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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
FORM 10-Q
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-36609
NORTHERN TRUST CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | |
| Delaware | 36-2723087 |
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification No.) |
| | | | | | | | |
| 50 South LaSalle Street | 60603 |
| Chicago, | Illinois | (Zip Code) |
| (Address of principal executive offices) | |
Registrant’s telephone number, including area code: (312) 630-6000
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, $1.66 2/3 Par Value | NTRS | The NASDAQ Stock Market LLC |
| Depositary Shares, each representing 1/1,000th interest in a share of Series E Non-Cumulative Perpetual Preferred Stock | NTRSO | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer | x | Accelerated filer | ¨ |
| | | |
| Non-accelerated filer | ¨ | Smaller reporting company | ☐ |
| | | |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
At September 30, 2022, 208,415,673 shares of common stock, $1.66 2/3 par value, were outstanding.
NORTHERN TRUST CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL HIGHLIGHTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| CONDENSED INCOME STATEMENTS ($ In Millions) | 2022 | 2021 | % CHANGE(1) | 2022 | 2021 | % CHANGE(1) |
| Noninterest Income | $ | 1,241.8 | | $ | 1,287.4 | | (4) | % | $ | 3,889.5 | | $ | 3,775.4 | | 3 | % |
| Net Interest Income | 513.0 | | 346.4 | | 48 | | 1,352.7 | | 1,022.1 | | 32 | |
| Total Revenue | 1,754.8 | | 1,633.8 | | 7 | | 5,242.2 | | 4,797.5 | | 9 | |
| Provision for Credit Losses | 0.5 | | (13.0) | | N/M | 7.0 | | (70.0) | | N/M |
| Noninterest Expense | 1,229.8 | | 1,128.7 | | 9 | | 3,659.3 | | 3,367.0 | | 9 | |
| Income before Income Taxes | 524.5 | | 518.1 | | 1 | | 1,575.9 | | 1,500.5 | | 5 | |
| Provision for Income Taxes | 129.7 | | 122.4 | | 6 | | 395.6 | | 361.6 | | 9 | |
| Net Income | $ | 394.8 | | $ | 395.7 | | — | % | $ | 1,180.3 | | $ | 1,138.9 | | 4 | % |
| | | | | | | | | | | | | | | | | | | | |
| PER COMMON SHARE | | | | | | |
| Net Income — Basic | $ | 1.80 | | $ | 1.81 | | — | % | $ | 5.44 | | $ | 5.24 | | 4 | % |
| — Diluted | 1.80 | | 1.80 | | — | | 5.43 | | 5.22 | | 4 | |
| Cash Dividends Declared Per Common Share | 0.75 | | 0.70 | | 7 | | 2.15 | | 2.10 | | 2 | |
| Book Value — End of Period (EOP) | 48.68 | | 53.04 | | (8) | | 48.68 | | 53.04 | | (8) | |
| Market Price — EOP | 85.56 | | 107.81 | | (21) | | 85.56 | | 107.81 | | (21) | |
| | | | | | | | | | | |
| SELECTED BALANCE SHEET DATA ($ In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 | % CHANGE(1) |
| End of Period: | | | |
| Total Assets | $ | 159,839.6 | | $ | 183,889.8 | | (13) | % |
| Earning Assets | 142,738.5 | | 172,276.0 | | (17) | |
| Deposits | 128,547.4 | | 159,928.4 | | (20) | |
| Stockholders’ Equity | 11,030.4 | | 12,016.8 | | (8) | |
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| 2022 | 2021 | % CHANGE(1) | 2022 | 2021 | % CHANGE(1) |
| Average Balances: | | | | | | |
| Total Assets | $ | 146,402.2 | | $ | 156,452.8 | | (6) | % | $ | 154,152.1 | | $ | 154,681.3 | | — | % |
| Earning Assets | 132,146.5 | | 143,953.4 | | (8) | | 140,540.9 | | 142,201.1 | | (1) | |
| Deposits | 118,488.1 | | 129,795.4 | | (9) | | 128,720.7 | | 128,082.2 | | — | |
| Stockholders’ Equity | 10,935.6 | | 11,852.9 | | (8) | | 11,115.8 | | 11,648.2 | | (5) | |
| | | | | | | | | | | |
| CLIENT ASSETS ($ In Billions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 | % CHANGE(1) |
Assets Under Custody/Administration(2) | $ | 12,822.0 | | $ | 16,248.8 | | (21) | % |
| Assets Under Custody | 9,986.3 | | 12,612.3 | | (21) | |
| Assets Under Management | 1,209.9 | | 1,607.1 | | (25) | |
N/M - Not meaningful
(1) Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.
(2) For the purposes of disclosing Assets Under Custody/Administration, to the extent that both custody and administration services are provided, the value of the assets is included only once in this amount.
SELECTED RATIOS AND METRICS
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| 2022 | 2021 | 2022 | 2021 |
| Financial Ratios: | | | | |
| Return on Average Common Equity | 14.9 | % | 13.7 | % | 14.9 | % | 13.7 | % |
| Return on Average Assets | 1.07 | | 1.00 | | 1.02 | | 0.98 | |
| Dividend Payout Ratio | 41.7 | | 38.9 | | 39.6 | | 40.2 | |
Net Interest Margin(1) | 1.58 | | 0.98 | | 1.32 | | 0.99 | |
| | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | DECEMBER 31, 2021 | | |
| STANDARDIZED
APPROACH | ADVANCED
APPROACH | STANDARDIZED
APPROACH | ADVANCED
APPROACH | WELL-CAPITALIZED RATIOS | MINIMUM CAPITAL RATIOS |
| Capital Ratios: | | | | | | |
| Northern Trust Corporation | | | | | | |
| Common Equity Tier 1 Capital | 10.1 | % | 11.4 | % | 11.9 | % | 13.2 | % | N/A | 4.5 | % |
| Tier 1 Capital | 11.1 | | 12.5 | | 12.9 | | 14.3 | | 6.0 | | 6.0 | |
| Total Capital | 12.2 | | 13.5 | | 14.1 | | 15.3 | | 10.0 | | 8.0 | |
| Tier 1 Leverage | 7.0 | | 7.0 | | 6.9 | | 6.9 | | N/A | 4.0 | |
| Supplementary Leverage | N/A | 7.7 | | N/A | 8.2 | | N/A | 3.0 | |
| | | | | | |
| The Northern Trust Company | | | | | | |
| Common Equity Tier 1 Capital | 10.7 | % | 12.2 | % | 12.0 | % | 13.5 | % | 6.5 | % | 4.5 | % |
| Tier 1 Capital | 10.7 | | 12.2 | | 12.0 | | 13.5 | | 8.0 | | 6.0 | |
| Total Capital | 11.6 | | 13.0 | | 13.0 | | 14.4 | | 10.0 | | 8.0 | |
| Tier 1 Leverage | 6.7 | | 6.7 | | 6.4 | | 6.4 | | 5.0 | | 4.0 | |
| Supplementary Leverage | N/A | 7.4 | | N/A | 7.6 | | 3.0 | | 3.0 | |
(1) Net interest margin is presented on a fully taxable equivalent (FTE) basis, a non-generally accepted accounting principle (GAAP) financial measure that facilitates the analysis of asset yields. The net interest margin on a GAAP basis and a reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis are presented in “Reconciliation to Fully Taxable Equivalent” within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.
PART I – FINANCIAL INFORMATION
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk
The following is management’s discussion and analysis of the financial condition and results of operations (MD&A) of Northern Trust Corporation (Corporation) for the third quarter of 2022. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report as well as the Annual Report on Form 10-K for the year ended December 31, 2021. Investors also should read the section entitled “Forward-Looking Statements.”
Certain terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended December 31, 2021.
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS
General
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: Asset Servicing and Wealth Management. During the first quarter of 2022, the Corporation changed the name of its Corporate & Institutional Services (C&IS) segment to “Asset Servicing.” Accordingly, the disclosures herein and all future disclosures regarding the Corporation’s reporting segments filed with, or furnished to, the SEC will refer to this segment as Asset Servicing. Asset management and related services are provided to Asset Servicing and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the terms “Northern Trust,” “we,” “us,” “our,” “its,” or similar terms mean the Corporation and its subsidiaries on a consolidated basis.
Overview of Financial Results
Net Income per diluted common share was $1.80 in both the current quarter and the third quarter of 2021. Net Income decreased $0.9 million to $394.8 million in the current quarter from $395.7 million in the prior-year quarter. Annualized return on average common equity was 14.9% in the current quarter and 13.7% in the prior-year quarter. The annualized return on average assets was 1.07% in the current quarter as compared to 1.00% in the prior-year quarter.
Revenue increased $121.0 million, or 7%, to $1.75 billion in the current quarter from $1.63 billion in the prior-year quarter.
Beginning in the first quarter of 2022, Trust, Investment and Other Servicing fees were impacted by the change in classification of certain fees that were previously recorded in Other Operating Income or as a reduction of Other Operating Expense. This change resulted in no impact to Net Income. The accounting reclassification increased Trust, Investment and Other Servicing fees in the third quarter of 2022 by $15.6 million, with a $6.2 million decrease in Other Operating Income and a $9.4 million increase in Other Operating Expense. The classification changes are considered by the Corporation’s management to be a better representation of the underlying nature of the business as they are directly tied to client asset levels and the related services are more akin to our core service offerings. Prior-year amounts have not been reclassified.
Trust, Investment and Other Servicing Fees decreased $32.3 million, or 3%, from $1.11 billion in the prior-year quarter to $1.08 billion in the current quarter, primarily due to lagged unfavorable markets and unfavorable currency translation, partially offset by lower money market fund fee waivers.
Net Interest Income increased $166.6 million, or 48%, to $513.0 million in the current quarter as compared to $346.4 million in the prior-year quarter, primarily due to a higher net interest margin, partially offset by lower average earning assets.
There was a $0.5 million Provision for Credit Losses in the current quarter, as compared to a $13.0 million release of credit reserves in the prior-year quarter. The current quarter provision was primarily due to an increase in the collective basis reserve, driven by a weaker macroeconomic outlook, partially offset by improvements in credit quality mainly within the commercial and institutional portfolio. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics.
Noninterest Expense increased $101.1 million, or 9%, from $1.13 billion in the prior-year quarter to $1.23 billion in the current quarter, primarily attributable to higher Compensation, Equipment and Software expense, Outside Services and Employee Benefits.
The Provision for Income Taxes in the current quarter totaled $129.7 million, representing an effective tax rate of 24.7%. The Provision for Income Taxes in the prior-year quarter totaled $122.4 million, representing an effective tax rate of 23.6%. The effective tax rate increased compared to the prior-year quarter primarily due to the increased impact of limitations on the U.S. foreign tax credit.
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Trust, Investment and Other Servicing Fees
Trust, Investment and Other Servicing Fees are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears.
Northern Trust voluntarily waived $2.6 million of money market fund fees for the three months ended September 30, 2022 and $76.7 million of money market fund fees for the three months ended September 30, 2021.
Beginning in the first quarter of 2022, Trust, Investment and Other Servicing Fees were impacted by the change in classification of certain fees that were previously recorded in Other Operating Income or as a reduction of Other Operating Expense. The accounting reclassification increased Trust, Investment and Other Servicing Fees in the current quarter by $15.6 million, with a $6.2 million decrease in Other Operating Income and a $9.4 million increase in Other Operating Expense. Prior-year amounts have not been reclassified.
The components of Trust, Investment and Other Servicing Fees are provided below.
