contain credit-risk-related
contingent features in which the counterparty has the option to declare Northern
Trust in default and accelerate cash settlement of net derivative liabilities
with the counterparty in the event Northern Trust's credit rating falls below
specified levels. At December 31, 2019 , the net maximum amount of these
termination payments that Northern Trust could have been required to pay was
$439.1 million . Other than these credit-risk-related contingent derivative
counterparty payments, Northern Trust had no long-term debt covenants or other
credit-risk-related payments at December 31, 2019 , that would be triggered by a
significant downgrade in its debt ratings.
Statements of Cash Flows
For the year ended December 31, 2019 , net cash provided by operating activities
was $2.6 billion , primarily reflecting period earnings and lower net collateral
deposited with derivative counterparties.
Net cash provided by operating activities for the year ended December 31, 2018 ,
was $1.8 billion , primarily reflecting period earnings and the impact of other
operating activities and non-cash charges such as amortization of computer
software, partially offset by higher net collateral deposited with derivative
counterparties.
Net cash used in investing activities was $3.4 billion for the year ended
December 31, 2019 , primarily reflecting higher levels of deposits with the
Federal Reserve and other central banks, net purchases of debt securities
available for sale, and the purchase of bank-owned life insurance policies in
2019, partially offset by the net proceeds from the maturity and redemption of
debt securities held to maturity and lower levels of loans and leases.
Net cash provided by investing activities was $4.3 billion for the year ended
December 31, 2018 , primarily reflecting decreased levels of deposits with the
Federal Reserve and other central banks and lower interest-bearing deposits with
banks, partially offset by net purchases of debt securities available for sale
and held to maturity and the net change in other investing activities.
For the year ended December 31, 2019 , net cash provided by financing activities
totaled $0.6 billion , primarily reflecting higher levels of total deposits,
proceeds from the issuance by the Corporation of 3.15% senior notes, and
proceeds from the Series E Non-Cumulative Perpetual Preferred Stock issuance,
partially offset by lower federal funds purchased, lower short-term other
borrowings, and the repurchase of common stock pursuant to the Corporation's
share repurchase program. The increase in total deposits was primarily
attributable to higher levels of domestic interest-bearing client deposits and
non-U.S. office noninterest-bearing deposits, partially offset by lower levels
of non-U.S. interest-bearing deposits.
For the year ended December 31, 2018 , net cash used in financing activities
totaled $5.8 billion , primarily reflecting decreased levels of total deposits,
the repurchase of common stock pursuant to the Corporation's share repurchase
program,
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lower securities sold under agreements to repurchase, dividends paid on common and preferred stock, and repayments of the 6.50% subordinated notes previously issued by the Bank and dueAugust 2018 , partially offset by higher short-term other borrowings and the proceeds from the issuance by the Corporation of 3.65% senior notes. The decrease in total deposits was primarily attributable to lower levels of non-interest bearing domestic and non-U.S. office client deposits and lower domestic interest-bearing client deposits. Regulatory EnvironmentNorthern Trust actively follows regulatory developments and regularly evaluates its liquidity risk management framework against proposed rulemaking and industry best practices in order to comply with applicable regulations and further enhance its liquidity policies. Please refer to "Liquidity Standards" under "Supervision and Regulation" in Item 1, "Business," of this Annual Report on Form 10-K for a discussion of applicable liquidity standards.
Contractual Obligations
The following table shows
TABLE 49: CONTRACTUAL OBLIGATIONS AS OF
PAYMENT DUE BY PERIOD
ONE YEAR 1-3 OVER 5
($ In Millions) TOTAL AND LESS YEARS 3-5 YEARS YEARS
Senior Notes(1) $ 2,573.0 $ 499.9 $ 998.8 $ - $ 1,074.3
Subordinated Debt(1) 1,148.1 - - - 1,148.1
Floating Rate Capital Debt(1) 277.7 - - - 277.7
Operating Leases(2) 695.7 101.3 164.3 130.1 300.0
Purchase Obligations(3) 720.1 287.7 349.7 80.3 2.4
Total Contractual Obligations
Note: Obligations as shown do not include deposit liabilities or interest requirements on funding sources. (1) Refer to Note 13, "Senior Notes and Long-Term Debt," and Note 14, "Floating Rate Capital Debt," to the consolidated financial statements provided in Item 8, "Financial Statements and Supplementary Data," for further details. (2) Refer to Note 10, "Lease Commitments," to the consolidated financial statements provided in Item 8, "Financial Statements and Supplementary Data," for further details. (3) Purchase obligations consist of enforceable and legally binding agreements to purchase products or services at specified significant terms. Capital Management One ofNorthern Trust's primary objectives is to maintain a strong capital position to merit the confidence of clients, counterparties, creditors, regulators and stockholders. A strong capital position helpsNorthern Trust execute its strategies and withstand unforeseen adverse developments. Senior management, with oversight from the Capital Governance Committee and the full Board of Directors, is responsible for capital management and planning.Northern Trust manages its capital on both a total Corporation basis and a legal entity basis. The Capital Committee is responsible for measuring and managing capital metrics against levels set forth within the Capital Policy approved by the Capital Governance Committee of the Board of Directors. In establishing the metrics related to capital, a variety of factors are taken into consideration, including the unique risk profiles ofNorthern Trust's businesses, regulatory requirements, capital levels relative to peers, and the impact on credit ratings. Capital levels were strengthened in 2019 as average stockholders' equity increased$419.5 million , or 4%, reaching$10.6 billion . Total stockholders' equity was$11.1 billion atDecember 31, 2019 , as compared to$10.5 billion atDecember 31, 2018 . During 2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Non-Cumulative Perpetual Preferred Stock for proceeds of$391.4 million , net of underwriting discounts, commissions, and other issuance costs. These proceeds were subsequently used to fund the redemption of all outstanding shares of the Corporation's Series C Non-Cumulative Perpetual Preferred Stock onJanuary 2, 2020 . InJuly 2019 , the Board increased the quarterly common stock dividend by 17% to$0.70 per common share. Common dividends totaling$565.9 million were declared in 2019. During the year endedDecember 31, 2019 , the Corporation repurchased 11.8 million shares of common stock, including 0.6 million shares withheld related to share-based compensation, at an average price per share of$93.40 . Preferred dividends totaling$46.4 million were declared in 2019.
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In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced approaches. For each ratio, the lower of the result calculated under the standardized approach and the advanced approach serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of the Corporation's common stockholders' equity to total risk-based capital and its risk-based capital ratios, under the applicableU.S. regulatory rules as ofDecember 31, 2019 and 2018. TABLE 50: CAPITAL ADEQUACY ($ In Millions) DECEMBER 31, 2019 DECEMBER 31, 2018 STANDARDIZED ADVANCED STANDARDIZED ADVANCED APPROACH APPROACH APPROACH APPROACH Common Equity Tier 1 Capital Common Stockholders' Equity$ 9,817.5 $ 9,817.5 $ 9,626.3 $ 9,626.3 Net Unrealized (Gains) Losses on Debt Securities Available for Sale - - - - Net Unrealized (Gains) Losses on Cash Flow Hedges - - - -Goodwill and Other Intangible Assets, net of Deferred Tax Liability (776.1 ) (776.1 ) (767.6 ) (767.6 ) Pension and Other Postretirement Benefit Adjustments - - - - Other (142.7 ) (142.7 ) (128.9 ) (128.9 ) Total Common Equity Tier 1 8,898.7 8,898.7 8,729.8 8,729.8 Additional Tier 1 Capital Preferred Stock 1,273.4 1,273.4 882.0 882.0 Other (20.1 ) (20.1 ) (15.1 ) (15.1 ) Total Additional Tier 1 Capital 1,253.3 1,253.3 866.9 866.9 Total Tier 1 Capital 10,152.0 10,152.0 9,596.7 9,596.7 Tier 2 Capital Qualifying Allowance for Credit Losses 124.4 - 138.2 - Qualifying Subordinated Debt 1,099.5 1,099.5 1,099.4 1,099.4 Floating Rate Capital 80.8 80.8 107.7 107.7 Total Tier 2 Capital 1,304.7 1,180.3 1,345.3 1,207.1Total Risk-Based Capital $ 11,456.7 $ 11,332.3 $ 10,942.0 $ 10,803.8 Risk-Weighted Assets(1)$ 70,088.3 $ 67,526.9 $ 67,837.1 $ 63,914.8 Total Assets - End of Period (EOP) 136,828.4 136,828.4 132,212.5 132,212.5 Adjusted Average Fourth Quarter Assets(2) 117,165.7 117,165.7 120,402.6 120,402.6 Total Loans and Leases - EOP 31,409.6 31,409.6 32,490.0 32,490.0 Common Stockholders' Equity to: Total Loans and Leases - EOP 31.26 % 31.26 % 29.63 % 29.63 % Total Assets - EOP 7.18 7.18 7.28 7.28 Risk-Based Capital Ratios Common Equity Tier 1 Capital 12.7 % 13.2 % 12.9 % 13.7 % Tier 1 Capital 14.5 15.0 14.1 15.0 Total Capital (Tier 1 and Tier 2) 16.3 16.8 16.1 16.9 Tier 1 Leverage 8.7 8.7 8.0 8.0 Supplementary Leverage(3) N/A 7.6 N/A 7.0 (1) Risk-weighted assets exclude, as applicable under each regulatory approach, amounts primarily related to goodwill, certain other intangible assets, and net unrealized gains or losses on securities and reflect adjustments for excess allowances for credit losses that have been excluded from Tier 1 and Tier 2 capital, if any. (2) Adjusted average fourth quarter assets exclude amounts primarily related to goodwill, other intangible assets, and net unrealized gains or losses on securities. (3) EffectiveJanuary 1, 2018 , the Corporation and Bank are subject to a minimum supplementary leverage ratio of 3 percent. As ofDecember 31, 2019 and 2018, the Corporation's capital ratios exceeded the minimum requirements for classification as "well-capitalized" under applicableU.S. regulatory requirements. Further information regarding the Corporation's and the Bank's capital ratios and the minimum requirements for classification as "well-capitalized" is provided in the "Supervision and Regulation" section of Item 1, "Business," and Note 34, "Regulatory Capital Requirements," to the consolidated financial statements provided in Item 8, "Financial Statements and Supplementary Data." 68 2019 Annual Report | Northern Trust Corporation
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As ofDecember 31, 2019 , the Corporation's common equity Tier 1 capital ratio as calculated under the advanced approaches methodologies would have been 13.2% on a fully phased-in basis, while the Corporation's common equity Tier 1 capital ratio under the standardized approach would have been 12.7% on a fully phased-in basis. OFF-BALANCE-SHEET ARRANGEMENTSAssets Under Custody/Administration and Assets Under Management Northern Trust , in the normal course of business, holds assets under custody/administration and management in a fiduciary or agency capacity for its clients. In accordance with GAAP, these assets are not assets ofNorthern Trust and are not included in its consolidated balance sheets. Commitments, Letters of Credit, and Securities Lent withIndemnification Northern Trust , in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the potential credit exposure should the instrument be drawn fully upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit,Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. The following table provides details ofNorthern Trust's off-balance-sheet financial instruments as ofDecember 31, 2019 and 2018.
TABLE 51: SUMMARY OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS WITH CONTRACT AMOUNTS
DECEMBER 31,
($ In Millions) 2019 2018
Undrawn Commitments to Extend Credit
One Year and Less $ 7,500.2 $ 7,629.9
Over One Year 16,906.0 17,393.1
Total $ 24,406.2 $ 25,023.0 Standby Letters of Credit and Financial Guarantees
32.3 32.3
Custody Securities Lent with Indemnification 138,085.9 128,904.8
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Undrawn commitments to extend credit generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements. The following table provides information about the industry sector and expiration dates of undrawn commitments to extend credit as ofDecember 31, 2019 . TABLE 52: UNDRAWN COMMITMENTS TO EXTEND CREDIT BY INDUSTRY SECTOR AS OF DECEMBER 31, 2019 COMMITMENT EXPIRATION TOTAL ONE YEAR OVER ONE OUTSTANDING ($ In Millions) COMMITMENTS AND LESS YEAR LOANS Commercial Commercial and Institutional Finance and Insurance$ 3,664.3 $ 1,786.8 $ 1,877.5 $ 2,412.2 Holding Companies - - - 30.7 Manufacturing 6,659.7 780.1 5,879.6 1,479.1 Mining 747.5 224.6 522.9 15.1 Public Administration 58.2 4.3 53.9 53.6 Retail Trade 749.7 192.0 557.7 145.7 Services 5,817.1 2,352.1 3,465.0 3,807.0
Transportation and Warehousing 285.1 - 285.1
247.8 Utilities 1,259.5 - 1,259.5 10.6 Wholesale Trade 710.8 71.2 639.6 390.7 Other Commercial 200.7 131.2 69.5 323.1 Commercial and Institutional(1) 20,152.6 5,542.3 14,610.3 8,915.6 Commercial Real Estate 301.6 102.5 199.1 3,378.0 Lease Financing, net - - - 65.6 Non-U.S. 1,144.3 587.8 556.5 1,751.0 Other 87.5 87.5 - 164.0 Total Commercial 21,686.0 6,320.1 15,365.9 14,274.2 Personal Residential Real Estate 714.2 119.4 594.8 5,999.6 Private Client 1,970.2 1,024.9 945.3 11,068.7 Other 35.8 35.8 - 67.1 Total Personal 2,720.2 1,180.1 1,540.1 17,135.4 Total$ 24,406.2 $ 7,500.2 $ 16,906.0 $ 31,409.6
(1) Commercial and Institutional industry sector information is presented on the basis of the North American Industry Classification System (NAICS).
Standby letters of credit obligateNorthern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges and similar transactions.Northern Trust is obligated to meet the entire financial obligation of these agreements and in certain cases is able to recover the amounts paid through recourse against collateral received or other participants. Standby letters of credit and financial guarantees of$2.4 billion and$2.5 billion atDecember 31, 2019 and 2018, respectively, include$44.5 million and$72.3 million , respectively, of standby letters of credit secured by cash deposits or participated to others. Financial guarantees are issued byNorthern Trust to guarantee the performance of a client to a third party under certain arrangements. Commercial letters of credit are instruments issued byNorthern Trust on behalf of its clients that authorize a third party (the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement and other similar instruments. Commercial letters of credit are issued primarily to facilitate international trade. As part of its securities custody activities and at the direction of its clients,Northern Trust lends securities owned by clients to borrowers who are reviewed and approved by the Northern Trust Capital Markets Credit Committee. In connection with these activities,Northern Trust has issued indemnifications to certain clients against certain losses that are a direct result of a borrower's failure to return securities when due, should the value of such securities exceed the value of the collateral 70 2019 Annual Report |Northern Trust Corporation
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required to be posted. Borrowers are required to collateralize fully securities received with cash or marketable securities. As securities are loaned, collateral is maintained at a minimum of 100% of the fair value of the securities plus accrued interest. The collateral is revalued on a daily basis. The amount of securities loaned subject to indemnification was$138.1 billion and$128.9 billion atDecember 31, 2019 and 2018, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and no liability was recorded atDecember 31, 2019 , or 2018 related to these indemnifications. Additional information aboutNorthern Trust's off-balance-sheet financial instruments is included in Note 29, "Off-Balance-Sheet Financial Instruments, Guarantees and Other Commitments" to the consolidated financial statements provided in Item 8, "Financial Statements and Supplementary Data." Variable Interest Entities Variable Interest Entities (VIEs) are defined within GAAP as entities which either have a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. Investors that finance a VIE through debt or equity interests, or other counterparties that provide other forms of support, such as guarantees, subordinated fee arrangements, or certain types of derivative contracts, are variable interest holders in the entity and the variable interest holder, if any, that has both the power to direct the activities that most significantly impact the entity and a variable interest that could potentially be significant to the entity is deemed to be the VIE's primary beneficiary and is required to consolidate the VIE. Leveraged Leases. In leveraged leasing transactions,Northern Trust acts as lessor of the underlying asset subject to the lease and typically funds 20-30% of the asset's cost via an equity ownership in a trust with the remaining 70-80% provided by third-party non-recourse debt holders. In such transactions, the trusts, which are VIEs, are created to provide the lessee use of the property with substantially all of the rights and obligations of ownership. The lessee's maintenance and operation of the leased property has a direct effect on the fair value of the underlying property, and the lessee also has the ability to increase the benefits it can receive and limit the losses it can suffer by the manner in which it uses the property. As a result,Northern Trust has determined that it is not the primary beneficiary of the leveraged lease trust VIEs given it lacks the power to direct the activities that most significantly impact the economic performance of the leveraged lease trust VIEs. Tax Credit Structures.Northern Trust invests in qualified affordable housing projects and community development entities (collectively, community development projects) that are designed to generate a return primarily through the realization of tax credits. The community development projects are formed as limited partnerships and limited liability companies in whichNorthern Trust invests as a limited partner/investor member through equity contributions. The economic performance of the community development projects, some of which are VIEs, is subject to the performance of their underlying investment and their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments.Northern Trust has determined that it is not the primary beneficiary of any community development project VIEs as it lacks the power to direct the activities that most significantly impact the economic performance of the underlying investments or to affect their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the general partners and managing members who exercise full and exclusive control of the operations of the community development project VIEs. Investment Funds.Northern Trust acts as asset manager for various funds in which clients ofNorthern Trust are investors. As an asset manager of funds,Northern Trust earns a competitively priced fee that is based on assets managed and varies with each fund's investment objective. Based on its analysis,Northern Trust has determined that it is not the primary beneficiary of these VIEs under GAAP. CRITICAL ACCOUNTING ESTIMATES Our significant accounting policies are described in Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements provided in Item 8, "Financial Statements and Supplementary Data." The use of estimates and assumptions is required in the preparation of financial statements in conformity with GAAP and actual results could differ from those estimates. TheSEC has issued guidance relating to the disclosure of critical accounting estimates. Critical accounting estimates are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact onNorthern Trust's future financial condition and results of operations.
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ForNorthern Trust , accounting estimates that are viewed as critical are those relating to the allowance for credit losses and pension plan accounting. Management has discussed the development and selection of each critical accounting estimate with the Audit Committee of the Board of Directors (Audit Committee). Allowance for Credit Losses The allowance for credit losses represents management's estimate of probable losses which have been incurred as of the date of the consolidated financial statements. The loan and lease portfolio and other lending-related credit exposures are regularly reviewed to evaluate the level of the allowance for credit losses. In determining an appropriate allowance level,Northern Trust evaluates the allowance necessary for impaired loans and lending-related commitments and estimates losses inherent in other lending-related credit exposures. The allowance for credit losses consists of the following components: Specific Allowance: The specific allowance is determined through an individual evaluation of loans and lending-related commitments considered impaired taking into consideration expected future cash flows, collateral value, and other factors that may impact the borrower's ability to pay. For impaired loans where the amount of specific allowance, if any, is determined based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and utilized by management. These appraisals are generally less than twelve months old and are subject to adjustments to reflect management's judgment as to the realizable value of the collateral. Inherent Allowance: The inherent allowance estimation methodology is based on internally developed loss data specific to theNorthern Trust loan and lease portfolio from a historical observation period that includes both expansionary and recessionary periods. The estimation methodology and the related qualitative adjustment framework segregate the loan and lease portfolio into segments based on loan type, loan size, and borrower rating. For each segment, the probability of default over a loss emergence period and a loss given default are derived from the historical data and applied to the total exposure at default to determine a quantitative inherent allowance. The estimated allowance is reviewed by the Loan Loss Reserve Committee within a qualitative adjustment framework to determine an appropriate adjustment to the quantitative inherent allowance for each segment of the loan portfolio. In determining the appropriate adjustment, management applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology and environmental factors that are not contemplated in the quantitative methodology. The Loan Loss Reserve Committee is comprised of representatives from Credit Risk Management, the reporting segments and Corporate Finance. The quarterly analysis of the specific and inherent allowance components and the control process maintained by Credit Risk Management and the lending staff are the principal methods relied upon by management for the timely identification of, and adjustment for, changes in estimated credit loss levels. In addition toNorthern Trust's own experience, management also considers regulatory guidance. Control processes and analyses employed to determine an appropriate level of allowance for credit losses are reviewed on at least an annual basis and modified as considered appropriate. Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance for credit losses. Subsequent recoveries, if any, are credited to the allowance. Determinations as to whether loan balances for which the collectability is in question are charged-off or a specific reserve is established based on management's assessment as to the level of certainty regarding the amount of loss. The provision for credit losses, which is charged to income, is the amount necessary to adjust the allowance for credit losses to the level deemed to be appropriate through the above process. Actual losses may vary from current estimates and the amount of the provision for credit losses may be either greater than or less than actual net charge-offs. Management's estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. Management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, in determining an appropriate allowance level. Due to the inherent imprecision in accounting estimates, other estimates or assumptions could reasonably have been used in 2019 and changes in estimates are reasonably likely to occur from period to period. Additionally, as an integral part of their examination process, various federal and state regulatory agencies also review the allowance for credit losses. These agencies may require that certain loan balances be classified differently or charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. However, management believes that the allowance for credit losses adequately addresses these uncertainties and has been established at an appropriate level to cover probable losses which have occurred as of the date of the consolidated financial statements.