TABLE 1: TRUST, INVESTMENT AND OTHER SERVICING FEES
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | | |
| ($ In Millions) | 2022 | 2021 | CHANGE |
| Asset Servicing Trust, Investment and Other Servicing Fees | | | | |
| Custody and Fund Administration | $ | 407.3 | | $ | 460.2 | | $ | (52.9) | | (12) | % |
| Investment Management | 136.0 | | 113.6 | | 22.4 | | 20 | |
| Securities Lending | 21.7 | | 20.2 | | 1.5 | | 8 | |
| Other | 38.2 | | 36.2 | | 2.0 | | 6 | |
| Total Asset Servicing Trust, Investment and Other Servicing Fees | $ | 603.2 | | $ | 630.2 | | $ | (27.0) | | (4) | % |
| Wealth Management Trust, Investment and Other Servicing Fees | | | | |
| Central | $ | 171.3 | | $ | 178.8 | | $ | (7.5) | | (4) | % |
| East | 124.1 | | 130.2 | | (6.1) | | (5) | |
| West | 92.5 | | 97.0 | | (4.5) | | (5) | |
| Global Family Office | 87.6 | | 74.8 | | 12.8 | | 17 | |
| Total Wealth Management Trust, Investment and Other Servicing Fees | $ | 475.5 | | $ | 480.8 | | $ | (5.3) | | (1) | % |
| Total Consolidated Trust, Investment and Other Servicing Fees | $ | 1,078.7 | | $ | 1,111.0 | | $ | (32.3) | | (3) | % |
Asset Servicing
Custody and Fund Administration fees, the largest component of Asset Servicing fees, are driven primarily by values of client assets under custody/administration (AUC/A), transaction volumes and the number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client-specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment Management fees are based generally on market values of client assets under management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag. Securities Lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. The Other fee category in Asset Servicing includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.
Custody and Fund Administration fees decreased from the prior-year quarter, primarily due to unfavorable currency translation and unfavorable markets, partially offset by new business.
Investment Management fees increased from the prior-year quarter, primarily due to lower money market fund fee waivers and the accounting reclassification previously discussed, partially offset by asset outflows and unfavorable markets.
Wealth Management
Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and one-quarter lagged asset values. Fee income in the regions (Central, East and West) decreased from the prior-year quarter, due to unfavorable markets, partially offset by lower money market fund fee waivers. Global Family Office fee income increased from the prior-year quarter, primarily due to lower money market fund fee waivers and new business, partially offset by unfavorable markets.
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Trust, Investment and Other Servicing Fees (continued)
Market Indices
The following tables present selected market indices and the percentage changes year-over-year to provide context regarding equity and fixed income market impacts on the Corporation’s results.
TABLE 2: EQUITY MARKET INDICES
| | | | | | | | | | | | | | | | | | | | |
| DAILY AVERAGES | PERIOD-END |
| THREE MONTHS ENDED SEPTEMBER 30, | AS OF SEPTEMBER 30, |
| 2022 | 2021 | CHANGE | 2022 | 2021 | CHANGE |
| S&P 500 | 3,977 | | 4,420 | | (10) | % | 3,586 | | 4,308 | | (17) | % |
| MSCI EAFE (U.S. dollars) | 1,848 | | 2,337 | | (21) | | 1,661 | | 2,281 | | (27) | |
| MSCI EAFE (local currency) | 1,217 | | 1,326 | | (8) | | 1,137 | | 1,315 | | (14) | |
TABLE 3: FIXED INCOME MARKET INDICES
| | | | | | | | | | | |
| AS OF SEPTEMBER 30, |
| 2022 | 2021 | CHANGE |
| Barclays Capital U.S. Aggregate Bond Index | 2,011 | | 2,355 | | (15) | % |
| Barclays Capital Global Aggregate Bond Index | 427 | | 536 | | (20) | |
Client Assets
As noted above, AUC/A and assets under management are two of 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 in this amount. The following table presents AUC/A by reporting segment.
TABLE 4: ASSETS UNDER CUSTODY / ADMINISTRATION BY REPORTING SEGMENT
| | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | CHANGE Q3-22/Q2-22 | CHANGE Q3-22/Q3-21 |
| ($ In Billions) |
| Asset Servicing | $ | 11,954.0 | | $ | 12,812.2 | | $ | 14,800.2 | | (7) | % | (19) | % |
| Wealth Management | 868.0 | | 921.5 | | 976.0 | | (6) | | (11) | |
| Total Assets Under Custody / Administration | $ | 12,822.0 | | $ | 13,733.7 | | $ | 15,776.2 | | (7) | % | (19) | % |
The following table presents Northern Trust’s assets under custody, a component of AUC/A, by reporting segment.
TABLE 5: ASSETS UNDER CUSTODY BY REPORTING SEGMENT
| | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | CHANGE Q3-22/Q2-22 | CHANGE Q3-22/Q3-21 |
| ($ In Billions) |
| Asset Servicing | $ | 9,125.5 | | $ | 9,771.2 | | $ | 11,283.6 | | (7) | % | (19) | % |
| Wealth Management | 860.8 | | 913.0 | | 962.9 | | (6) | | (11) | |
| Total Assets Under Custody | $ | 9,986.3 | | $ | 10,684.2 | | $ | 12,246.5 | | (7) | % | (18) | % |
Consolidated assets under custody decreased from the prior quarter and prior-year quarter, primarily reflecting the impact of unfavorable markets and unfavorable currency translation.
The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.
TABLE 6: ALLOCATION OF ASSETS UNDER CUSTODY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 |
| ASSET SERVICING | WM | TOTAL | ASSET SERVICING | WM | TOTAL | ASSET SERVICING | WM | TOTAL |
| Equities | 43 | % | 55 | % | 44 | % | 44 | % | 56 | % | 45 | % | 47 | % | 62 | % | 48 | % |
| Fixed Income Securities | 35 | | 15 | | 33 | | 35 | | 15 | | 33 | | 35 | | 14 | | 33 | |
| Cash and Other Assets | 20 | | 30 | | 21 | | 19 | | 29 | | 20 | | 16 | | 24 | | 17 | |
| Securities Lending Collateral | 2 | | — | | 2 | | 2 | | — | | 2 | | 2 | | — | | 2 | |
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Trust, Investment and Other Servicing Fees (continued)
The following table presents Northern Trust’s assets under custody by investment type.
TABLE 7: ASSETS UNDER CUSTODY BY INVESTMENT TYPE | | | | | | | | | | | | | | | | | |
| ($ In Billions) | SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | CHANGE Q3-22/Q2-22 | CHANGE Q3-22/Q3-21 |
| Equities | $ | 4,409.0 | | $ | 4,785.5 | | $ | 5,899.5 | | (8) | % | (25) | % |
| Fixed Income Securities | 3,288.7 | | 3,513.8 | | 4,046.5 | | (6) | | (19) | |
| Cash and Other Assets | 2,126.5 | | 2,215.6 | | 2,092.4 | | (4) | | 2 | |
| Securities Lending Collateral | 162.1 | | 169.3 | | 208.1 | | (4) | | (22) | |
| Total Assets Under Custody | $ | 9,986.3 | | $ | 10,684.2 | | $ | 12,246.5 | | (7) | % | (18) | % |
The following table presents Northern Trust’s assets under management by reporting segment.
TABLE 8: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT
| | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | CHANGE Q3-22/Q2-22 | CHANGE Q3-22/Q3-21 |
| ($ In Billions) |
| Asset Servicing | $ | 873.7 | | $ | 950.0 | | $ | 1,159.5 | | (8) | % | (25) | % |
| Wealth Management | 336.2 | | 352.8 | | 372.9 | | (5) | | (10) | |
| Total Assets Under Management | $ | 1,209.9 | | $ | 1,302.8 | | $ | 1,532.4 | | (7) | % | (21) | % |
Consolidated assets under management decreased compared to the prior quarter, primarily reflecting net outflows, the impact of unfavorable markets and unfavorable currency translation. Consolidated assets under management decreased compared to the prior-year quarter, primarily reflecting the impact of unfavorable markets, net outflows and unfavorable currency translation.
The following table presents the allocation of Northern Trust’s assets under management by reporting segment.
TABLE 9: ALLOCATION OF ASSETS UNDER MANAGEMENT
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 |
| ASSET SERVICING | WM | TOTAL | ASSET SERVICING | WM | TOTAL | ASSET SERVICING | WM | TOTAL |
| Equities | 51 | % | 51 | % | 51 | % | 50 | % | 52 | % | 51 | % | 51 | % | 57 | % | 53 | % |
| Fixed Income Securities | 12 | | 24 | | 15 | | 12 | | 23 | | 15 | | 11 | | 22 | | 14 | |
| Cash and Other Assets | 19 | | 25 | | 21 | | 20 | | 25 | | 21 | | 20 | | 21 | | 19 | |
| Securities Lending Collateral | 18 | | — | | 13 | | 18 | | — | | 13 | | 18 | | — | | 14 | |
The following table presents Northern Trust’s assets under management by investment type.
TABLE 10: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
| | | | | | | | | | | | | | | | | |
| ($ In Billions) | SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | CHANGE Q3-22/Q2-22 | CHANGE Q3-22/Q3-21 |
| Equities | $ | 615.1 | | $ | 664.1 | | $ | 806.4 | | (7) | % | (24) | % |
| Fixed Income Securities | 182.6 | | 194.9 | | 210.6 | | (6) | | (13) | |
| Cash and Other Assets | 250.1 | | 274.5 | | 307.3 | | (9) | | (19) | |
| Securities Lending Collateral | 162.1 | | 169.3 | | 208.1 | | (4) | | (22) | |
| Total Assets Under Management | $ | 1,209.9 | | $ | 1,302.8 | | $ | 1,532.4 | | (7) | % | (21) | % |
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Trust, Investment and Other Servicing Fees (continued)
The following table presents activity in consolidated assets under management by product.
TABLE 11: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT
| | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED |
| ($ In Billions) | SEPTEMBER 30, 2022 | JUNE 30, 2022 | MARCH 31, 2022 | DECEMBER 31, 2021 | SEPTEMBER 30, 2021 |
| Beginning Balance of AUM | $ | 1,302.8 | | $ | 1,487.8 | | $ | 1,607.1 | | $ | 1,532.4 | | $ | 1,539.4 | |
| Inflows by Product | | | | | |
| Equities | 39.5 | | 51.4 | | 59.1 | | 54.7 | | 82.0 | |
| Fixed Income | 12.3 | | 11.8 | | 13.0 | | 18.6 | | 16.7 | |
| Cash and Other Assets | 128.9 | | 186.5 | | 205.9 | | 263.9 | | 183.5 | |
| Securities Lending Collateral | 55.3 | | 61.6 | | 70.2 | | 61.3 | | 71.2 | |
| Total Inflows | 236.0 | | 311.3 | | 348.2 | | 398.5 | | 353.4 | |
| Outflows by Product | | | | | |
| Equities | (56.5) | | (60.6) | | (72.0) | | (57.6) | | (102.1) | |
| Fixed Income | (12.4) | | (14.8) | | (15.6) | | (15.2) | | (15.6) | |
| Cash and Other Assets | (152.2) | | (220.3) | | (242.2) | | (226.1) | | (170.5) | |
| Securities Lending Collateral | (62.5) | | (69.5) | | (88.6) | | (73.9) | | (62.4) | |
| Total Outflows | (283.6) | | (365.2) | | (418.4) | | (372.8) | | (350.6) | |
| Net Inflows (Outflows) | (47.6) | | (53.9) | | (70.2) | | 25.7 | | 2.8 | |
| Market Performance, Currency & Other | | | | | |
| Market Performance & Other | (35.1) | | (118.5) | | (45.3) | | 51.8 | | (5.9) | |
| Currency | (10.2) | | (12.6) | | (3.8) | | (2.8) | | (3.9) | |
| Total Market Performance, Currency & Other | (45.3) | | (131.1) | | (49.1) | | 49.0 | | (9.8) | |
| Ending Balance of AUM | $ | 1,209.9 | | $ | 1,302.8 | | $ | 1,487.8 | | $ | 1,607.1 | | $ | 1,532.4 | |
Other Noninterest Income
The components of noninterest income are provided below.