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Pension Plan AccountingNorthern Trust maintains a noncontributory defined benefit pension plan covering substantially allU.S. employees (U.S. Qualified Plan) and aU.S. noncontributory supplemental pension plan (U.S. Non-qualified Plan). Certain European-based employees also retain benefits in local defined benefit pension plans, of which the majority are closed to new employees and to future benefit accruals. Measuring cost and reporting liabilities resulting from defined benefit pension plans requires the use of several assumptions regarding future interest rates, asset returns, compensation increases, mortality rates, and other actuarially-based projections relating to the plans. Due to the long-term nature of this obligation and the estimates that are required to be made, the assumptions used in determining the periodic pension expense and the projected pension obligation are closely monitored and reviewed annually for adjustments that may be required. Pension accounting guidance requires that differences between estimates and actual experience be recognized as other comprehensive income in the period in which they occur. The differences are amortized into net periodic pension expense from accumulated other comprehensive income over the future working lifetime of eligible participants. As a result, differences between the estimates made in the calculation of periodic pension expense and the projected pension obligation and actual experience affect stockholders' equity in the period in which they occur but continue to be recognized as expense systematically and gradually over subsequent periods.Northern Trust recognizes the significant impact that these pension-related assumptions have on the determination of the pension obligations and related expense and has established procedures for monitoring and setting these assumptions each year. These procedures include an annual review of actual demographic and investment experience with the pension plans' actuaries. In addition to actual experience, adjustments to these assumptions consider observable yields on fixed income securities, known compensation trends and policies, as well as economic conditions and investment strategies that may impact the estimated long-term rate of return on plan assets. In determining the pension expense for theU.S. pension plans in 2019,Northern Trust utilized a discount rate of 4.47% for both theU.S. Qualified Plan and theU.S. Non-qualified Plan. The rate of increase in the compensation level is based on a graded schedule from 9.00% to 2.50% that averaged 4.39%. The expected long-term rate of return onU.S. Qualified Plan assets was 6.00%. In evaluating possible revisions to pension-related assumptions for theU.S. pension plans as ofNorthern Trust's December 31, 2019 measurement date, the following were considered: • Discount Rate:Northern Trust estimates the discount rate for itsU.S.
pension plans by applying the projected cash flows for future benefit
payments to the Aon AA Above Median yield curve as of the measurement date.
This yield curve is composed of individual zero-coupon interest rates for 198
different time periods over a 99-year time horizon. Zero-coupon rates
utilized by the yield curve are mathematically derived from observable market
yields for AA-rated corporate bonds. This yield curve model referenced by
at
decrease from 4.47% at
• Compensation Level: Based on a review of actual and anticipated salary
experience, the compensation scale assumption is based on a graded schedule
from 9.00% to 2.50% that averages 4.97%.
• Rate of Return on Plan Assets: The expected return on plan assets is based on
an estimate of the long-term (30 years) rate of return on plan assets, which
is determined using a building block approach that considers the current
asset mix and estimates of return by asset class based on historical
experience, giving proper consideration to diversification and rebalancing.
Current market factors such as inflation and interest rates are also
evaluated before long-term capital market assumptions are determined. Peer
data and historical returns are reviewed to check for reasonability and
appropriateness. As a result of these analyses,
return assumption for the
to 5.25% for 2020.
• Mortality Table: As of
aggregate Pri-2012 mortality table with a 2012 base year, which was released
by the
obligations reflect proposed future improvement under scale MP-2019, which
was also released by the
assumption was updated at
The updated improvement scale applies to annuity payments only and results in
generally lower projected mortality improvements than estimated by the
MP-2018 improvement scale. Mortality assumptions on lump sum payments remain
static and continue to be in line with the
lump sums in 2020.
Net pension expense in 2020 is expected to increase by approximately
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In order to illustrate the sensitivity of these assumptions on the expectedU.S pension plans' periodic pension expense in 2020 and the projected benefit obligation as ofDecember 31, 2019 , the following table is presented to show the effect of increasing or decreasing each of these assumptions by 25 basis points.
TABLE 53: SENSITIVITY OF
25 BASIS 25 BASIS
($ In Millions) POINT INCREASE POINT DECREASE
Increase (Decrease) in 2020 Pension Expense
Discount Rate Change $ (4.2 ) $ 4.4
Compensation Level Change 2.0 (2.0 )
Rate of Return on Plan Assets Change (3.7 ) 3.7
Increase (Decrease) in 2019 Projected Benefit Obligation
Discount Rate Change (51.8 ) 54.8
Compensation Level Change 8.9 (8.6 )
Pension Contributions: The deduction limits specified by the Internal Revenue
Code for contributions made by sponsors of defined benefit pension plans are
based on a "Target Liability" under the provisions of the Pension Protection Act
of 2006. There were no contributions to the U.S. Qualified Plan for the 2019
plan year. Northern Trust contributed $50.0 million to the U.S. Qualified Plan
at the beginning of 2018, retrospectively for the 2017 plan year. The minimum
required contribution to the U.S. Qualified Plan is expected to be zero in 2020.
The maximum deductible contribution is estimated at $275 million for 2020.
FAIR VALUE MEASUREMENTS
The preparation of financial statements in conformity with GAAP requires certain
assets and liabilities to be reported at fair value. As of December 31, 2019 ,
approximately 29% of Northern Trust's total assets and approximately 1% of its
total liabilities were carried on the consolidated balance sheets at fair value.
As discussed more fully in Note 3, "Fair Value Measurements," to the
consolidated financial statements provided in Item 8, "Financial Statements and
Supplementary Data," GAAP requires entities to categorize financial assets and
liabilities carried at fair value according to a three-level valuation
hierarchy. The hierarchy gives the highest priority to quoted, active market
prices for identical assets and liabilities (Level 1) and the lowest priority to
valuation techniques that require significant management judgment because one or
more of the significant inputs are unobservable in the market place (Level 3).
Approximately 11% of Northern Trust's assets carried at fair value are
classified as Level 1. Northern Trust typically does not hold equity securities
or other instruments that are actively traded on an exchange.
Approximately 89% of Northern Trust's assets and 99% of its liabilities carried
at fair value are categorized as Level 2, as they are valued using models in
which all significant inputs are observable in active markets. Investment debt
securities classified as available for sale make up 97% of Level 2 assets with
the remaining 3% primarily consisting of derivative financial instruments. Level
2 liabilities are comprised solely of derivative financial instruments.
Northern Trust's Level 2 assets include available for sale and trading account
securities, the fair values of which are determined predominantly by external
pricing vendors. Northern Trust has a well-established process to validate
prices received from pricing vendors as discussed more fully in Note 3, "Fair
Value Measurements," to the consolidated financial statements provided in
Item 8, "Financial Statements and Supplementary Data."
As of December 31, 2019 , all derivative assets and liabilities, excluding the
swap related to the sale of certain Visa Class B common shares described below,
were classified as Level 2 and approximately 97%, measured on a notional value
basis, related to client-related and trading activities, predominantly
consisting of foreign exchange contracts. Derivative instruments are valued
internally using widely accepted income-based models that incorporate inputs
readily observable in actively quoted markets and reflect contractual terms of
contracts. Northern Trust evaluated the impact of counterparty credit risk and
its own credit risk on the valuation of derivative instruments. Factors
considered included the likelihood of default by Northern Trust and its
counterparties, the remaining maturities of the instruments, net exposures after
giving effect to master netting agreements, available collateral, and other
credit enhancements in determining the appropriate fair value of derivative
instruments. The resulting valuation adjustments are not considered material.
As of December 31, 2019 , Northern Trust's Level 3 liabilities consisted of swaps
that Northern Trust entered into with the purchaser of 1.1 million and 1.0
million shares of Visa Inc. Class B common stock (Visa Class B common shares)
previously held by Northern Trust and sold in June 2016 and 2015, respectively.
Pursuant to the swaps, Northern Trust retains the risks associated with the
ultimate conversion of the Visa Class B common shares into shares of Visa Inc.
Class A common stock (Visa Class A common shares), such that the counterparty
will be compensated for any dilutive adjustments to the conversion
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ratio andNorthern Trust will be compensated for any anti-dilutive adjustments to the ratio. The swaps also require periodic payments fromNorthern Trust to the counterparty calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swaps are determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement areNorthern Trust's own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. See "Visa Class B Common Shares" under Note 26, "Contingent Liabilities," provided in Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K for further information. WhileNorthern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets, could have a material effect on the computation of their estimated fair values. RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS OnJanuary 1, 2020 ,Northern Trust adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the "incurred loss" approach under current GAAP with an "expected loss" model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary-impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. In conjunction with the adoption of ASU 2016-13,Northern Trust expects an increase in the allowance for credit losses of less than$20 million . This change in accounting principle will be applied prospectively by increasing the allowance for credit losses onJanuary 1, 2020 , with a corresponding cumulative effect adjustment to decrease retained earnings, net of income taxes. Periods prior to the adoption date will not be adjusted.Northern Trust also expects that the Corporation and the Bank's capital ratios will not be materially impacted by the adoption of this standard. InAugust 2018 , the FASB issued ASU No. 2018-15, "Intangibles -Goodwill and Other - Internal -Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of theFASB Emerging Issues Task Force )" (ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). ASU 2018-15 is effective for fiscal years beginning afterDecember 15, 2019 , and interim periods within those fiscal years, although early adoption is permitted. ASU 2018-15 is not expected to have a significant impact onNorthern Trust's consolidated financial condition or results of operations. RISK MANAGEMENT Risk Management OverviewNorthern Trust employs an integrated risk management framework to support its business decisions and the execution of its corporate strategies. The framework provides a methodology to identify, assess, monitor, measure, manage and report both internal and external risks toNorthern Trust , and promotes a culture of risk awareness and good conduct across the organization.Northern Trust's risk culture encompasses the general awareness, attitude and conduct of employees with respect to risk and the management of risk across all lines of defense within the organization.Northern Trust cultivates a culture of effective risk management by defining and embedding risk management accountabilities in all employee performance expectations and provides training, development and performance rewards to reinforce this culture.Northern Trust's risk management framework contains three inter-related elements, designed to support consistent enterprise risk identification, management and reporting: a comprehensive risk inventory, a static taxonomy of risk categories and a dynamic taxonomy of risk themes. The risk inventory is a detailed register of the risks inherently faced byNorthern Trust . The risk categories and risk themes are classification systems used for classifying and managing the risk inventory and enabling different risk profile views. All identified risks inherent inNorthern Trust's business activities are cataloged into the following risk categories: credit, operational, fiduciary, compliance, market, liquidity, and strategic risk. All material risks are also dynamically cataloged into various risk themes which are defined groupings that share common characteristics, focus on business outcomes and span across risk categories.Northern Trust implements its risk management framework through a "three lines of defense" operating model, embedding a robust risk management capability within its businesses. The model, used to communicate risk management expectations
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across the organization, contains three roles, each a complementary level of risk management accountability. Within this operating model,Northern Trust's businesses are the first line of defense for protecting it against the risks inherent in its businesses and are supported by dedicated business risk management teams. The Risk Management function, the second line of defense, sets the direction forNorthern Trust's risk management activities and provides aggregate risk oversight and reporting in support of risk governance. Audit Services, the third line of defense, provides independent assurance as to the effectiveness of the integrated risk framework. Risk Governance and Oversight Overview Risk governance is an integral aspect of corporate governance atNorthern Trust , and includes clearly defined accountabilities, expectations, internal controls and processes for risk-based decision-making and escalation of issues. The diagram below provides a high-level overview ofNorthern Trust's risk governance structure, highlighting oversight by the Board of Directors and key risk-related committees.