TABLE 12: OTHER NONINTEREST INCOME
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | | |
| ($ In Millions) | 2022 | 2021 | CHANGE |
| Foreign Exchange Trading Income | $ | 64.7 | | $ | 66.4 | | $ | (1.7) | | (3) | % |
| Treasury Management Fees | 9.3 | | 11.2 | | (1.9) | | (18) | |
| Security Commissions and Trading Income | 32.1 | | 36.5 | | (4.4) | | (12) | |
| Other Operating Income | 57.3 | | 62.3 | | (5.0) | | (8) | |
| Investment Security Gains (Losses), net | (0.3) | | — | | (0.3) | | N/M |
| Total Other Noninterest Income | $ | 163.1 | | $ | 176.4 | | $ | (13.3) | | (8) | % |
N/M - Not meaningful
Beginning in the first quarter of 2022, Other Operating Income was impacted by the change in classification of certain fees to Trust, Investment and Other Servicing Fees. The impact to Other Operating Income in the current quarter was $6.2 million relating to amounts now recorded in Trust, Investment and Other Servicing Fees. Prior-year amounts have not been reclassified.
Security Commissions and Trading Income decreased compared to the prior-year quarter primarily due to lower interest rate swap activity.
Other Operating Income decreased compared to the prior-year quarter, primarily driven by lower miscellaneous income and the accounting reclassification previously discussed, partially offset by increased income related to a bank-owned life insurance program. Please refer to Note 16 — Other Operating Income to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for further detail.
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
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, Federal Reserve and Other Central Bank Deposits and Other, Securities, and Loans and Leases—are financed by a large base of interest-bearing funds that include client deposits, short-term borrowings, Senior Notes and Long-Term Debt. Short-term borrowings include Federal Funds Purchased, Securities Sold Under Agreements to Repurchase, and Other Borrowings. Earning assets are also funded by noninterest-related funds, which include demand deposits and stockholders’ equity. Net Interest Income is subject to variations in the level and mix of earning assets and interest-bearing funds and their relative sensitivity to interest rates. In addition, the levels of nonaccruing assets and client compensating deposit balances used to pay for services impact Net Interest Income.
Net interest margin is the difference between what we earn on our assets and what we pay for deposits and other sources of funding. The direction and level of interest rates are important factors in our earnings. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets.
Net Interest Income stated on a fully taxable equivalent (FTE) basis is a non-generally accepted accounting principle (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 in “Reconciliation to Fully Taxable Equivalent” within this MD&A.
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)
The following tables present an analysis of average daily balances and interest rates affecting Net Interest Income and an analysis of Net Interest Income changes.
TABLE 13: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME
| | | | | | | | | | | | | | | | | | | | |
| (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS) | THIRD QUARTER |
| 2022 | 2021 |
| ($ In Millions) | INTEREST | AVERAGE BALANCE | AVERAGE RATE(6) | INTEREST | AVERAGE BALANCE | AVERAGE RATE(6) |
| Interest-Earning Assets | | | | | | |
Federal Reserve and Other Central Bank Deposits and Other(1) | $ | 135.5 | | $ | 30,598.3 | | 1.76 | % | $ | 4.2 | | $ | 40,540.6 | | 0.04 | % |
Interest-Bearing Due from and Deposits with Banks(2) | 14.5 | | 3,976.8 | | 1.45 | | 1.9 | | 5,165.4 | | 0.15 | |
| Federal Funds Sold | — | | 5.1 | | 2.79 | | — | | 0.1 | | 0.41 | |
Securities Purchased under Agreements to Resell(7) | 30.5 | | 1,270.9 | | 9.51 | | 0.8 | | 840.9 | | 0.38 | |
| Securities | | | | | | |
| U.S. Government | 11.9 | | 2,637.3 | | 1.79 | | 6.8 | | 2,669.3 | | 1.01 | |
| Obligations of States and Political Subdivisions | 20.3 | | 3,437.9 | | 2.36 | | 18.1 | | 3,691.0 | | 1.96 | |
| Government Sponsored Agency | 105.2 | | 21,774.7 | | 1.92 | | 70.3 | | 24,414.0 | | 1.14 | |
Other(3) | 112.8 | | 26,979.1 | | 1.66 | | 78.2 | | 28,221.4 | | 1.10 | |
| Total Securities | 250.2 | | 54,829.0 | | 1.81 | | 173.4 | | 58,995.7 | | 1.17 | |
Loans and Leases(4) | 380.9 | | 41,466.4 | | 3.64 | | 181.7 | | 38,410.7 | | 1.87 | |
| Total Interest-Earning Assets | 811.6 | | 132,146.5 | | 2.44 | | 362.0 | | 143,953.4 | | 1.00 | |
Cash and Due from Banks and Other Central Bank Deposits(5) | — | | 1,903.1 | | — | | — | | 2,011.5 | | — | |
| Other Noninterest-Earning Assets | — | | 12,352.6 | | — | | — | | 10,487.9 | | — | |
| Total Assets | $ | — | | $ | 146,402.2 | | — | % | $ | — | | $ | 156,452.8 | | — | % |
| Average Source of Funds | | | | | | |
| Deposits | | | | | | |
| Savings, Money Market and Other | $ | 68.6 | | $ | 29,089.3 | | 0.94 | % | $ | 3.0 | | $ | 28,472.3 | | 0.04 | % |
| Savings Certificates and Other Time | 4.0 | | 986.0 | | 1.61 | | 1.2 | | 870.9 | | 0.53 | |
| Non-U.S. Offices — Interest-Bearing | 104.7 | | 64,057.3 | | 0.65 | | (20.5) | | 70,210.8 | | (0.12) | |
| Total Interest-Bearing Deposits | 177.3 | | 94,132.6 | | 0.75 | | (16.3) | | 99,554.0 | | (0.07) | |
| Federal Funds Purchased | 9.9 | | 1,967.5 | | 2.00 | | — | | 165.8 | | 0.09 | |
Securities Sold under Agreements to Repurchase(7) | 25.5 | | 489.6 | | 20.72 | | 0.1 | | 293.0 | | 0.06 | |
| Other Borrowings | 35.7 | | 5,991.1 | | 2.36 | | 3.6 | | 5,526.8 | | 0.26 | |
| Senior Notes | 28.6 | | 2,969.6 | | 3.79 | | 11.7 | | 2,840.7 | | 1.64 | |
| Long-Term Debt | 9.3 | | 1,087.6 | | 3.41 | | 5.3 | | 1,166.2 | | 1.79 | |
| Floating Rate Capital Debt | — | | — | | — | | 0.5 | | 277.8 | | 0.75 | |
| Total Interest-Related Funds | 286.3 | | 106,638.0 | | 1.07 | | 4.9 | | 109,824.3 | | 0.02 | |
| Interest Rate Spread | — | | — | | 1.37 | | — | | — | | 0.98 | |
| Demand and Other Noninterest-Bearing Deposits | — | | 24,355.5 | | — | | — | | 30,241.4 | | — | |
| Other Noninterest-Bearing Liabilities | — | | 4,473.1 | | — | | — | | 4,534.2 | | — | |
| Stockholders’ Equity | — | | 10,935.6 | | — | | — | | 11,852.9 | | — | |
| Total Liabilities and Stockholders’ Equity | $ | — | | $ | 146,402.2 | | — | % | $ | — | | $ | 156,452.8 | | — | % |
| Net Interest Income/Margin (FTE Adjusted) | $ | 525.3 | | $ | — | | 1.58 | % | $ | 357.1 | | $ | — | | 0.98 | % |
| Net Interest Income/Margin (Unadjusted) | $ | 513.0 | | $ | — | | 1.54 | % | $ | 346.4 | | $ | — | | 0.95 | % |
(1)Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets on the consolidated balance sheets.
(2)Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(3)Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets.
(4)Average balances include nonaccrual loans and leases. Lease financing receivable balances are reduced by deferred income.
(5)Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits 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.
(7)Includes the impact of balance sheet netting under master netting arrangements of approximately $4.3 billion for the three months ended September 30, 2022. Excluding the impact of netting, the average interest rate on Securities Purchased under Agreements to Resell would be approximately 2.16% for the three months ended September 30, 2022. Excluding the impact of netting, the average interest rate on Securities Sold under Agreements to Repurchase would be approximately 2.11% for the three months ended September 30, 2022. Beginning in the third quarter of 2021, Northern Trust became an approved Government Securities Division (GSD) netting and sponsoring member in the Fixed Income Clearing Corporation (FICC) sponsored member program, through which Northern Trust submits eligible repurchase and reverse repurchase transactions in U.S. Government securities between Northern Trust and its sponsored member clients for novation and clearing. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when FICC is the counterparty.
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)
TABLE 14: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE(1)
| | | | | | | | | | | |
| (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS) | THREE MONTHS ENDED SEPTEMBER 30, 2022/2021 |
| CHANGE DUE TO | |
| (In Millions) | AVERAGE BALANCE | AVERAGE RATE | NET (DECREASE) INCREASE |
| Increase (Decrease) in Net Interest Income (FTE) | | | |
| Federal Reserve and Other Central Bank Deposits and Other | $ | (39.1) | | $ | 170.4 | | $ | 131.3 | |
| Interest-Bearing Due from and Deposits with Banks | (0.5) | | 13.1 | | 12.6 | |
| | | |
| Securities Purchased under Agreements to Resell | 0.6 | | 29.1 | | 29.7 | |
| Securities | | | |
| U.S. Government | (0.1) | | 5.2 | | 5.1 | |
| Obligations of States and Political Subdivisions | (1.4) | | 3.6 | | 2.2 | |
| Government Sponsored Agency | (8.4) | | 43.3 | | 34.9 | |
| Other | (3.3) | | 37.9 | | 34.6 | |
| Total Securities | (13.2) | | 90.0 | | 76.8 | |
| Loans and Leases | 15.4 | | 183.8 | | 199.2 | |
| Total Interest Income | $ | (36.8) | | $ | 486.4 | | $ | 449.6 | |
| | | |
| Interest-Bearing Deposits | | | |
| Savings, Money Market and Other | $ | 0.1 | | $ | 65.5 | | $ | 65.6 | |
| Savings Certificates and Other Time | 0.2 | | 2.6 | | 2.8 | |
| Non-U.S. Offices - Interest-Bearing | (13.7) | | 138.9 | | 125.2 | |
| Total Interest-Bearing Deposits | (13.4) | | 207.0 | | 193.6 | |
| Federal Funds Purchased | 3.3 | | 6.6 | | 9.9 | |
| Securities Sold under Agreements to Repurchase | 6.4 | | 19.0 | | 25.4 | |
| Other Borrowings | 0.3 | | 31.8 | | 32.1 | |
| Senior Notes | 0.5 | | 16.4 | | 16.9 | |
| Long-Term Debt | (0.4) | | 4.4 | | 4.0 | |
| Floating Rate Capital Debt | (0.5) | | — | | (0.5) | |
| Total Interest Expense | $ | (3.8) | | $ | 285.2 | | $ | 281.4 | |
| Increase (Decrease) in Net Interest Income (FTE) | $ | (33.0) | | $ | 201.2 | | $ | 168.2 | |
(1)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.
Notes: Net Interest Income (FTE Adjusted), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans and securities. The adjustments are based on a federal income tax rate of 21.0%, where the rate is adjusted for applicable state income taxes, net of related federal tax benefit. Total taxable equivalent interest adjustments amounted to $12.3 million and $10.7 million for the three months ended September 30, 2022 and 2021, respectively. A reconciliation of Net Interest Income and net interest margin on a GAAP basis to Net Interest Income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided in “Reconciliation to Fully Taxable Equivalent” within this MD&A. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets.
Interest revenue on cash collateral positions is reported above in Interest-Bearing Due from and Deposits with Banks and in Loans and Leases. Interest Expense on cash collateral positions is reported above in Non-U.S. Offices Interest-Bearing Deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract in Other Assets and Other Liabilities, respectively.