TABLE 54: RISK GOVERNANCE STRUCTURE
Northern Trust Corporation Board of Directors
Audit Committee Business Risk Committee Capital Governance Compensation and
Committee Benefits Committee
Global Enterprise Risk Committee (GERC)
Operational Fiduciary Compliance & Market & Model Risk
Credit Risk Risk Risk Ethics Liquidity Oversight
Committee Committee Committee Oversight Risk Committee
Committee Committee
The Board of Directors provides oversight of risk management directly and
through certain of its committees: the Audit Committee, the Business Risk
Committee, the Capital Governance Committee and the Compensation and Benefits
Committee . The Board of Directors approves Northern Trust's risk management
framework and Corporate Risk Appetite Statement. The Business Risk Committee
assumes primary responsibility and oversight with respect to credit risk,
operational risk, fiduciary risk, compliance risk, market risk, liquidity risk,
and strategic risk. The Audit Committee provides oversight with respect to
financial reporting and legal risk, while the Compensation and Benefits
Committee oversees the development and operation of Northern Trust's incentive
compensation program. The Compensation and Benefits Committee annually reviews
management's assessment of the effectiveness of the design and performance of
Northern Trust's incentive compensation arrangements and practices in providing
incentives that are consistent with Northern Trust's safety, soundness, and
culture. This assessment includes an evaluation of whether Northern Trust's
incentive compensation arrangements and practices discourage inappropriate
risk-taking behavior by participants. The Capital Governance Committee assists
the Board in discharging its oversight duties with respect to capital management
and resolution planning activities. Among other responsibilities, the Capital
Governance Committee oversees Northern Trust's capital adequacy assessments,
forecasting, and stress testing processes and activities, including the annual
CCAR exercise, and challenges management, as appropriate, on various elements of
such processes and activities. Accordingly, the Capital Governance Committee
provides oversight with respect to Northern Trust's linkage of material risks to
the capital adequacy assessment process.
The Chief Risk Officer (CRO) oversees Northern Trust's management of risk and
compliance, promotes risk awareness and fosters a proactive risk management
environment wherein risks inherent in the business strategy are identified,
understood, appropriately monitored and mitigated. The CRO reports directly to
the Business Risk Committee and the Corporation's Chief Executive Officer. The
CRO regularly advises the Business Risk Committee and reports to the Committee
at least quarterly on risk exposures, risk management deficiencies and emerging
risks. In accordance with the risk management framework, the CRO and the Risk
Management executive leadership team of Northern Trust , together with the Chief
Financial Officer, Head of Capital and Resolution Planning, General Counsel and
Chief Audit Executive, meet as the Global Enterprise Risk Committee (GERC) to
provide executive management oversight and guidance with respect to the
management of the categories of risk and risk themes within Northern Trust .
Among other risk management responsibilities, GERC receives reports,
escalations, or recommendations from senior risk committees that are responsible
for the management of risk, and from time to time may delegate responsibility to
such committees for risk issues. Senior risk committees include:
The Credit Risk Committee (CRC) establishes and monitors credit-related policies
and practices throughout
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Operational Risk Committee (ORC) provides independent oversight and is responsible for setting the operational risk-related policies and developing the operational risk management framework and programs that support coordination of operational risk activities.
The Fiduciary Risk Committee (FRC) is responsible for establishing and reviewing the fiduciary risk policies and establishing the fiduciary risk framework, governance and programs that support the coordination of fiduciary risk activities.
The Compliance & Ethics Oversight Committee (CEOC) provides oversight and direction with respect to compliance policies, implementation of the compliance and ethics program, and the coordination of regulatory compliance initiatives across the Corporation.The Market & Liquidity Risk Committee (MLRC) oversees activities relating to the management of market and liquidity risks by facilitating a focused review of market and liquidity risk exposures and providing rigorous challenge of related policies, key assumptions, and practices.
In addition to the aforementioned committees,
Risk Assessment, Appetite and Reporting Processes As part of the integrated risk framework,Northern Trust has established key risk identification and risk management processes, embedded within its businesses to enable a risk-informed profile that supports its business decisions and the execution of its corporate strategies.Northern Trust's risk assessment process consists of a series of programs across the first and second lines of defense that identify, measure, manage and report risks in line with risk appetite and guidelines.Northern Trust defines its risk appetite as the aggregate level and types of risk the Board of Directors and senior management are willing to assume to achieve the Corporation's strategic objectives and business plan, consistent with prudent management of risk and applicable capital, liquidity, and other regulatory requirements. It includes consideration of the likelihood and impact of risks, using both monetary loss and non-financial measures across risk themes to monitor against tolerance thresholds and guideline levels that trigger escalation to senior management. Risk Control Risk Control is an internal, independent review function within the Risk Management function. Risk Control is managed by the Head of Risk Control and is comprised of Model Risk Management, Credit Review, Global Compliance Testing and Basel Independent Verification groups, each with its own risk focus and oversight. Model Risk Management is responsible for the implementation and management of the enterprise-wide model risk framework and independently validating new models and reviewing and re-validating existing models. Credit Review provides an independent, ongoing assessment of credit exposure and related credit risk management processes acrossNorthern Trust . Global Compliance Testing evaluates the effectiveness of procedures and controls designed to comply with relevant laws and regulations, as well as correspondingNorthern Trust policies governing regulatory compliance activities. Lastly, Basel Independent Verification promotes rigor and accuracy inNorthern Trust's ongoing compliance with Basel III requirements and adherence to Enhanced Prudential Standards, including liquidity stress testing. The Business Risk Committee has oversight responsibility with respect to Risk Control generally as well as each of these groups. Audit Services Audit Services is an independent control function that assesses and validates controls withinNorthern Trust's risk management framework. Audit Services is managed by the Chief Audit Executive with oversight from the Audit Committee. Audit Services tests the overall adequacy and effectiveness of the system of internal controls associated with the advanced systems on an ongoing basis and reports the results of these audits directly to the Audit Committee. Audit Services includes professionals with a broad range of audit and industry experience, including risk management expertise. The Chief Audit Executive reports directly to the Audit Committee and the Corporation's Chief Executive Officer and is a non-voting member of GERC. Credit Risk Credit risk is the risk to interest income or principal from the failure of a borrower or counterparty to perform on an obligation. 2019 Annual Report |Northern Trust Corporation 77
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Credit Risk Overview Credit risk is inherent in many ofNorthern Trust's activities. A significant component of credit risk relates to loans, leases, securities, and counterparty-related exposures.Northern Trust's loan portfolio differs significantly from those of other largeU.S. financial institutions in thatNorthern Trust is generally: • not an originator of loan products to be sold into a secondary market or to
be bundled into asset securitizations;
• not an agent bank or syndicator of loans, where risk management is achieved
post-close through the sale of participations; and
• not a participant in leveraged financial transactions, such as project
finance, private-equity-originated acquisition financing or hedge fund
leveraging.
Credit Risk Framework and Governance
The Credit Risk Management function is the focal point of the credit risk
framework and, while independent of the businesses, it works closely with them
to achieve the goal of assuring proactive management of credit risk. To monitor
and control credit risk, the Credit Risk Management function maintains a
framework that consists of policies, standards, and programs designed to promote
a prudent relationship-based credit culture. This function also monitors
adherence to corporate policies, standards, programs, and external regulations.
The Credit Risk Management function provides a system of checks and balances for
Northern Trust's diverse credit-related activities by monitoring these
activities and practices and promoting their uniform application throughout
Northern Trust .
The credit risk framework provides authorities for approval of the extension of
credit. Individual credit authority for commercial and personal loans is limited
to specified amounts and maturities. Credit requests exceeding individual
authority because of amount, rating, term or other conditions, are referred to
the relevant Group Credit Approval Committee. Credit decisions involving
exposure in excess of these limits require the approval of the Senior Credit
Committee. The Capital Markets Credit Committee has sole credit authority for
the approval, modification, or renewal of credit exposure to all wholesale
market counterparties.
The CRC establishes and monitors credit-related policies and programs throughout
Northern Trust and promotes their uniform application. The Chief Credit Officer
reports directly to the CRO and chairs the CRC. Independent oversight and review
of the credit risk framework also is provided by Risk Control.
Credit Risk Measurement
An integral component of credit risk measurement is Northern Trust's internal
risk rating system. Northern Trust's internal risk rating system enables
identification, measurement, approval and monitoring of credit risk.
Calculations include entity-specific information about the obligor's or
counterparty's probability of default and exposure-specific information about
loss given default, exposure at default and maturity.
The Credit Risk Management function is responsible for the ongoing oversight of
each model that supports the internal risk-rating system. Independent model
governance and oversight is further supported by the activities of Risk Control.
Loans and Other Extensions of Credit
A significant component of credit risk relates to the loan portfolio, including
contractual obligations such as legally binding commitments to extend credit,
commercial letters of credit, and standby letters of credit. These contractual
obligations and arrangements are discussed in the "Off-Balance-Sheet
Arrangements" section and in Note 29, "Off-Balance-Sheet Financial Instruments,
Guarantees and Other Commitments" to the consolidated financial statements
provided in Item 8, "Financial Statements and Supplementary Data."
As part of Northern Trust's credit processes, the Credit Risk Management
function oversees a range of portfolio reviews that focus on significant and/or
weaker-rated credits. This approach allows management to take remedial action in
an effort to deal with potential problems. An integral part of the Credit Risk
Management function is a formal review of past due and potential problem loans
to determine which credits, if any, need to be placed on nonperforming status or
charged off. Northern Trust maintains a loan portfolio watch list for adversely
classified credit exposures that includes all nonperforming credits as well as
other loans with elevated risk of default. Independent from the Credit Risk
Management function, Credit Review undertakes both on-site and off-site file
reviews that evaluate effectiveness of management's implementation of the Credit
Risk Management's requirements.
Counterparty Credit Risk
Counterparty credit risk for Northern Trust primarily arises from a variety of
funding, treasury, trading and custody-related activities, including
over-the-counter (OTC) currency and interest rate derivatives, and from
indemnified securities lending transactions. Credit exposure to counterparties
is managed by use of a framework for setting limits by product type and exposure
tenor.
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To calculate exposure,Northern Trust treats repurchase agreements, reverse repurchase agreements and indemnified securities lending transactions as repo-style transactions. Foreign exchange exposures and interest rate derivatives are treated as OTC derivatives. The exposure at default measurement methodology for each eligible type of counterparty credit exposure, including the use of netting and collateral as risk mitigants, is determined based on operational requirements, the characteristics of the contract type and the portfolio size and complexity. Credit Risk MitigationNorthern Trust considers cash flow to be the primary source of repayment for client-related credit exposures. However,Northern Trust employs several different types of credit risk mitigants to manage its overall credit risk in the event cash flow is not sufficient to repay a credit exposure.Northern Trust broadly groups its risk mitigation techniques into the following three primary categories. Physical and Financial Collateral:Northern Trust's primary risk mitigation approaches include the requirement of collateral. Residential and commercial real estate exposures are typically secured by properly margined mortgages on the property. In cases where loans to commercial or certain Wealth Management clients are secured by marketable securities, the daily values of the securities are monitored closely to ensure adherence to collateral coverage policies. Netting: On-balance-sheet netting is employed where applicable for counterparties with master netting agreements. Netting is primarily related to foreign exchange transactions with major banks and institutional clients subject to eligible master netting agreements.Northern Trust has elected to take the credit risk mitigation capital benefit of netting within its regulatory capital calculation at this time.
Guarantees: Personal and corporate guarantees are often taken to facilitate
potential collection efforts and to protect
Another important risk management practice is the avoidance of undue concentrations of exposure, such as in any single (or small number of related) obligor/counterparty, loan type, industry, geography, country or risk mitigant. Processes are in place to establish limits on certain concentrations and the monitoring of adherence to the limits.
Operational Risk Operational risk is the risk of loss from inadequate or failed internal processes, human factors and systems, or from external events.
Operational Risk Overview Operational risk is inherent in each ofNorthern Trust's businesses and corporate functions and reflects the potential for inadequate information systems, operating problems, product design and delivery difficulties, potential legal actions, or other catastrophes to result in losses. This includes the potential that continuity of service and resiliency may be impacted.
Operational risk includes compliance, fiduciary and legal risks, which under the Corporation's risk structure are governed and managed explicitly.
Operational Risk Framework and Governance To monitor and control operational risk,Northern Trust maintains a framework consisting of risk management policies, programs and practices designed to promote a sound operational environment and maintain the Corporation's operational risk profile and losses within approved risk appetites and guidelines. The framework is deployed consistently and globally across all businesses and its objective is to identify and measure the factors that influence risk and drive action to reduce future loss events. The Operational Risk Management function is responsible for defining the operational risk framework and providing independent oversight of the framework acrossNorthern Trust . It is the responsibility of each business to implement the enterprise-wide operational risk framework and business-specific risk management programs to identify, monitor, measure, manage and report on operational risk and mitigateNorthern Trust's exposure to loss. Several key programs support the operational risk framework, including: • Loss Event Data Program - a program that collects internal and external loss data for use in monitoring operational risk exposure, various business analyses and a Basel Advanced Measurement Approach (AMA) capital quantification.
• Risk and Control Self-Assessment - a structured risk management process used
by
respective business environments and to assess the adequacy of associated
internal controls.
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• Operational Risk Scenario Analysis - a systematic process of obtaining expert
opinions from business managers and risk management experts to derive
reasoned assessments of the likelihood of occurrence and the potential loss
impact of plausible high-severity operational losses.
• Product and Process Risk Management Program - a program used for evaluating
and managing risks associated with the introduction of new and modified
noncredit products and services, significant changes to operating processes,
and related significant loss events.
• Outsourcing Risk Management Program - a program that provides processes for
appropriate risk assessment, measurement, monitoring and management of
outsourced technology and business process outsourcing.
• Information Security and Technology Risk Management - a program that
communicates and implements compliance and risk management processes and
controls to address information security, including cyber threats and
technology risks to the organization.
• Business Continuity and Disaster Recovery Management Program - a program
designed to minimize business impact and support the resumption of mission
critical functions for clients following an incident.
• Physical Security - a program that provides for the safety of
partners, clients, and visitors worldwide.
• Insurance Management Program - a program designed to reduce the monetary
impact of certain operational loss events.
As discussed in Risk Control, Model Risk Management also is part of the operational risk framework.
The ORC is responsible for overseeing the activities ofNorthern Trust related to the management of operational risk including establishing the Corporate Operational Risk Policy and approving the operational risk framework and programs. This committee has the expanded role of coordinating operational risk issues related to compliance and fiduciary risks. The purpose of this committee is to provide executive management's insight and guidance to the management of existing and emerging operational risks. Operational Risk MeasurementNorthern Trust utilizes the AMA capital quantification process to estimate required capital for the Corporation and applicableU.S. banking subsidiaries.Northern Trust's AMA capital quantification process incorporates outputs from the Loss Event Data, Risk and Control Self-Assessment and Operational Risk Scenario Analysis programs to derive required capital. Business environment factor information is used to estimate loss frequency. The AMA capital quantification process uses a Loss Distribution Approach methodology to combine frequency and severity distributions to arrive at an estimate of the potential aggregate loss at the 99.9th percentile of the aggregate loss distribution over a one-year time horizon. Information Security and Technology Management Effective management of risks related to the confidentiality, integrity and availability of information is crucial in an environment of increasing cyber threat and requires a structured approach to establish and communicate expectations and required practices.Northern Trust's information security and technology risk management framework includes a comprehensive governance structure and an Information Security and Technology Risk Management Policy and Program approved by the Business Risk Committee. The framework is supported by an organizational structure that reflects support from executive management and includes risk committees comprised of members from across the businesses, including theInformation Security and Technology Risk Committee (ISTRC). The ISTRC is chaired by the Chief Information Risk Officer, who regularly reports to the Business Risk Committee on the status of the Information Security and Technology Risk Management Program. In addition to a strong governance process, internal controls and risk management practices are designed to keep risk at levels appropriate toNorthern Trust's overall risk appetite and the inherent risk in the markets in whichNorthern Trust operates.Northern Trust employees are responsible for promoting information security as well as adhering to applicable policies and standards and other means provided to them to safeguard electronic information and business systems within their care. Training and awareness programs to educate employees on information security are ongoing and include multiple approaches such as mandatory computer-based training, phishing simulations, and the designation of individuals as Information Security and Privacy Champions within the businesses. In cases whereNorthern Trust relies on vendors to perform services, controls are routinely reviewed for alignment with industry standards and their ability to protect information. Any findings identified are remediated following a risk-based approach. In addition to the various information security controls managed and monitored within the organization,Northern Trust uses external third-party security teams on a regular basis to assess effectiveness. These teams perform security program maturity assessments, penetration tests, security assessments and reviews ofNorthern Trust's susceptibility to social engineering attacks such as spear phishing.Northern Trust operates a global security operations center for threat identification and response. This center aggregates security threat information from systems and platforms across the businesses, and alerts the organization in accordance with its documented Cyber Incident Response Plan. 80 2019 Annual Report |Northern Trust Corporation
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The Cyber Incident Response Plan is used to respond to cybersecurity incidents. A cybersecurity incident is defined as an incident caused by damaging activity, which requires actions to prevent and respond to disruptions, denials, compromises or exfiltration that impact the confidentiality, integrity and availably of the assets ofNorthern Trust or its clients. The plan provides a streamlined approach that can be invoked rapidly to address matters that raise enterprise concern and to communicate impact, actions and status to senior management, including the Chief Information Security Officer and Chief Information Risk Officer, and appropriate stakeholders. The plan is designed to work with enterprise-level response plans, and is reviewed, tested, and updated regularly.Northern Trust's disclosure controls and procedures also address cybersecurity incidents and include elements to ensure that there is an analysis of potential disclosure obligations arising from any such incidents.Northern Trust also maintains compliance programs to address the applicability of restrictions on securities trading while in possession of material, nonpublic information, including in instances in which such information may relate to cybersecurity incidents. Business Resiliency and Continuity ManagementNorthern Trust's business resiliency approach encompasses business continuity and disaster recovery processes enterprise-wide (including staff, technology and facilities) to ensure that following a disaster or business interruptionNorthern Trust resumes mission-critical business and economic functions and fulfills all regulatory and legal requirements.Northern Trust's business resiliency mitigation and preventative measures include sophisticated physical security, resilient designs and peer capacity for its corporate data centers, a highly redundant global network, robust network security, resiliency centers that offer alternative workstations, and transfer of work and work-from-home programs that provide further capability. All ofNorthern Trust's businesses are required to risk-assess their critical functions regularly and develop business continuity plans covering resource requirements (people, systems, vendor relationships and other assets), arrangements for obtaining these resources and prioritizing the resumption of each function in compliance with corporate standards. The strength of the business continuity programs of all critical third-party vendors toNorthern Trust are reviewed on a regular basis. All ofNorthern Trust's businesses test their plans at least annually. The ORC annually reviews and presents the corporate business continuity plan to the Business Risk Committee.Northern Trust has also begun exploring the integration of climate-related scenario analyses into its broader risk management program to help align with certain recommendations of theTask Force on Climate Related Financial Disclosures (TCFD). Conducting such climate-related scenario analyses and assessing the magnitude of climate-related financial risks and opportunities related toNorthern Trust's global assets are intended to position the organization to navigate uncertain climate futures more effectively. Fiduciary Risk Fiduciary risks are risks arising from the failure in administering or managing financial and other assets in clients' fiduciary accounts: i) to adhere to a fiduciary standard of care if required under the terms of governing documents or applicable laws; or ii) to properly discharge fiduciary duties. Fiduciary status may hinge on the nature of a particular function being performed and fiduciary standards may vary by jurisdiction, type of relationship and governing document. Fiduciary Risk Overview The fiduciary risk management framework identifies, assesses, measures, monitors and reports on fiduciary risk matters deemed significant. Fiduciary risk is mitigated through internal controls and risk management practices that are designed to identify, understand and keep such risk at levels consistent with the organization's overall risk appetite while also managing the inherent risk in each relationship for whichNorthern Trust serves in a fiduciary capacity. Each business is responsible for complying with all corporate policies and external regulations and for establishing specific procedures, standards and guidelines to manage fiduciary risk within the desired risk appetite level. Fiduciary Risk Framework and Governance The FRC is responsible for establishing and reviewing the fiduciary risk policies and establishing the fiduciary risk framework, governance and programs that support the coordination of fiduciary risk activities to identify, monitor, manage and report on fiduciary risk. In addition, the FRC serves as an escalation point for significant issues raised by its subcommittees or elsewhere in the organization. Compliance Risk Compliance risk is the risk of legal or regulatory sanctions, financial loss, or damage to reputation resulting from failure to comply with laws, regulations, rules, other regulatory requirements, or codes of conduct and other standards of self-regulatory organizations applicable toNorthern Trust . Compliance risk includes the following two subcategories: • Regulatory Risk - risk arising from failure to comply with prudential and conduct of business or other regulatory requirements. 2019 Annual Report |Northern Trust Corporation 81
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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• Financial Crime Risk - risk arising from financial crime (e.g., money
laundering, sanctions violations, fraud, insider dealing, theft, etc.) in
relation to the products, services, or accounts of the institution, its
clients, or others associated with the same.