Net Interest Income, stated on a FTE basis, increased from the prior-year quarter, primarily due to a higher net interest margin, partially offset by lower average earning assets. Average earning assets decreased from the prior-year quarter, primarily due to lower levels of short-term interest-bearing deposits with central banks and lower levels of securities, partially offset by higher levels of loans. The decline in the size of the average balance sheet was primarily the result of lower levels of client deposits.
The net interest margin on an FTE basis increased from the prior-year quarter, primarily due to higher average interest rates and favorable balance sheet mix shift.
Federal Reserve and Other Central Bank Deposits and Other averaged $30.6 billion and decreased $9.9 billion, or 25%, from $40.5 billion in the prior-year quarter. Interest-Bearing Due from and Deposits with Banks averaged $4.0 billion and decreased $1.2 billion, or 23%, from $5.2 billion in the prior-year quarter. Average Securities were $54.8 billion and decreased $4.2 billion, or 7%, from $59.0 billion in the prior-year quarter and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $930.2 million, $175.7 million and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $52.1 billion in the current quarter and $56.4 billion in the prior-year quarter. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $2.7 billion in the current quarter and $2.6 billion in the prior-year quarter.
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)
Loans and Leases averaged $41.5 billion and increased $3.1 billion, or 8%, from $38.4 billion in the prior-year quarter, primarily reflecting higher levels of commercial and institutional, non-U.S., commercial real estate, and residential real estate loans, partially offset by lower levels of private client loans. Commercial and institutional loans averaged $12.4 billion and increased $1.6 billion, or 15%, from $10.8 billion for the prior-year quarter. Non-U.S. loans averaged $3.7 billion and increased $1.3 billion or 54%, from $2.4 billion for the prior-year quarter. Commercial real estate loans averaged $4.4 billion and increased $271.9 million, or 7%, from $4.1 billion for the prior-year quarter. Residential real estate loans averaged $6.4 billion and increased $209.1 million, or 3%, from $6.2 billion for the prior-year quarter. Private client loans averaged $13.6 billion and decreased $836.6 million, or 6%, from $14.5 billion for the prior-year quarter.
Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits decreased $5.5 billion, or 5%, to an average of $94.1 billion in the current quarter from $99.6 billion in the prior-year quarter. Other Average Interest-Related Funds increased $2.2 billion, or 22%, to an average of $12.5 billion in the current quarter from $10.3 billion in the prior-year quarter. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings.
Interest expense for Interest-Bearing Deposits in the current quarter was driven by higher interest rates. Average Non-U.S. Offices Interest-Bearing Deposits comprised 68% and 71% of total average Interest-Bearing Deposits for the three months ended September 30, 2022 and 2021, respectively.
Provision for Credit Losses
There was a $0.5 million Provision for Credit Losses in the current quarter, as compared to a $13.0 million release of credit reserves in the prior-year quarter. The provision in the current quarter was primarily due to an increase in the collective basis reserve, driven by a weaker macroeconomic outlook, partially offset by improvements in credit quality mainly within the commercial and institutional portfolio. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics.
The release of credit reserves in the prior-year quarter was primarily due to a decrease in the reserve evaluated on a collective basis, driven by improvements in projected economic conditions at the time and portfolio credit quality, partially offset by portfolio growth. Decreases in the collective basis reserve were primarily in the commercial and institutional and commercial real estate portfolios.
Net charge-offs in the current quarter were $4.5 million, reflecting $0.9 million of recoveries and $5.4 million of charge-offs. The prior-year quarter included $1.1 million of net recoveries, reflecting $1.1 million of recoveries and de minimis charge-offs. Nonaccrual assets of $76.4 million decreased $64.8 million, or 46%, from $141.2 million at the end of the prior-year quarter.
For additional discussion of the allowance for credit losses, refer to the “Asset Quality” section in this MD&A.
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Expense
Beginning in the first quarter of 2022, Other Operating Expense was impacted by the change in classification of certain amounts previously reported as a reduction of Other Operating Expense to Trust, Investment and Other Servicing Fees. The impact to Other Operating Expense in the current quarter was $9.4 million relating to amounts now recorded in Trust, Investment and Other Servicing Fees rather than as a reduction of Other Operating Expense. Prior-year amounts have not been reclassified.
The components of Noninterest Expense are provided in the following table.
TABLE 15: NONINTEREST EXPENSE
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | | |
| ($ In Millions) | 2022 | 2021 | CHANGE |
| Compensation | $ | 553.3 | | $ | 496.0 | | $ | 57.3 | | 12 | % |
| Employee Benefits | 109.9 | | 101.7 | | 8.2 | | 8 | |
| Outside Services | 220.9 | | 210.7 | | 10.2 | | 5 | |
| Equipment and Software | 212.4 | | 185.2 | | 27.2 | | 15 | |
| Occupancy | 51.3 | | 53.9 | | (2.6) | | (5) | |
| Other Operating Expense | 82.0 | | 81.2 | | 0.8 | | 1 | |
| Total Noninterest Expense | $ | 1,229.8 | | $ | 1,128.7 | | $ | 101.1 | | 9 | % |
Compensation expense, the largest component of Noninterest Expense, increased compared to the prior-year quarter, primarily due to higher salary expense, partially offset by favorable currency translation.
Employee Benefits expense included U.S. Qualified Plan pension settlement charges of $17.0 million in the current quarter and $6.9 million in the prior-year quarter. Please refer to Note 18 — Pension and Postretirement Health Care to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for further detail regarding pension settlement charges.
Outside Services expense increased compared to the prior-year quarter, primarily due to higher consulting services and technical services costs, partially offset by lower third-party advisory fees.
Equipment and Software expense increased compared to the prior-year quarter, primarily due to higher software costs driven by continued technology investments as well as amortization.
Provision for Income Taxes
Income tax expense for the three months ended September 30, 2022 was $129.7 million, representing an effective tax rate of 24.7%, compared to $122.4 million in the prior-year quarter, representing an effective tax rate of 23.6%.
The effective tax rate increased compared to the prior-year quarter primarily due to the increased impact of limitations on the U.S. foreign tax credit.
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS
Overview of Financial Results
Net Income per diluted common share increased in the current period to $5.43 from $5.22 in the comparable prior-year period. Net Income increased $41.4 million, or 4%, to $1.18 billion in the current period from $1.14 billion in the prior-year period. Annualized return on average common equity was 14.9% in the current period and 13.7% in the prior-year period. The annualized return on average assets was 1.02% in the current period compared to 0.98% in the prior-year period.
Revenue for the nine months ended September 30, 2022 increased $444.7 million, or 9%, from $4.80 billion in the prior-year period to $5.24 billion in the current period.
Trust, Investment and Other Servicing Fees increased $140.4 million, or 4%, from $3.25 billion in the prior-year period to $3.39 billion in the current period, primarily driven by lower money market fee waivers, new business, and the accounting reclassification previously mentioned, partially offset by unfavorable currency translation and unfavorable markets.
Other Noninterest Income decreased $26.3 million, or 5% from $525.3 million in the prior-year period to $499.0 million in the current period, primarily driven by lower Other Operating Income, partially offset by higher Foreign Exchange Trading Income.
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Overview of Financial Results (continued)
Net Interest Income increased $330.6 million, or 32%, to $1.35 billion in the current period from $1.02 billion in the prior-year period, primarily due to a higher net interest margin and nonrecurring interest received from the sale of certain nonaccrual loans, partially offset by lower average earning assets.
There was a $7.0 million Provision for Credit Losses in the current period, as compared to a $70.0 million release of credit reserves in the prior-year period. The provision in the current period was primarily due to an increase in the collective basis reserve, partially offset by net recoveries during the current period. The increase in the collective basis reserve was driven by a weaker macroeconomic outlook, partially offset by improvements in credit quality mainly within the commercial and institutional and commercial real estate portfolios.
Noninterest Expense increased $292.3 million, or 9%, from $3.37 billion in the prior-year period to $3.66 billion in the current period, primarily attributable to higher Compensation and Equipment and Software expense.
The Provision for Income Taxes for the nine months ended September 30, 2022 totaled $395.6 million, representing an effective tax rate of 25.1%. The Provision for Income Taxes for the nine months ended September 30, 2021 totaled $361.6 million, representing an effective tax rate of 24.1%. The effective tax rate increased compared to the prior-year period primarily due to the increased impact of limitations on the U.S. foreign tax credit and reserves for uncertain tax positions, partially offset by the deferred tax impact of the UK statutory tax rate increase enacted in the prior-year-period.
Trust, Investment and Other Servicing Fees
Northern Trust voluntarily waived $61.9 million of money market fund fees for the nine months ended September 30, 2022 as compared to $206.7 million for the nine months ended September 30, 2021.
The components of Trust, Investment and Other Servicing Fees are provided in the table below.
TABLE 16: TRUST, INVESTMENT AND OTHER SERVICING FEES
| | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, | | |
| ($ In Millions) | 2022 | 2021 | CHANGE |
| Asset Servicing Trust, Investment and Other Servicing Fees | | | | |
| Custody and Fund Administration | $ | 1,293.8 | | $ | 1,361.1 | | $ | (67.3) | | (5) | % |
| Investment Management | 431.3 | | 330.2 | | 101.1 | | 31 | |
| Securities Lending | 62.1 | | 57.9 | | 4.2 | | 7 | |
| Other | 121.1 | | 113.0 | | 8.1 | | 7 | |
| Total Asset Servicing Trust, Investment and Other Servicing Fees | $ | 1,908.3 | | $ | 1,862.2 | | $ | 46.1 | | 2 | % |
| Wealth Management Trust, Investment and Other Servicing Fees | | | | |
| Central | $ | 530.4 | | $ | 517.3 | | $ | 13.1 | | 3 | % |
| East | 386.2 | | 376.4 | | 9.8 | | 3 | |
| West | 292.6 | | 281.6 | | 11.0 | | 4 | |
| Global Family Office | 273.0 | | 212.6 | | 60.4 | | 28 | |
| Total Wealth Management Trust, Investment and Other Servicing Fees | $ | 1,482.2 | | $ | 1,387.9 | | $ | 94.3 | | 7 | % |
| Total Consolidated Trust, Investment and Other Servicing Fees | $ | 3,390.5 | | $ | 3,250.1 | | $ | 140.4 | | 4 | % |
Asset Servicing
Custody and Fund Administration fees, the largest component of Asset Servicing fees, decreased primarily driven by unfavorable currency translation. Investment Management fees increased primarily due to lower money market fee waivers and the accounting reclassification previously discussed, partially offset by asset outflows.
Wealth Management
Fee income in the regions (Central, East and West) increased primarily due to lower money market fund fee waivers and new business. Global Family Office fee income increased primarily due to new business and lower money market fee waivers.
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Other Noninterest Income
The components of other noninterest income are provided in the following table.
TABLE 17: OTHER NONINTEREST INCOME
| | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, | | |
| ($ In Millions) | 2022 | 2021 | CHANGE |
| Foreign Exchange Trading Income | $ | 223.2 | | $ | 215.7 | | $ | 7.5 | | 3 | % |
| Treasury Management Fees | 31.0 | | 33.7 | | (2.7) | | (8) | |
| Security Commissions and Trading Income | 101.1 | | 104.3 | | (3.2) | | (3) | |
| Other Operating Income | 144.0 | | 171.6 | | (27.6) | | (16) | |
| Investment Security Gains (Losses), net | (0.3) | | — | | (0.3) | | N/M |
| Total Other Noninterest Income | $ | 499.0 | | $ | 525.3 | | $ | (26.3) | | (5) | % |
N/M - Not meaningful
Beginning in the first quarter of 2022, Other Operating Income was impacted by the change in classification of certain fees to Trust, Investment and Other Servicing Fees. The impact to Other Operating Income for the nine months ended September 30, 2022 was $20.0 million relating to amounts now recorded in Trust, Investment and Other Servicing Fees. Prior-year amounts have not been reclassified.