Compliance Risk Framework and Governance
The compliance risk management framework identifies, assesses, controls,
measures, monitors and reports on compliance risk. The framework is designed to
minimize compliance risk and maintain an environment in which criminal or
regulatory violations do not occur. The framework includes a comprehensive
governance structure and a Compliance and Ethics Program approved by the
Business Risk Committee.
Each business is responsible for the implementation and effectiveness of the
Compliance and Ethics Program and specific compliance policies within their
respective businesses. Each business is responsible for its respective
employees' compliance with corporate policies and external regulations and for
establishing specific procedures, standards and guidelines to manage compliance
risk in accordance with Northern Trust's Compliance and Ethics Program.
The CEOC establishes and monitors adherence to Northern Trust's Compliance and
Ethics Program. The Chief Compliance and Ethics Officer reports to the Business
Risk Committee, as appropriate, and chairs the CEOC.
Liquidity Risk
Liquidity risk is the risk of not being able to raise sufficient funds or
maintain collateral to meet balance sheet and contingent liability cash flow
obligations when due, because of firm-specific or market-wide stress events.
Liquidity Risk Overview
Northern Trust maintains a strong liquidity position and conservative liquidity
risk profile. Northern Trust's balance sheet is primarily liability-driven. That
is, the main driver of balance sheet changes comes from changing levels of
client deposits, which are generally related to the level of custody assets
serviced and commercial and personal deposits. This liability-driven business
model differs from a typical asset-driven business model, where increased levels
of deposits and wholesale borrowings are required to support, for example,
increased levels of lending. Northern Trust's balance sheet is generally
comprised of high-quality assets that are managed to meet anticipated
obligations under stress, resulting in low liquidity risk.
Liquidity Risk Framework and Governance
Northern Trust maintains a liquidity risk framework consisting of risk
management policies and practices to keep its risk profile within the
Board-approved Corporate Risk Appetite Statement. All liquidity risk activities
are overseen by the Risk Management function, which is independent of the
businesses undertaking the activities.
The Liquidity Management Policy and exposure limits for liquidity risk are set
by the Board, and committee structures have been established to implement and
monitor adherence to corporate policies, external regulations and established
procedures. Limits are monitored based on measures such as the liquidity
coverage ratio (LCR) and the liquidity stress-testing buffer across a range of
time horizons. Treasury , in the first line of defense, proposes liquidity risk
management strategies and is responsible for performing liquidity management
activities. The Asset and Liability Management Committee (ALCO) provides first
line management oversight and is responsible for approving strategies and
activities within the risk appetite, monitoring risk metrics, overseeing balance
sheet resources, and reviewing reporting such as cash flows, LCR, and stress
test results.
Market and Liquidity Risk Management, in the second line of defense, provides
challenge to the first line activities, evaluates compliance with regulatory
requirements and process effectiveness, and escalates material items for
corrective action. The MLRC provides second line oversight and is responsible
for reviewing market and liquidity risk exposures, approving and monitoring risk
metrics, and approving key methodologies and assumptions that drive liquidity
risk measurement.
Liquidity Risk Analysis, Monitoring, and Reporting
Liquidity risk is analyzed and monitored in order to ensure compliance with the
approved risk appetite. Various liquidity analysis and monitoring activities are
employed by Northern Trust to understand better the nature and sources of its
liquidity risks, including: liquidity stress testing, liquidity metric
monitoring, collateral management, intraday management, cash flow projections,
operational deposit modeling, liquid asset buffer measurement, funds transfer
pricing, and contingency funding planning.
The liquidity risk management process is supported through management and
regulatory reporting. Both Northern Trust's Treasury and Market and Liquidity
Risk Management functions produce management reports that enable oversight
bodies to make informed decisions and support management of liquidity risk
within the approved risk appetite. Holistic liquidity metrics
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such as LCR and internal liquidity stress testing are actively monitored, along with a suite of other metrics that provide early warning indicators of changes in the risk profile. Market Risk There are two types of market risk, interest rate risk and trading risk. Interest rate risk is the potential for movements in interest rates to cause changes in net interest income and the market value of equity. Trading risk is the potential for movements in market variables such as foreign exchange and interest rates to cause changes in the value of trading positions. Market Risk Framework and GovernanceNorthern Trust maintains a market risk framework consisting of risk management policies and practices to keep its risk profile within the Board-approved Corporate Risk Appetite Statement. All market risk activities are overseen by the Risk Management function, which is independent of the businesses undertaking the activities. The Asset and Liability Management Policy, Policy on Dealer Trading Activities, and exposure limits for market risk are set by board-level committees, and committee structures have been established to implement and monitor adherence to corporate policies, external regulations and established procedures. Limits are monitored based on measures such as sensitivity of net interest income (NII), sensitivity of market value of equity (MVE), and Value-at-Risk (VaR) across a range of time horizons.Treasury , in the first line of defense, proposes market risk management strategies and is responsible for performing market risk management activities. ALCO provides first line management oversight and is responsible for approving strategies and activities within the risk appetite, monitoring risk metrics, overseeing balance sheet resources, and reviewing reporting such as stress test results. Market and Liquidity Risk Management, in the second line of defense, provides challenge to the first line activities, evaluates compliance with regulatory requirements and process effectiveness, and escalates material items for corrective action. The MLRC provides second line oversight and is responsible for reviewing market risk exposures, establishing and monitoring risk metrics, and approving key methodologies and assumptions that drive market risk measurement. Interest Rate Risk Overview Interest rate risk in the banking book is the potential for deterioration inNorthern Trust's financial position (e.g. interest income, market value of equity, or capital) due to changes in interest rates. NII and MVE sensitivity are the primary metrics used for measurement and management of interest rate risk. Changes in interest rates can have a positive or negative impact on NII depending on the positioning of assets, liabilities and off-balance-sheet instruments. Changes in interest rates also can impact the values of assets, liabilities and off-balance-sheet positions, which indirectly impact the MVE. To mitigate interest rate risk, the structure of the balance sheet is managed so that movements of interest rates on assets and liabilities (adjusted for hedges) are sufficiently correlated, which allowsNorthern Trust to manage its interest rate risk within its risk appetite. There are four commonly recognized types of interest rate risk in the banking book: • repricing, which arises from differences in the maturity and repricing terms
of assets and liabilities;
• yield curve, which arises from changes in the shape of the yield curve;
• basis, which arises from imperfect correlation in the adjustment of the rates
earned and paid on different financial instruments with otherwise similar
repricing characteristics; and
• embedded optionality, which arises from client or counterparty behavior in
response to interest rate changes.
Interest Rate Risk Analysis, Monitoring, andReporting Northern Trust uses two primary measurement techniques to manage interest rate risk: NII and MVE sensitivity. NII sensitivity provides management with a short-term view of the impact of interest rate changes on NII. MVE sensitivity provides management with a long-term view of interest rate changes on MVE based on the period-end balance sheet.Northern Trust limits aggregate interest rate risk (as measured by the NII sensitivity and MVE sensitivity simulation techniques) to an acceptable level within the context of risk appetite. A variety of actions may be used to implement risk management strategies to modify interest rate risk including: • purchase of securities;
• sale of debt securities that are classified as available for sale;
• issuance of senior notes and subordinated notes;
• collateralized borrowings from the
• placing and taking Eurodollar time deposits; and
• hedging with various types of derivative financial instruments.
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NII Sensitivity The modeling of NII sensitivity incorporates on-balance-sheet positions, as well as derivative financial instruments (principally interest rate swaps) that are used to manage interest rate risk.Northern Trust uses market implied forward interest rates as the base case and measures the sensitivity (i.e., change) of a static balance sheet to changes in interest rates. Stress testing of interest rates is performed to include such scenarios as immediate parallel shocks to rates, nonparallel (i.e., twist) changes to yield curves that result in their becoming steeper or flatter, and changes to the relationship among the yield curves (i.e., basis risk). The NII sensitivity analysis incorporates certain critical assumptions such as interest rates and client behaviors under changing rate environments. These assumptions are based on a combination of historical analysis and future expected pricing behavior. The simulation cannot precisely estimate NII sensitivity given uncertainty in the assumptions. The following key assumptions are incorporated into the NII simulation: • the balance sheet size and mix remains constant over the simulation horizon
with maturing assets and liabilities replaced with instruments with similar
terms as those that are maturing, with the exception of certain nonmaturity
deposits that are considered short-term in nature and therefore receive a
more conservative interest-bearing treatment;
• prepayments on mortgage loans and securities collateralized by mortgages are
projected under each rate scenario using a third-party mortgage analytics
system that incorporates market prepayment assumptions;
• cash flows for structured securities are estimated using a third-party vendor
in conjunction with the prepayments provided by the third-party mortgage
analytics vendor;
• nonmaturity deposit pricing is projected based on
historical patterns and management judgment, depending upon the availability
of historical data and current pricing strategies/or judgment; and
• new business rates are based on current spreads to market indices.
The following table shows the estimated NII impact over the next twelve months of 100 and 200 basis point upward and 100 basis point downward movements in interest rates relative to forward rates. Each rate movement is assumed to occur gradually over a one-year period.
TABLE 55: NET INTEREST INCOME SENSITIVITY AS OF
INCREASE/(DECREASE)
ESTIMATED IMPACT ON
NEXT TWELVE MONTHS
($ In Millions) OF NET
INTEREST INCOME
INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES
$ 70
200 Basis Points 85
DECREASE IN INTEREST RATES BELOW MARKET IMPLIED FORWARD RATES
100 Basis Points (77 )
The NII sensitivity analysis does not incorporate certain management actions
that may be used to mitigate adverse effects of actual interest rate movement.
For that reason and others, the estimated impacts do not reflect the likely
actual results but serve as estimates of interest rate risk. NII sensitivity is
not comparable to actual results disclosed elsewhere or directly predictive of
future values of other measures provided.
MVE Sensitivity
MVE is defined as the present value of assets minus the present value of
liabilities, net of the value of financial derivatives that are used to manage
the interest rate risk of balance sheet items. The potential effect of interest
rate changes on MVE is derived from the impact of such changes on projected
future cash flows and the present value of these cash flows and is then compared
to the established limit. Northern Trust uses current market rates (and the
future rates implied by these market rates) as the base case and measures MVE
sensitivity under various rate scenarios. Stress testing of interest rates is
performed to include such scenarios as immediate parallel shocks to rates,
nonparallel (i.e., twist) changes to yield curves that result in their becoming
steeper or flatter, and changes to the relationship among the yield curves
(i.e., basis risk).
The MVE sensitivity analysis incorporates certain critical assumptions such as
interest rates and client behaviors under changing rate environments. These
assumptions are based on a combination of historical analysis and future
expected pricing behavior. The simulation cannot precisely estimate MVE
sensitivity given uncertainty in the assumptions. Many of the assumptions that
apply to NII sensitivity also apply to MVE sensitivity simulations, with the
following separate key assumptions incorporated into the MVE simulation:
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• the present value of nonmaturity deposits are estimated using dynamic decay
methodologies or estimated remaining lives, which are based on a combination
of
judgment-some balances are assumed to be core and have longer lives while
other balances are assumed to be temporary and have comparatively shorter
lives;
• the present values of most noninterest-related balances (such as receivables,
equipment, and payables) are the same as their book values; and
• Monte Carlo simulation is used to generate forward interest rate paths.
The following table shows the estimated impact on MVE of 100 and 200 basis point shocks up and a 100 basis point shock down from current market implied forward rates.
TABLE 56: MARKET VALUE OF EQUITY SENSITIVITY AS OF
INCREASE/(DECREASE)
ESTIMATED IMPACT ON
MARKET VALUE OF
($ In Millions) EQUITY
INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES
$ (203 )
200 Basis Points (773 )
DECREASE IN INTEREST RATES BELOW MARKET IMPLIED FORWARD RATES
45
The MVE simulations do not incorporate certain management actions that may be
used to mitigate adverse effects of actual interest rate movements. For that
reason and others, the estimated impacts do not reflect the likely actual
results but serve as estimates of interest rate risk. MVE sensitivity is not
comparable to actual results disclosed elsewhere or directly predictive of
future values of other measures provided.
Foreign Currency Risk Overview
Northern Trust's balance sheet is exposed to nontrading foreign currency risk as
a result of its holdings of non-U.S. dollar denominated assets and liabilities,
investment in non-U.S. subsidiaries, and future non-U.S. dollar denominated
revenue and expense. To manage currency exposures on the balance sheet, Northern
Trust attempts to match its assets and liabilities by currency. If those
currency offsets do not exist on the balance sheet, Northern Trust will use
foreign exchange derivative contracts to mitigate its currency exposure. Foreign
exchange contracts are also used to reduce Northern Trust's currency exposure to
future non-U.S. dollar denominated revenue and expense.
In addition, Northern Trust provides global foreign exchange (GFX) services to
clients. Most of these services are provided in connection with Northern Trust's
growing global custody business. In the normal course of business, Northern
Trust also engages in trading of non-U.S. currencies for its own account. Both
activities are considered trading activities.
Foreign currency trading positions exist when aggregate obligations to purchase
and sell a currency other than the U.S. dollar do not offset each other in
amount, or offset each other over different time periods. The GFX trading
portfolio at Northern Trust is composed of spot, forward, and non-deliverable
foreign currency transactions. For GFX, spot risk is driven primarily by foreign
exchange rate (FX) risk, and forward risk is driven primarily by interest rate
(IR) risk.
Foreign Currency Risk Measurement
Northern Trust measures daily the risk of loss associated with all non-U.S.
currency positions using a VaR model and applying the historical simulation
methodology. This statistical model provides estimates, based on a variety of
high confidence levels, of the potential loss in value that might be incurred if
an adverse shift in non-U.S. currency exchange rates were to occur over a small
number of days. The model incorporates foreign currency and interest rate
volatilities and correlations in price movements among the currencies. VaR is
computed for each trading desk and for the global portfolio.
VaR measures are computed in a vended software application which reads foreign
exchange positions from Northern Trust's trading systems each day. Data vendors
provide foreign exchange rates and interest rates for all currencies. The Risk
Management function monitors on a daily basis VaR model inputs and outputs for
reasonableness.
Foreign Currency Risk Monitoring, Reporting and Analysis
Northern Trust monitors several variations of the GFX VaR measures to meet
specific regulatory and internal management needs. Variations include different
methodologies (historical simulation, Monte Carlo simulation and Taylor
approximation), horizons of one day and ten days, confidence levels of 95% and
99%, subcomponent VaRs using only FX drivers and only
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IR drivers, and look back periods of one year, two years, and four years. Those alternative measures provide management an array of corroborating metrics and alternative perspectives onNorthern Trust's market risks. Automated daily reports are produced and distributed to business managers and risk managers. The Risk Management function also reviews and reports several variations of the VaR measures in historical time series format to provide management with a historical perspective on risk. The table below presents the levels of total regulatory VaR and its subcomponents for GFX in the years indicated below, based on the historical simulation methodology, a 99% confidence level, a one-day horizon and equally-weighted volatility. The total VaR for GFX is typically less than the sum of its two subcomponents due to diversification benefits derived from the two subcomponents.
TABLE 57: GLOBAL FOREIGN CURRENCY VALUE-AT-RISK
TOTAL VaR
($ In Millions) (FX AND IR DRIVERS) FX VaR (FX DRIVERS ONLY) IR VaR (IR DRIVERS ONLY)
FOR THE YEAR ENDED
DECEMBER 31, 2019 2018 2019 2018 2019 2018
High $ 0.3 $ 0.3 $ 0.3 $ 0.2 $ 0.2 $ 0.3
Low - 0.1 - - - -
Average 0.1 0.1 0.1 0.1 0.1 0.1
As of December 31, 0.1 0.1 0.1 0.1 0.1 0.1
During 2019, Northern Trust experienced one day of actual GFX trading loss in
excess of the daily GFX VaR estimate. During 2018, Northern Trust did not incur
an actual GFX trading loss in excess of the daily GFX VaR estimate.
Other Nonmaterial Trading Activities
Market risk associated with other trading activities is negligible. Northern
Trust's broker-dealer subsidiary, Northern Trust Securities, Inc., maintains a
small portfolio of trading securities held for customer accommodation purposes,
which averaged $1.2 million for the year ended December 31, 2019.
Northern Trust is also party to interest rate derivative contracts consisting
mostly of interest rate swaps and swaptions entered into to meet clients'
interest rate management needs, but also including a small number of caps and
floors. All interest rate derivative transactions are executed by Northern
Trust's Treasury department. When Northern Trust enters into client
transactions, its practice is to mitigate the resulting market risk with
offsetting interbank derivative transactions with matching terms and maturities.
Strategic Risk
Strategic risk is the vulnerability of the organization to internal or external
developments that render corporate strategy ineffective or unachievable. The
consequences of strategic risk can be diminished long-term earnings and capital,
as well as reputational damage to the firm. Strategic risk includes the
following three subcategories:
• Macroeconomic and geopolitical risk, which centers on events or themes that
would have a significant, detrimental impact on financial markets, and by
extension, financial services firms. Episodes of this kind would tend to have
general, as opposed to idiosyncratic, consequences.
• Business risk, which arises from change in the following areas:
• Internal: situations within
continuity, profitability, or the achievement of strategic objectives
• Secular: behavioral or technological change that affects clients and
renders a Northern Trust process or service obsolete
• Competitive: new products or shifts in the industry landscape that
challenge Northern Trust's performance
• Regulatory: changes to prudential or fiscal policy that have an adverse
impact on Northern Trust or its clients
• Reputation risk is a residual risk which arises from negative perception on
the part of clients, counterparties, stockholders, investors, debt holders,
market analysts, regulators, staff, or other relevant parties that adversely
affects
arise from a range of risk events and is not limited to strategic risk.