Foreign Exchange Trading Income increased from the prior-year period, primarily due to higher client volumes, partially offset by decreased foreign exchange swap activity in Treasury.
Other Operating Income decreased from the prior-year period, primarily due to lower miscellaneous income and the accounting reclassification previously discussed, partially offset by increased income related to a bank-owned life insurance program and lower expenses for existing swap agreements related to Visa Inc. Class B common shares. Please refer to Note 16 — Other Operating Income to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for further detail.
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income
The following tables present an analysis of average balances and interest rate changes affecting Net Interest Income and an analysis of Net Interest Income changes.
TABLE 18: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME
| | | | | | | | | | | | | | | | | | | | |
| (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS) | NINE MONTHS ENDED SEPTEMBER 30, |
| 2022 | 2021 |
| ($ In Millions) | INTEREST | AVERAGE BALANCE | AVERAGE RATE(6) | INTEREST | AVERAGE BALANCE | AVERAGE RATE(6) |
| Average Earning Assets | | | | | | |
Federal Reserve and Other Central Bank Deposits and Other(1) | $ | 212.3 | | $ | 37,455.5 | | 0.76 | % | $ | 5.6 | | $ | 38,380.9 | | 0.02 | % |
Interest-Bearing Due from and Deposits with Banks(2) | 23.6 | | 4,194.6 | | 0.75 | | 7.0 | | 6,117.4 | | 0.15 | |
| Federal Funds Sold | — | | 2.7 | | 2.02 | | — | | 0.2 | | 0.41 | |
Securities Purchased under Agreements to Resell(7) | 38.4 | | 1,039.4 | | 4.94 | | 2.7 | | 1,131.9 | | 0.32 | |
| Securities | | | | | | |
| U.S. Government | 33.4 | | 2,595.9 | | 1.72 | | 20.9 | | 2,740.0 | | 1.02 | |
| Obligations of States and Political Subdivisions | 60.4 | | 3,571.3 | | 2.26 | | 50.5 | | 3,422.8 | | 1.97 | |
| Government Sponsored Agency | 262.7 | | 22,578.5 | | 1.56 | | 227.3 | | 24,592.8 | | 1.24 | |
Other(3) | 277.2 | | 28,510.0 | | 1.30 | | 228.9 | | 29,501.7 | | 1.04 | |
| Total Securities | 633.7 | | 57,255.7 | | 1.48 | | 527.6 | | 60,257.3 | | 1.17 | |
Loans and Leases(4) | 829.7 | | 40,593.0 | | 2.73 | | 527.0 | | 36,313.4 | | 1.94 | |
| Total Earning Assets | 1,737.7 | | 140,540.9 | | 1.65 | | 1,069.9 | | 142,201.1 | | 1.01 | |
Cash and Due from Banks and Other Central Bank Deposits(5) | — | | 2,169.2 | | — | | — | | 2,340.6 | | — | |
| Other Noninterest-Earning Assets | — | | 11,442.0 | | — | | — | | 10,139.6 | | — | |
| Total Assets | $ | — | | $ | 154,152.1 | | — | % | $ | — | | $ | 154,681.3 | | — | % |
| Average Source of Funds | | | | | | |
| Deposits | | | | | | |
| Savings, Money Market and Other | $ | 90.6 | | $ | 30,783.4 | | 0.39 | % | $ | 9.7 | | $ | 27,551.4 | | 0.05 | % |
| Savings Certificates and Other Time | 6.2 | | 874.0 | | 0.95 | | 3.8 | | 897.6 | | 0.56 | |
| Non-U.S. Offices — Interest-Bearing | 87.8 | | 65,370.8 | | 0.18 | | (58.0) | | 69,246.6 | | (0.11) | |
| Total Interest-Bearing Deposits | 184.6 | | 97,028.2 | | 0.25 | | (44.5) | | 97,695.6 | | (0.06) | |
| Federal Funds Purchased | 12.7 | | 970.7 | | 1.75 | | (0.4) | | 254.7 | | (0.19) | |
Securities Sold under Agreements to Repurchase(7) | 31.8 | | 447.5 | | 9.51 | | 0.1 | | 204.5 | | 0.05 | |
| Other Borrowings | 47.2 | | 4,631.4 | | 1.36 | | 10.3 | | 5,137.8 | | 0.27 | |
| Senior Notes | 57.1 | | 2,767.6 | | 2.75 | | 39.2 | | 2,973.0 | | 1.76 | |
| Long-Term Debt | 21.5 | | 1,103.9 | | 2.60 | | 15.9 | | 1,171.2 | | 1.81 | |
| Floating Rate Capital Debt | — | | — | | — | | 1.6 | | 277.8 | | 0.78 | |
| Total Interest-Related Funds | 354.9 | | 106,949.3 | | 0.44 | | 22.2 | | 107,714.6 | | 0.03 | |
| Interest Rate Spread | — | | — | | 1.21 | | — | | — | | 0.98 | |
| Demand and Other Noninterest-Bearing Deposits | — | | 31,692.5 | | — | | — | | 30,386.6 | | — | |
| Other Liabilities | — | | 4,394.5 | | — | | — | | 4,931.9 | | — | |
| Stockholders’ Equity | — | | 11,115.8 | | — | | — | | 11,648.2 | | — | |
| Total Liabilities and Stockholders’ Equity | $ | — | | $ | 154,152.1 | | — | % | $ | — | | $ | 154,681.3 | | — | % |
| Net Interest Income/Margin (FTE Adjusted) | $ | 1,382.8 | | $ | — | | 1.32 | % | $ | 1,047.7 | | $ | — | | 0.99 | % |
| Net Interest Income/Margin (Unadjusted) | $ | 1,352.7 | | $ | — | | 1.29 | % | $ | 1,022.1 | | $ | — | | 0.96 | % |
(1)Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets on the consolidated balance sheets.
(2)Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(3)Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets.
(4)Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.
(5)Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits 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.
(7)Includes the impact of balance sheet netting under master netting arrangements of approximately $2.8 billion for the nine months ended September 30, 2022. Excluding the impact of netting, the average interest rate on Securities Purchased under Agreements to Resell would be approximately 1.35% for the nine months ended September 30, 2022. Excluding the impact of netting, the average interest rate on Securities Sold under Agreements to Repurchase would be approximately 1.32% for the nine months ended September 30, 2022. Beginning in the third quarter of 2021, Northern Trust became an approved GSD netting and sponsoring member in the FICC sponsored member program, through which Northern Trust submits eligible repurchase and reverse repurchase transactions in U.S. Government securities between Northern Trust and its sponsored member clients for novation and clearing. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when FICC is the counterparty.
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)
TABLE 19: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE(1)
| | | | | | | | | | | |
| (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS) | NINE MONTHS ENDED SEPTEMBER 30, 2022/2021 |
| CHANGE DUE TO |
| (In Millions) | AVERAGE BALANCE | AVERAGE
RATE | NET (DECREASE) INCREASE |
| Increase (Decrease) in Net Interest Income (FTE) | | | |
| Federal Reserve and Other Central Bank Deposits and Other | $ | (0.1) | | $ | 206.8 | | $ | 206.7 | |
| Interest-Bearing Due from and Deposits with Banks | (2.8) | | 19.4 | | 16.6 | |
| | | |
| Securities Purchased under Agreements to Resell | (0.2) | | 35.9 | | 35.7 | |
| Securities | | | |
| U.S. Government | (1.2) | | 13.7 | | 12.5 | |
| Obligations of States and Political Subdivisions | 2.3 | | 7.6 | | 9.9 | |
| Government Sponsored Agency | (19.9) | | 55.3 | | 35.4 | |
| Other | (9.0) | | 57.3 | | 48.3 | |
| Total Securities | (27.8) | | 133.9 | | 106.1 | |
| Loans and Leases | 17.7 | | 285.0 | | 302.7 | |
| Total Interest Income | $ | (13.2) | | $ | 681.0 | | $ | 667.8 | |
| | | |
| Interest-Bearing Deposits | | | |
| Savings, Money Market and Other | $ | 1.4 | | $ | 79.5 | | $ | 80.9 | |
| Savings Certificates and Other Time | (0.1) | | 2.5 | | 2.4 | |
| Non-U.S. Offices - Interest-Bearing | (1.5) | | 147.3 | | 145.8 | |
| Total Interest-Bearing Deposits | (0.2) | | 229.3 | | 229.1 | |
| Federal Funds Purchased | 2.8 | | 10.3 | | 13.1 | |
| Securities Sold under Agreements to Repurchase | 0.2 | | 31.5 | | 31.7 | |
| Other Borrowings | (1.1) | | 38.0 | | 36.9 | |
| Senior Notes | (2.9) | | 20.8 | | 17.9 | |
| Long-Term Debt | (0.9) | | 6.5 | | 5.6 | |
| Floating Rate Capital Debt | (1.6) | | — | | (1.6) | |
| Total Interest Expense | $ | (3.7) | | $ | 336.4 | | $ | 332.7 | |
| (Decrease) Increase in Net Interest Income (FTE) | $ | (9.5) | | $ | 344.6 | | $ | 335.1 | |
(1) 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.
Notes: Net Interest Income (FTE Adjusted), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans and securities. The adjustments are based on a federal income tax rate of 21.0%, where the rate is adjusted for applicable state income taxes, net of related federal tax benefit. Total taxable equivalent interest adjustments amounted to $30.1 million and $25.6 million for the nine months ended September 30, 2022 and 2021, respectively. A reconciliation of Net Interest Income and net interest margin on a GAAP basis to Net Interest Income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided in “Reconciliation to Fully Taxable Equivalent” within this MD&A. Net interest margin is calculated by dividing annualized net interest income by average interest-earning assets.
Interest revenue on cash collateral positions is reported above 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.
Net Interest Income, stated on an FTE basis, increased from the prior-year period, primarily due to a higher net interest margin and nonrecurring interest received from the sale of certain nonaccrual loans, partially offset by lower average earning assets. Average earning assets decreased from the prior-year period primarily due to lower levels of securities and net short-term interest-bearing deposits with banks and central banks, partially offset by higher levels of loans.
The net interest margin on an FTE basis increased from the prior-year period, primarily due to higher average interest rates.
Federal Reserve and Other Central Bank Deposits and Other averaged $37.5 billion and decreased $925.4 million, or 2%, from $38.4 billion in the prior-year period. Average Securities were $57.3 billion and decreased $3.0 billion, or 5%, from $60.3 billion in the prior-year period and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $949.1 million, $110.5 million and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $54.7 billion in the current period and $57.1 billion in the prior-year period. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $2.6 billion in the current period and $3.1 billion in the prior-year period. Interest-Bearing Due from and Deposits with Banks averaged $4.2 billion in the current period and $6.1 billion in the prior-year period.
Loans and leases averaged $40.6 billion and increased $4.3 billion, or 12%, from $36.3 billion in the prior-year period, primarily reflecting higher levels of commercial and institutional, non-U.S., private client, commercial real estate, and residential real estate loans. Commercial and institutional loans averaged $12.1 billion and increased $1.9 billion, or 19%, from $10.2 billion for the prior-year period. Non-U.S. loans averaged $3.3 billion and increased $871.4 million or 36% from $2.5
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Net Interest Income (continued)
billion for the prior-year period. Private client loans averaged $13.8 billion and increased $546.2 million, or 4%, from $13.3 billion for the prior-year period. Commercial real estate loans averaged $4.3 billion and increased $458.3 million, or 12%, from $3.9 billion for the prior-year period. Residential real estate loans averaged $6.3 billion and increased $138.1 million, or 2%, from $6.2 billion for the prior-year period.
Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits decreased $667.4 million, or 1%, to an average of $97.0 billion in the current period from $97.7 billion in the prior-year period. Other Average Interest-Related Funds decreased $97.9 million, or 1%, to an average of $9.9 billion in the current period from $10.0 billion in the prior-year period. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings.
Interest expense for Interest-Bearing Deposits in the current period was driven by higher interest rates. Average non-U.S. offices interest-bearing deposits comprised 67% and 71% of total average interest-bearing deposits for the nine months ended September 30, 2022 and 2021, respectively.
Provision for Credit Losses
There was a $7.0 million Provision for Credit Losses for the nine months ended September 30, 2022, as compared to a $70.0 million release of credit reserves in the prior-year period. The provision in the current period was primarily due to an increase in the collective basis reserve, partially offset by net recoveries during the current period. The increase in the collective basis reserve was driven by a weaker macroeconomic outlook, partially offset by improvements in credit quality mainly within the commercial and institutional and commercial real estate portfolios.
The release of credit reserves in the prior-year period was primarily due to a decrease in the collective basis reserve driven by continued improvements in projected economic conditions at the time and portfolio credit quality, partially offset by portfolio growth.
Net recoveries in the current-year period totaled $4.2 million resulting from $5.5 million of charge-offs and $9.7 million of recoveries, compared to net recoveries of $5.2 million in the prior-year period resulting from $0.4 million of charge-offs and $5.6 million of recoveries.
For additional discussion of the allowance for credit losses, refer to the “Asset Quality” section in this MD&A.
Noninterest Expense
The components of Noninterest Expense are provided in the following table.
TABLE 20: NONINTEREST EXPENSE
| | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, | | |
| ($ In Millions) | 2022 | 2021 | CHANGE |
| Compensation | $ | 1,663.7 | | $ | 1,500.8 | | $ | 162.9 | | 11 | % |
| Employee Benefits | 333.8 | | 323.5 | | 10.3 | | 3 | |
| Outside Services | 647.4 | | 625.2 | | 22.2 | | 4 | |
| Equipment and Software | 609.4 | | 540.2 | | 69.2 | | 13 | |
| Occupancy | 153.4 | | 156.9 | | (3.5) | | (2) | |
| Other Operating Expense | 251.6 | | 220.4 | | 31.2 | | 14 | |
| Total Noninterest Expense | $ | 3,659.3 | | $ | 3,367.0 | | $ | 292.3 | | 9 | % |
Compensation expense, the largest component of Noninterest Expense increased compared to the prior-year period, primarily due to higher salary expense and incentives.
Employee Benefits expense included U.S. Qualified Plan pension settlement charges of $37.3 million in the current period and $24.5 million in the prior-year period. Please refer to Note 18 — Pension and Postretirement Health Care to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for further detail regarding pension settlement charges.
Outside Services expense increased compared to the prior-year period, primarily reflecting higher consulting services and technical services costs, partially offset by lower third-party advisory fees.
Equipment and Software expense increased compared to the prior-year period, primarily due to higher software support costs driven by continued technology investments as well as amortization.
NINE-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)
Noninterest Expense (continued)
Other Operating Expense increased compared to the prior-year period, primarily due to the accounting reclassification and other miscellaneous expense, partially offset by lower supplemental compensation plan expense. Please refer to Note 17 — Other Operating Expense to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for further detail.
Provision for Income Taxes
Income tax expense for the nine months ended September 30, 2022 was $395.6 million, representing an effective tax rate of 25.1%, compared to $361.6 million for the nine months ended September 30, 2021, representing an effective tax rate of 24.1%.
The effective tax rate increased compared to the prior-year period primarily due to the increased impact of limitations on the U.S. foreign tax credit and reserves for uncertain tax positions, partially offset by the deferred tax impact of the UK statutory tax rate increase enacted in the prior-year-period.
REPORTING SEGMENTS
Northern Trust is organized around its two client-focused reporting segments: Asset Servicing and Wealth Management. Asset management and related services are provided to Asset Servicing 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 Asset Servicing and Wealth Management.
Reporting segment financial information, presented on an internal management reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Additionally, segment information is presented on an FTE basis as management believes an FTE presentation provides a clearer indication of net interest income. The adjustment to an FTE basis has no impact on Net Income.
Revenues, expenses and average assets are allocated to Asset Servicing 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.
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.
REPORTING SEGMENTS (continued)
The following table presents the earnings contributions and average assets of Northern Trust’s reporting segments for the three and nine months ended September 30, 2022 and 2021.
TABLE 21: RESULTS OF REPORTING SEGMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ In Millions) | ASSET SERVICING | WEALTH MANAGEMENT | OTHER | RECONCILING ITEMS | TOTAL CONSOLIDATED |
| THREE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| Noninterest Income | | | | | | | | | | |
| Trust, Investment and Other Servicing Fees | $ | 603.2 | | $ | 630.2 | | $ | 475.5 | | $ | 480.8 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,078.7 | | $ | 1,111.0 | |
| Foreign Exchange Trading Income | 63.7 | | 63.2 | | 1.0 | | 3.2 | | — | | — | | — | | — | | 64.7 | | 66.4 | |
| Other Noninterest Income | 62.5 | | 65.6 | | 37.0 | | 48.0 | | (1.1) | | (3.6) | | — | | — | | 98.4 | | 110.0 | |
| Total Noninterest Income | 729.4 | | 759.0 | | 513.5 | | 532.0 | | (1.1) | | (3.6) | | — | | — | | 1,241.8 | | 1,287.4 | |
| Net Interest Income | 303.3 | | 158.9 | | 222.0 | | 198.2 | | — | | — | | (12.3) | | (10.7) | | 513.0 | | 346.4 | |
| Revenue | 1,032.7 | | 917.9 | | 735.5 | | 730.2 | | (1.1) | | (3.6) | | (12.3) | | (10.7) | | 1,754.8 | | 1,633.8 | |
| Provision for Credit Losses | (5.1) | | (6.9) | | 5.6 | | (6.1) | | — | | — | | — | | — | | 0.5 | | (13.0) | |
| Noninterest Expense | 760.4 | | 716.6 | | 449.0 | | 410.9 | | 20.4 | | 1.2 | | — | | — | | 1,229.8 | | 1,128.7 | |
| Income before Income Taxes | 277.4 | | 208.2 | | 280.9 | | 325.4 | | (21.5) | | (4.8) | | (12.3) | | (10.7) | | 524.5 | | 518.1 | |
| Provision for Income Taxes | 67.7 | | 50.0 | | 79.6 | | 84.3 | | (5.3) | | (1.2) | | (12.3) | | (10.7) | | 129.7 | | 122.4 | |
| Net Income | $ | 209.7 | | $ | 158.2 | | $ | 201.3 | | $ | 241.1 | | $ | (16.2) | | $ | (3.6) | | $ | — | | $ | — | | $ | 394.8 | | $ | 395.7 | |
| Percentage of Consolidated Net Income | 53 | % | 40 | % | 51 | % | 61 | % | (4) | % | (1) | % | N/A | N/A | 100 | % | 100 | % |
| Average Assets | $ | 109,677.2 | | $ | 119,951.9 | | $ | 36,725.0 | | $ | 36,500.9 | | $ | — | | $ | — | | N/A | N/A | $ | 146,402.2 | | $ | 156,452.8 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| ($ In Millions) | ASSET SERVICING | WEALTH MANAGEMENT | OTHER | RECONCILING ITEMS | TOTAL CONSOLIDATED |
| NINE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| Noninterest Income | | | | | | | | | | |
| Trust, Investment and Other Servicing Fees | $ | 1,908.4 | | $ | 1,862.2 | | $ | 1,482.1 | | $ | 1,387.9 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,390.5 | | $ | 3,250.1 | |
| Foreign Exchange Trading Income | 215.9 | | 205.6 | | 7.3 | | 10.1 | | — | | — | | — | | — | | 223.2 | | 215.7 | |
| Other Noninterest Income | 185.4 | | 194.8 | | 101.6 | | 130.5 | | (11.2) | | (15.7) | | — | | — | | 275.8 | | 309.6 | |
| Total Noninterest Income | 2,309.7 | | 2,262.6 | | 1,591.0 | | 1,528.5 | | (11.2) | | (15.7) | | — | | — | | 3,889.5 | | 3,775.4 | |
| Net Interest Income | 748.5 | | 472.7 | | 634.3 | | 575.0 | | — | | — | | (30.1) | | (25.6) | | 1,352.7 | | 1,022.1 | |
| Revenue | 3,058.2 | | 2,735.3 | | 2,225.3 | | 2,103.5 | | (11.2) | | (15.7) | | (30.1) | | (25.6) | | 5,242.2 | | 4,797.5 | |
| Provision for Credit Losses | 3.8 | | (29.1) | | 3.2 | | (40.9) | | — | | — | | — | | — | | 7.0 | | (70.0) | |
| Noninterest Expense | 2,269.4 | | 2,133.3 | | 1,333.2 | | 1,212.5 | | 56.7 | | 21.2 | | — | | — | | 3,659.3 | | 3,367.0 | |
| Income before Income Taxes | 785.0 | | 631.1 | | 888.9 | | 931.9 | | (67.9) | | (36.9) | | (30.1) | | (25.6) | | 1,575.9 | | 1,500.5 | |
| Provision for Income Taxes | 194.0 | | 153.1 | | 248.6 | | 243.3 | | (16.9) | | (9.2) | | (30.1) | | (25.6) | | 395.6 | | 361.6 | |
| Net Income | $ | 591.0 | | $ | 478.0 | | $ | 640.3 | | $ | 688.6 | | $ | (51.0) | | $ | (27.7) | | $ | — | | $ | — | | $ | 1,180.3 | | $ | 1,138.9 | |
| Percentage of Consolidated Net Income | 50 | % | 42 | % | 54 | % | 60 | % | (4) | % | (2) | % | N/A | N/A | 100 | % | 100 | % |
| Average Assets | $ | 117,251.0 | | $ | 119,859.4 | | $ | 36,901.1 | | $ | 34,821.9 | | $ | — | | $ | — | | N/A | N/A | $ | 154,152.1 | | $ | 154,681.3 | |
Note: Segment results are stated on an FTE basis. The FTE adjustments are eliminated in the reconciling items column with the Corporation’s total consolidated financial results stated on a GAAP basis. The adjustment to an FTE basis has no impact on Net Income.Asset Servicing
Asset Servicing Net Income
For the quarter ended September 30, 2022, Net Income increased $51.5 million, or 33%, from the prior-year quarter, primarily reflecting higher Net Interest Income, partially offset by higher Noninterest Expenses, lower Trust, Investment and Other Servicing Fees and higher Provision for Income Taxes.
For the nine months ended September 30, 2022, Net Income increased $113.0 million, or 24%, from the prior-year period, primarily reflecting higher Net Interest Income and Trust, Investment and Other Servicing Fees, partially offset by higher
REPORTING SEGMENTS (continued)
Asset Servicing (continued)
Noninterest Expense, Provision for Income Taxes, and Provision for Credit Losses in the current period as compared to a release in the prior-year period.
Asset Servicing Trust, Investment and Other Servicing Fees
For an explanation of Asset Servicing Trust, Investment, and Other Servicing Fees, please see the “Trust, Investment and Other Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.
Asset Servicing Foreign Exchange Trading Income
For the nine months ended September 30, 2022, Foreign Exchange Trading Income increased $10.3 million, or 5%, from the prior-year period, primarily due to higher client volumes, partially offset by decreased foreign exchange swap activity in Treasury.
Asset Servicing Other Noninterest Income
For the nine months ended September 30, 2022, Other Noninterest Income decreased $9.4 million, or 5%, from the prior-year period, primarily due to lower Other Operating Income.
Asset Servicing Net Interest Income
For the quarter ended September 30, 2022, Net Interest Income stated on an FTE basis increased $144.4 million, or 91%, from the prior-year quarter. For the nine months ended September 30, 2022, Net Interest Income stated on an FTE basis increased $275.8 million, or 58%, from the prior-year period.