Strategic Risk Framework and GovernanceNorthern Trust maintains a framework that consists of risk management policies and practices designed to identify, analyze, and limit (where possible) the impact of strategic risk. TheStrategic Risk Management function is responsible for defining this framework and providing independent oversight of its application acrossNorthern Trust . In furtherance of this effort,Northern Trust has established governance around its strategic planning processes to review and challenge strategic decisions. 86 2019 Annual Report |Northern Trust Corporation
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In addition,Northern Trust maintains a Global Stress Testing Framework which guides stress testing exercises across the company. Enterprise stress testing, a component of this effort, is specifically designed to look at the prospective impact of internal and external shocks on the organization.Northern Trust also maintains the Global Emergency Response Plan, which guides its reaction to adverse external events if they arise. Both GERC and the Business Risk Committee are responsible for reviewing the general methods, guidelines and policies by whichNorthern Trust monitors and controls strategic risk. FORWARD-LOOKING STATEMENTS This report may include statements which constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified typically by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "project," "likely," "plan," "goal," "target," "strategy," and similar expressions or future or conditional verbs such as "may," "will," "should," "would," and "could." Forward-looking statements include statements, other than those related to historical facts, that relate toNorthern Trust's financial results and outlook; capital adequacy; dividend policy and share repurchase program; accounting estimates and assumptions; credit quality including allowance levels; future pension plan contributions; effective tax rate; anticipated expense levels; contingent liabilities; acquisitions; strategies; market and industry trends; and expectations regarding the impact of accounting pronouncements and legislation. These statements are based onNorthern Trust's current beliefs and expectations of future events or future results, and involve risks and uncertainties that are difficult to predict and subject to change. These statements are also based on assumptions about many important factors, including: • financial market disruptions or economic recession inthe United States or
other countries across the globe resulting from any of a number of factors,
including, for example, actual or potential changes to international trade
policy;
• volatility or changes in financial markets, including debt and equity
markets, that impact the value, liquidity, or credit ratings of financial
assets in general, or financial assets held in particular investment funds or
client portfolios, including those funds, portfolios, and other financial
assets with respect to which
take, actions to provide asset value stability or additional liquidity;
• the impact of equity markets on fee revenue;
• the downgrade of
• changes in foreign exchange trading client volumes and volatility in foreign
currency exchange rates, changes in the valuation of the
to other currencies in which
expenses, and
arising from all such changes and volatility;
• a decline in the value of securities held in
portfolio, particularly asset-backed securities, the liquidity and pricing of
which may be negatively impacted by periods of economic turmoil and financial
market disruptions;
•
to cyber-security, data security, human errors or omissions, pricing or
valuation of securities, fraud, systems performance or defects, systems
interruptions, and breakdowns in processes or internal controls;
•
advancements in technology;
• a significant downgrade of any of
• the health and soundness of the financial institutions and other
counterparties with which
• uncertainties inherent in the complex and subjective judgments required to
assess credit risk and establish appropriate allowances therefor;
• changes in the method pursuant to which the London Interbank Offered Rate
(LIBOR) or other interest rate benchmarks are determined;
• the pace and extent of continued globalization of investment activity and
growth in worldwide financial assets;
• changes in interest rates or in the monetary or other policies of various
regulatory authorities or central banks;
• changes in the legal, regulatory and enforcement framework and oversight
applicable to financial institutions, including
• increased costs of compliance and other risks associated with changes in
regulation, the current regulatory environment, and areas of increased
regulatory emphasis and oversight in
such as anti-money laundering, anti-bribery, and data privacy;
• failure to satisfy regulatory standards or to obtain regulatory approvals
when required, including for the use and distribution of capital;
• changes in tax laws, accounting requirements or interpretations and other
legislation in the United States or other countries that could affect
Northern Trust or its clients;
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• geopolitical risks, risks related to global climate change and the risks of
extraordinary events such as natural disasters, pandemics, terrorist events
and war, and the responses of
events;
• the departure of the
referred to as "Brexit," and any negative effects thereof on global economic
conditions, global financial markets, and our business and results of
operations;
• changes in the nature and activities of
•
generate new business in existing and targeted markets and its ability to
deploy deposits in a profitable manner consistent with its liquidity
requirements;
•
and manage compliance with legal, tax, regulatory and other requirements;
•
margins;
•
satisfy clients and to develop an array of investment products;
•
to support business growth and expansion and maintain sufficient expertise to
support increasingly complex products and services;
•
including its "Value for Spend" initiative;
• uncertainties inherent in
plan, including discount rates and expected contributions, returns and
payouts;
•
practices and controls and managing risks inherent in its businesses,
including credit risk, operational risk, market and liquidity risk, fiduciary
risk, compliance risk and strategic risk;
• risks and uncertainties inherent in the litigation and regulatory process,
including the possibility that losses may be in excess of
recorded liability and estimated range of possible loss for litigation
exposures;
• risks associated with being a holding company, including
dependence on dividends from its principal subsidiary;
• the risk of damage to
confidence of clients, counterparties, rating agencies, and stockholders; and
• other factors identified elsewhere in this Annual Report on Form 10-K,
including those factors described in Item 1A, "Risk Factors," and other
filings with the
Actual results may differ materially from those expressed or implied by forward-looking statements. The information contained herein is current only as of the date of that information. All forward-looking statements included in this document are based upon information presently available, andNorthern Trust assumes no obligation to update its forward-looking statements. 88 2019 Annual Report |Northern Trust Corporation
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SUPPLEMENTAL INFORMATION Reconciliation to Fully Taxable Equivalent The following table presents a reconciliation of interest income, net interest income, net interest margin, and total revenue prepared in accordance with GAAP to such measures on an FTE basis, which are non-GAAP financial measures. Management believes this presentation provides a clearer indication of these financial measures for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income.
TABLE 58: RECONCILIATION TO FULLY TAXABLE EQUIVALENT
FOR THE YEAR ENDED DECEMBER 31,
2019 2018 2017
($ In Millions) REPORTED FTE ADJ. FTE REPORTED FTE ADJ. FTE REPORTED FTE ADJ. FTE
Interest Income $ 2,499.9 $ 32.8 $ 2,532.7 $ 2,321.4 $ 41.2 $ 2,362.6 $ 1,769.4 $ 45.8 $ 1,815.2
Interest Expense 822.0 - 822.0 698.7 - 698.7 340.2 - 340.2Net Interest Income $ 1,677.9 $ 32.8 $ 1,710.7 $ 1,622.7 $ 41.2 $ 1,663.9 $ 1,429.2 $ 45.8 $ 1,475.0 Net Interest Margin 1.57 %
1.60 % 1.43 % 1.46 % 1.29 % 1.33 %
Total Revenue $ 6,073.1 $ 32.8 $ 6,105.9 $ 5,960.2 $ 41.2 $ 6,001.4 $ 5,375.3 $ 45.8 $ 5,421.1
FOR THE YEAR ENDED DECEMBER 31,
2016 2015
($ In Millions) REPORTED FTE ADJ. FTE REPORTED FTE ADJ. FTE
Interest Income $ 1,416.9 $ 25.1 $ 1,442.0 $ 1,224.0 $ 25.3 $ 1,249.3
Interest Expense 182.0 - 182.0 153.9 - 153.9
Net Interest Income $ 1,234.9 $ 25.1 $ 1,260.0 $ 1,070.1 $ 25.3 $ 1,095.4
Net Interest Margin 1.15 % 1.18 % 1.05 % 1.07 %
Total Revenue $ 4,961.8 $ 25.1 $ 4,986.9 $ 4,702.6 $ 25.3 $ 4,727.9
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Quarterly Financial Data (Unaudited) The following table presents quarterly financial data for years ended 2019 and 2018. TABLE 59: QUARTERLY FINANCIAL DATA (UNAUDITED) STATEMENTS OF INCOME 2019 2018 ($ In Millions Except Per FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST Share Information) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER Trust, Investment and Other Servicing Fees $ 992.2 $ 975.5 $ 955.5 $ 928.9 $ 933.9 $ 939.2 $ 942.9 $ 937.7 Other Noninterest Income 134.7 144.7 133.7 130.0 152.7 126.9 149.9 154.3 Net Interest Income Interest Income 576.1 620.8 640.2 662.8 648.6 599.2 567.7 505.9 Interest Expense 155.3 203.1 222.8 240.8 231.4 191.0 154.4 121.9 Net Interest Income 420.8 417.7 417.4 422.0 417.2 408.2 413.3 384.0 Provision for Credit Losses (1.0 ) (7.0 ) (6.5 ) - (4.0 ) (9.0 ) 1.5 (3.0 ) Noninterest Expense 1,072.3 1,036.3 1,006.2 1,028.7 1,021.9 1,002.3 997.4 995.3 Provision for Income Taxes 105.3 124.0 117.5 105.1 76.0 106.5 116.8 102.1 Net Income $ 371.1 $ 384.6 $ 389.4 $ 347.1 $ 409.9 $ 374.5 $ 390.4 $ 381.6 Preferred Stock Dividends 5.8 17.4 5.9 17.3 5.9 17.3 5.9 17.3 Net Income Applicable to Common Stock $ 365.3 $ 367.2 $ 383.5 $ 329.8 $ 404.0 $ 357.2 $ 384.5 $ 364.3 PER COMMON SHARE Net Income - Basic $ 1.71 $ 1.70 $ 1.76 $ 1.49 $ 1.81 $ 1.59 $ 1.69 $ 1.59 - Diluted 1.70 1.69 1.75 1.48 1.80 1.58 1.68 1.58 AVERAGE BALANCE SHEET ASSETS Cash and Due from Banks $ 2,292.6 $ 2,551.5 $ 2,784.3 $ 1,940.7 $ 2,400.9 $ 2,702.9 $ 2,440.5 $ 2,593.2Federal Reserve and Other Central Bank Deposits and Other(1) 17,230.0 17,524.9 19,236.2
20,163.2 21,762.6 22,889.6 24,512.8 26,495.1 Interest-Bearing Due from and Deposits with Banks(2)
6,073.9 5,656.5 5,811.9 6,452.2 5,228.9 5,410.3 6,556.9 6,920.4
Federal Funds Sold and
Securities Purchased under
Agreements to Resell 945.9 816.9 650.9 978.1 1,334.3 1,775.2 1,417.1 1,467.1
Securities(3) 51,919.0 50,024.9 48,911.2 51,889.3 52,228.6 50,820.8 49,692.4 48,335.7
Loans and Leases 30,990.8 30,935.9 31,098.9 31,189.4 31,623.8 31,798.9 32,235.4 32,468.0 Allowance for Credit Losses Assigned to Loans and Leases (105.5 ) (111.2 ) (115.1 )
(114.0 ) (120.3 ) (127.6 ) (126.4 ) (131.0 ) Other Assets 8,758.6 8,952.7 7,980.6 6,917.8 6,855.4 6,885.5 7,138.0 6,344.8 Total Assets $ 118,105.3 $ 116,352.1 $ 116,358.9 $ 119,416.7 $ 121,314.2 $ 122,155.6 $ 123,866.7 $ 124,493.3 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand and Other Noninterest-Bearing $ 17,462.9 $ 16,687.3 $ 17,826.5 $ 17,858.4 $ 19,211.2 $ 19,430.5 $ 21,484.7 $ 22,022.9 Savings, Money Market, and Other 18,130.2 17,802.7 15,950.9 14,372.8 14,349.1 14,787.6 15,565.0 15,916.4 Savings Certificates and Other Time 919.0 898.9 888.6 761.4 721.1 810.5 896.6 1,058.5 Non-U.S. Offices - Interest-Bearing 52,925.8 53,631.5 54,679.9 58,377.2 58,873.9 58,473.2 57,684.5 59,199.7 Total Deposits 89,437.9 89,020.4 89,345.9 91,369.8 93,155.3 93,501.8 95,630.8 98,197.5 Short-Term Borrowings 8,770.5 8,768.8 9,427.6 10,494.0 10,987.9 11,380.7 11,336.2 9,405.3 Senior Notes 2,584.6 2,587.7 2,361.4 2,014.1 1,996.5 1,818.0 1,497.6 1,497.4 Long-Term Debt 1,154.0 1,156.7 1,131.6
1,112.9 1,099.6 1,254.4 1,410.8 1,426.5 Floating Rate Capital Debt 277.7 277.7 277.6
277.6 277.6 277.6 277.5 277.5 Other Liabilities 4,948.0 3,853.0 3,276.7 3,719.5 3,498.5 3,648.5 3,511.7 3,551.4 Stockholders' Equity 10,932.6 10,687.8 10,538.1 10,428.8 10,298.8 10,274.6 10,202.1 10,137.7 Total Liabilities and Stockholders' Equity $ 118,105.3 $ 116,352.1 $ 116,358.9 $ 119,416.7 $ 121,314.2 $ 122,155.6 $ 123,866.7 $ 124,493.3 (1)Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets in the consolidated balance sheets as of December 31, 2019, and 2018. (2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented in the consolidated balance sheets as of December 31, 2019, and 2018.. (3) Securities includeFederal Reserve and Federal Home Loan Bank stock and certain community development investments which are classified in Other Assets in the consolidated balance sheets as of December 31, 2019 and 2018.
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ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this item is incorporated herein by reference to the "Risk Management" section of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K.
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