The increase for the three and nine months ended September 30, 2022 primarily reflected a higher net interest margin. Average earning assets decreased $11.7 billion, or 11%, to $98.4 billion in the current quarter from $110.1 billion in the prior-year quarter and decreased $3.5 billion, or 3%, to $106.5 billion for the nine months ended September 30, 2022 from $110.0 billion in the prior-year period. The earning assets and funding sources in Asset Servicing for the three and nine months ended September 30, 2022 consisted primarily of intercompany assets, money market assets and loans and non-U.S. custody-related interest-bearing deposits, respectively.
Asset Servicing Provision for Credit Losses
For the three and nine months ended September 30, 2022, there was a $5.1 million release of credit reserves and a $3.8 million Provision for Credit Losses, respectively, compared to a $6.9 million and a $29.1 million release of credit reserves for the three and nine months ended September 30, 2021, respectively.
The release of credit reserves for the three months ended September 30, 2022 was primarily due to a charge-off for lease financing for which a reserve had previously been taken.
The Provision for Credit Losses for the nine months ended September 30, 2022 was primarily due to an increase in the collective basis reserve driven by a weaker macroeconomic outlook, partially offset by improvements in credit quality mainly within the commercial and institutional portfolio. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics.
Asset Servicing Noninterest Expense
For the quarter ended September 30, 2022, Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support and indirect expense allocations for certain corporate support services, increased $43.8 million, or 6%, from the prior-year quarter, primarily due to higher Compensation Expense and expense allocations.
For the nine months ended September 30, 2022, Noninterest Expense increased $136.1 million, or 6%, from the prior-year period, primarily reflecting higher expense allocations and Compensation Expense.
Wealth Management
Wealth Management Net Income
For the quarter ended September 30, 2022, Net Income decreased $39.8 million, or 17%, from the prior-year quarter primarily due to higher Noninterest Expense, a Provision for Credit Losses compared to a release of credit reserves in the prior-year quarter, and lower Other Noninterest Income, partially offset by higher Net Interest Income.
For the nine months ended September 30, 2022, Net Income decreased $48.3 million, or 7%, from the prior-year period primarily due to higher Noninterest Expense, a Provision for Credit Losses as compared to a release in the prior-year period and lower Other Noninterest Income, partially offset by higher Trust, Investment and Other Servicing Fees and Net Interest Income.
Wealth Management Trust, Investment and Other Servicing Fees
For an explanation of Wealth Management Trust, Investment and Other Servicing Fees, please see the “Trust, Investment and Other Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.
REPORTING SEGMENTS (continued)
Wealth Management (continued)
Wealth Management Other Noninterest Income
For the quarter ended September 30, 2022, Other Noninterest Income decreased $11.0 million, or 23%, from the prior-year quarter primarily due to lower Security Commissions and Trading Income and the change in classification of certain fees to Trust, Investment and Other Servicing Fees for which prior-year amounts have not been reclassified.
For the nine months ended September 30, 2022, Other Noninterest Income decreased $28.9 million, or 22%, from the prior-year period primarily due to lower income allocations and the accounting reclassification previously discussed.
Wealth Management Net Interest Income
For the quarter ended September 30, 2022, Net Interest Income stated on an FTE basis increased $23.8 million, or 12%, from the prior-year quarter. For the nine months ended September 30, 2022, Net Interest Income stated on an FTE basis increased $59.3 million, or 10%, from the prior-year period.
The increase for the three months ended September 30, 2022 reflected higher average loans. The increase for the nine months ended September 30, 2022 reflected higher average loans and deposit balances. The increase for both the three and nine months ended September 30, 2022 reflected higher average interest rates. Average earning assets in the current quarter decreased $107.5 million to $33.7 billion in the current quarter from $33.8 billion in the prior-year quarter and increased $1.8 billion, or 6%, to $34.0 billion for the nine months ended September 30, 2022 from $32.2 billion in the prior-year period. Earning assets and funding sources for the three and nine months ended September 30, 2022 were primarily comprised of loans and domestic interest-bearing deposits, respectively.
Wealth Management Provision for Credit Losses
For the three and nine months ended September 30, 2022, there was a $5.6 million and $3.2 million Provision for Credit Losses, respectively, compared to a $6.1 million and a $40.9 million release of credit reserves for the three and nine months ended September 30, 2021, respectively.
The Provision for Credit Losses for the three months ended September 30, 2022 was primarily due to an increase in the collective basis reserve driven by a weaker macroeconomic outlook, partially offset by improvements in credit quality within the commercial and institutional portfolio. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics.
The Provision for Credit Losses for the nine months ended September 30, 2022 was primarily due to an increase in the collective basis reserve, driven by a weaker macroeconomic outlook, partially offset by improvements in credit quality.
Wealth Management Noninterest Expense
For the quarter ended September 30, 2022, Noninterest Expense, which includes the direct expenses of the reporting segment, indirect expense allocations for product and operating support and indirect expense allocations for certain corporate support services, increased $38.1 million or 9% from the prior-year quarter, primarily reflecting higher Compensation expense and expense allocations.
For the nine months ended September 30, 2022, Noninterest Expense increased $120.7 million, or 10%, from the prior-year period, primarily reflecting higher Compensation expense and expense allocations.
Other
Other Noninterest Expense
For the three and nine months ended September 30, 2022, Other Noninterest Expense increased $19.2 million and $35.5 million, respectively, primarily due to higher pension settlement charges compared to the prior-year quarter and period, as well as higher miscellaneous expense.
CONSOLIDATED BALANCE SHEETS
The following tables summarize selected consolidated balance sheet information.
TABLE 22: SELECT CONSOLIDATED BALANCE SHEET INFORMATION
| | | | | | | | | | | | | | |
| ($ In Billions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 | CHANGE |
| Assets | | | | |
Federal Reserve and Other Central Bank Deposits and Other(1) | $ | 39.6 | | $ | 64.5 | | $ | (24.9) | | (39) | % |
Interest-Bearing Due from and Deposits with Banks(2) | 4.1 | | 3.9 | | 0.2 | | 6 | |
| Securities Purchased under Agreements to Resell | 1.2 | | 0.7 | | 0.5 | | 70 | |
Total Securities(3) | 53.8 | | 62.7 | | (8.9) | | (14) | |
| Loans and Leases | 44.0 | | 40.5 | | 3.5 | | 9 | |
| Total Earning Assets | 142.7 | | 172.3 | | (29.6) | | (17) | |
| Total Assets | 159.8 | | 183.9 | | (24.1) | | (13) | |
| Liabilities and Stockholders' Equity | | | | |
| Total Interest-Bearing Deposits | 100.7 | | 111.6 | | (10.9) | | (10) | |
| Demand and Other Noninterest-Bearing Deposits | 27.9 | | 48.3 | | (20.4) | | (42) | |
| Federal Funds Purchased | 4.4 | | — | | 4.4 | | N/M |
| Securities Sold under Agreements to Repurchase | 0.6 | | 0.5 | | 0.1 | | 6 | |
| Other Borrowings | 7.2 | | 3.6 | | 3.6 | | 100 | |
| Total Stockholders’ Equity | 11.0 | | 12.0 | | (1.0) | | (8) | |
(1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses for the purpose of presenting earning assets; such deposits are presented in Other Assets on the consolidated balance sheets.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(3) Total Securities includes certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets.
N/M - Not meaningful
TABLE 23: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| ($ In Billions) | 2022 | 2021 | CHANGE | 2022 | 2021 | CHANGE |
| Assets | | | | | | | | |
Federal Reserve and Other Central Bank Deposits and Other(1) | $ | 30.6 | | $ | 40.5 | | $ | (9.9) | | (25) | % | $ | 37.5 | | $ | 38.4 | | $ | (0.9) | | (2) | % |
Interest-Bearing Due from and Deposits with Banks(2) | 4.0 | | 5.2 | | (1.2) | | (23) | | 4.2 | | 6.1 | | (1.9) | | (31) | |
| Securities Purchased under Agreements to Resell | 1.3 | | 0.8 | | 0.5 | | 51 | | 1.0 | | 1.1 | | (0.1) | | (8) | |
Total Securities(3) | 54.8 | | 59.0 | | (4.2) | | (7) | | 57.3 | | 60.3 | | (3.0) | | (5) | |
| Loans and Leases | 41.5 | | 38.4 | | 3.1 | | 8 | | 40.5 | | 36.3 | | 4.2 | | 12 | |
| Total Earning Assets | 132.2 | | 143.9 | | (11.7) | | (8) | | 140.5 | | 142.2 | | (1.7) | | (1) | |
| Total Assets | 146.4 | | 156.5 | | (10.1) | | (6) | | 154.2 | | 154.7 | | (0.5) | | — | |
| Liabilities and Stockholders' Equity | | | | | | | | |
| Total Interest-Bearing Deposits | 94.1 | | 99.6 | | (5.5) | | (5) | | 97.0 | | 97.7 | | (0.7) | | (1) | |
| Demand and Other Noninterest-Bearing Deposits | 24.4 | | 30.2 | | (5.8) | | (19) | | 31.7 | | 30.4 | | 1.3 | | 4 | |
| Federal Funds Purchased | 2.0 | | 0.2 | | 1.8 | | N/M | 1.0 | | 0.3 | | 0.7 | | N/M |
| Securities Sold under Agreements to Repurchase | 0.5 | | 0.3 | | 0.2 | | 67 | 0.4 | | 0.2 | | 0.2 | | 119 | |
| Other Borrowings | 6.0 | | 5.5 | | 0.5 | | 8 | | 4.6 | | 5.1 | | (0.5) | | (10) | |
| Total Stockholders’ Equity | 10.9 | | 11.9 | | (1.0) | | (8) | | 11.1 | | 11.6 | | (0.5) | | (5) | |
(1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses for the purpose of presenting earning assets; such deposits are presented in Other Assets on the consolidated balance sheets.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(3) Total Securities includes certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets.
N/M - Not meaningful
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.
Short-Term Borrowings. Short-term borrowings includes Federal Funds Purchased, Securities Sold under Agreements to Repurchase, and Other Borrowings. Securities Sold under Agreements to Repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities sold is monitored, limits are set on exposure with
CONSOLIDATED BALANCE SHEETS (continued)
counterparties, and the financial condition of counterparties is regularly assessed. Securities Sold under Agreements to Repurchase are held by the counterparty until the repurchase. See Note 5 — Securities Sold Under Agreements to Repurchase, Note 21 — Commitments and Contingent Liabilities and Note 23 — Offsetting of Assets and Liabilities to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for additional information on our repurchase and reverse repurchase agreements.
Stockholders’ Equity. During the three and nine months ended September 30, 2022, the Corporation declared cash dividends totaling $158.4 million and $454.2 million to common stockholders and cash dividends totaling $16.2 million and $37.1 million to preferred stockholders. During the three and nine months ended September 30, 2021, the Corporation declared cash dividends totaling $148.0 million and $447.1 million to common stockholders, and cash dividends totaling $16.2 million and $37.1 million to preferred stockholders, respectively.
For the three and nine months ended September 30, 2022, the Corporation repurchased 11,080 and 309,334 shares of common stock, respectively, at a total cost of $1.2 million ($96.43 average price per share) and $35.2 million ($113.89 average price per share), respectively, all of which were related to share-based compensation to satisfy tax withholding obligations.
For the three months ended September 30, 2021, the Corporation repurchased 859,587 shares of common stock, including 11,169 shares withheld related to share-based compensation, at a total cost of $100.0 million ($116.34 average price per share). During the nine months ended September 30, 2021, the Corporation repurchased 2,511,564 shares of common stock, including 378,346 shares withheld related to share-based compensation, at a total cost of $265.8 million ($105.84 average price per share).
ASSET QUALITY
Securities Portfolio
Northern Trust maintains a high quality debt securities portfolio. Debt securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security. The following tables provide the fair value of available for sale (AFS) debt securities and amortized cost of held to maturity (HTM) debt securities by credit rating.
TABLE 24: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES BY CREDIT RATING
| | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| ($ In Millions) | AAA | AA | A | BBB | NOT RATED | TOTAL |
| U.S. Government | $ | 2,544.0 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2,544.0 | |
| Obligations of States and Political Subdivisions | 137.8 | | 700.1 | | — | | — | | — | | 837.9 | |
| Government Sponsored Agency | 11,898.7 | | — | | — | | — | | — | | 11,898.7 | |
| Non-U.S. Government | 276.6 | | — | | — | | — | | — | | 276.6 | |
| Corporate Debt | 342.4 | | 436.8 | | 1,014.2 | | 19.5 | | 27.6 | | 1,840.5 | |
| Covered Bonds | 391.0 | | — | | 20.5 | | — | | — | | 411.5 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 1,800.0 | | 476.9 | | 211.4 | | — | | — | | 2,488.3 | |
| Other Asset-Backed | 5,294.0 | | — | | — | | — | | — | | 5,294.0 | |
| Commercial Mortgage-Backed | 1,387.8 | | — | | — | | — | | — | | 1,387.8 | |
| Total | $ | 24,072.3 | | $ | 1,613.8 | | $ | 1,246.1 | | $ | 19.5 | | $ | 27.6 | | $ | 26,979.3 | |
| Percent of Total | 89 | % | 6 | % | 5 | % | — | % | — | % | 100 | % |
| | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 |
| ($ In Millions) | AAA | AA | A | BBB | NOT RATED | TOTAL |
| U.S. Government | $ | 2,426.1 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2,426.1 | |
| Obligations of States and Political Subdivisions | 1,133.2 | | 2,742.9 | | — | | — | | — | | 3,876.1 | |
| Government Sponsored Agency | 18,075.6 | | — | | — | | — | | — | | 18,075.6 | |
| Non-U.S. Government | 374.0 | | — | | — | | — | | — | | 374.0 | |
| Corporate Debt | 442.0 | | 466.2 | | 1,206.6 | | 29.4 | | 197.5 | | 2,341.7 | |
| Covered Bonds | 364.1 | | — | | 23.5 | | — | | 118.0 | | 505.6 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 2,030.9 | | 783.7 | | 230.5 | | — | | — | | 3,045.1 | |
| Other Asset-Backed | 5,941.6 | | — | | — | | — | | — | | 5,941.6 | |
| Commercial Mortgage-Backed | 1,424.7 | | — | | — | | — | | — | | 1,424.7 | |
| Total | $ | 32,212.2 | | $ | 3,992.8 | | $ | 1,460.6 | | $ | 29.4 | | $ | 315.5 | | $ | 38,010.5 | |
| Percent of Total | 84 | % | 11 | % | 4 | % | — | % | 1 | % | 100 | % |
ASSET QUALITY (continued)
Securities Portfolio (continued)
As of September 30, 2022, the less than 1% of AFS debt securities not rated by Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings (S&P Global) or Fitch Ratings, Inc. (Fitch Ratings) consisted of corporate debt securities.
As of December 31, 2021, the 1% of AFS debt securities not rated by Moody’s, S&P Global or Fitch Ratings consisted of corporate debt securities and covered bonds.
TABLE 25: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING
| | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| ($ In Millions) | AAA | AA | A | BBB | NOT RATED | TOTAL |
| U.S. Government | $ | 57.9 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 57.9 | |
| Obligations of States and Political Subdivisions | 924.1 | | 1,634.4 | | — | | — | | — | | 2,558.5 | |
| Government Sponsored Agency | 9,627.1 | | — | | — | | — | | — | | 9,627.1 | |
| Non-U.S. Government | 818.8 | | 856.2 | | 874.0 | | 295.9 | | — | | 2,844.9 | |
| Corporate Debt | 2.0 | | 326.3 | | 469.9 | | — | | — | | 798.2 | |
| Covered Bonds | 2,466.3 | | — | | — | | — | | — | | 2,466.3 | |
| Certificates of Deposit | — | | — | | — | | — | | 475.5 | | 475.5 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 4,050.9 | | 1,543.3 | | 26.6 | | 1.0 | | — | | 5,621.8 | |
| Other Asset-Backed | 292.2 | | — | | — | | — | | — | | 292.2 | |
| Other | 64.2 | | — | | — | | — | | 443.2 | | 507.4 | |
| Total | $ | 18,303.5 | | $ | 4,360.2 | | $ | 1,370.5 | | $ | 296.9 | | $ | 918.7 | | $ | 25,249.8 | |
| Percent of Total | 72 | % | 17 | % | 6 | % | 1 | % | 4 | % | 100 | % |
| | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 |
| (In Millions) | AAA | AA | A | BBB | NOT RATED | TOTAL |
| U.S. Government | $ | 47.0 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 47.0 | |
| Obligations of States and Political Subdivisions | — | | 0.8 | | — | | — | | — | | 0.8 | |
| Government Sponsored Agency | 5,927.6 | | — | | — | | — | | — | | 5,927.6 | |
| Non-U.S. Government | 398.0 | | 942.6 | | 4,088.8 | | 343.9 | | — | | 5,773.3 | |
| Corporate Debt | 2.3 | | 386.7 | | 512.8 | | — | | — | | 901.8 | |
| Covered Bonds | 2,942.4 | | — | | — | | — | | — | | 2,942.4 | |
| Certificates of Deposit | — | | — | | — | | — | | 674.7 | | 674.7 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 4,207.6 | | 1,858.0 | | 31.3 | | 1.1 | | — | | 6,098.0 | |
| Other Asset-Backed | 682.6 | | — | | — | | — | | — | | 682.6 | |
| Other | — | | — | | — | | — | | 516.3 | | 516.3 | |
| Total | $ | 14,207.5 | | $ | 3,188.1 | | $ | 4,632.9 | | $ | 345.0 | | $ | 1,191.0 | | $ | 23,564.5 | |
| Percent of Total | 60 | % | 14 | % | 20 | % | 1 | % | 5 | % | 100 | % |
As of September 30, 2022 and December 31, 2021, 4% and 5% of HTM debt securities not rated by Moody’s, S&P Global or Fitch Ratings consisted of certificates of deposit with a remaining life of less than six months, as well as investments purchased by Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income communities within Northern Trust’s market area.
Net unrealized losses within the investment securities portfolio totaled $3.5 billion at September 30, 2022, compared to net unrealized losses of $187.1 million as of December 31, 2021. Net unrealized losses as of September 30, 2022 were comprised of $10.4 million and $3.5 billion of gross unrealized gains and losses, respectively. $1.3 billion of the $3.5 billion gross unrealized losses relate to AFS debt securities. The increase in net unrealized losses on the AFS debt securities portfolio was primarily due to higher interest rates. Net unrealized losses as of December 31, 2021 were comprised of $345.1 million and $532.2 million of gross unrealized gains and losses, respectively.
As of September 30, 2022, the $27.0 billion AFS debt securities portfolio had unrealized losses of $342.7 million and $299.9 million related to other asset-backed and government-sponsored agency securities, respectively, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of December 31, 2021, the $38.0 billion AFS debt securities portfolio had unrealized losses of $110.2 million related to government-sponsored agency securities, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of September 30, 2022 and December 31, 2021, 12% and 14%, respectively, of the AFS corporate debt securities portfolio was backed by guarantees provided by U.S. and non-U.S. government entities.
ASSET QUALITY (continued)
Securities Portfolio (continued)
As of September 30, 2022, the $25.2 billion HTM debt securities portfolio had unrealized losses of $1.0 billion and $491.4 million related to government-sponsored agency securities and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase. As of December 31, 2021, the $23.6 billion HTM debt securities portfolio had an unrealized loss of $106.1 million, $80.0 million and $71.6 million related to government-sponsored agency, sub-sovereign, supranational and non-U.S. agency bonds, and other residential mortgage-backed securities, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase.
HTM debt securities consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the three and nine months ended September 30, 2022, for capital management purposes, the Corporation transferred government sponsored agency and obligations of states and political subdivisions investment securities that had a fair value of $6.6 billion from the AFS to HTM classification, all of which were transferred during the third quarter of 2022. During the three months ended September 30, 2021, no securities were transferred from AFS to HTM. During the nine months ended September 30, 2021, the Corporation transferred government sponsored agency securities that had a fair value of $6.9 billion from AFS to HTM for capital management purposes, all of which were transferred during the second quarter of 2021. Upon transfer of a debt security from the AFS to HTM classification, the amortized cost is reset to fair value. Any net unrealized gain or loss at the date of transfer will remain in Accumulated Other Comprehensive Income (Loss) (AOCI) and be amortized into Net Interest Income over the remaining life of the securities using the effective interest method. The amortization of amounts retained in AOCI will offset the effect on interest income of the amortization of the premium or discount resulting from transferring the securities at fair value.
For additional information relating to the securities portfolio, refer to Note 4 — Securities to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).
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 potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until their repurchase.
For additional information relating to the securities sold under agreements to repurchase, refer to Note 5 — Securities Sold Under Agreements to Repurchase to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).
ASSET QUALITY (continued)
Nonaccrual Loans and Leases and Other Real Estate Owned
Nonaccrual assets consist of nonaccrual loans and leases and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans.
The following table provides the amounts of nonaccrual loans and leases, by loan and lease segment and class, and of OREO that were outstanding at the dates shown, as well as the balance of loans that were delinquent 90 days or more and still accruing interest. Loans that are delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash collections, renegotiation and renewals.
TABLE 26: NONACCRUAL ASSETS
| | | | | | | | | | | | | | |
| ($ In Millions) | SEPTEMBER 30, 2022 | % OF NONACCRUAL LOANS AND LEASES TO TOTAL NONACCRUAL LOANS AND LEASES | DECEMBER 31, 2021 | % OF NONACCRUAL LOANS AND LEASES TO TOTAL NONACCRUAL LOANS AND LEASES |
| Nonaccrual Loans and Leases | | | | |
| Commercial | | | | |
| Commercial and Institutional | $ | 18.4 | | 24 | % | $ | 19.5 | | 16 | % |
| Commercial Real Estate | 41.9 | | 55 | % | 66.6 | | 54 | % |
| | | | |
| Total Commercial | $ | 60.3 | | 79 | % | $ | 86.1 | | 70 | % |
| Personal | | | | |
| Residential Real Estate | $ | 16.1 | | 21 | % | $ | 36.2 | | 30 | % |
| Total Personal | $ | 16.1 | | 21 | % | $ | 36.2 | | 30 | % |
| Total Nonaccrual Loans and Leases | 76.4 | | | 122.3 | | |
| Other Real Estate Owned | — | | | 3.0 | | |
| Total Nonaccrual Assets | $ | 76.4 | | | $ | 125.3 | | |
| 90 Day Past Due Loans Still Accruing | $ | 51.5 | | | $ | 28.3 | | |
| Nonaccrual Loans and Leases to Total Loans and Leases | 0.17 | % | | 0.30 | % | |
| Allowance for Credit Losses Assigned to Loans and Leases to Nonaccrual Loans and Leases | 1.8 | x | | 1.1 | x | |
Nonaccrual assets of $76.4 million as of September 30, 2022 decreased from December 31, 2021 primarily due to the payoff of two nonaccrual loans in the commercial real estate portfolio and payoffs in the residential real estate portfolio. In addition to the negative impact on Net Interest Income and the risk of credit losses, nonaccrual assets also increase operating costs due to the expense associated with collection efforts. Changes in the level of nonaccrual assets may be indicative of changes in the credit quality of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment of the allowance evaluated on an individual basis and the quantitative and qualitative factors used in the determination of the allowance evaluated on a collective basis within the allowance for credit losses.
Northern Trust’s credit policies do not allow for the origination of loan types generally considered to be 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 first lien mortgages and equity credit lines, which 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.
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.
For additional information relating to the loans and leases portfolio, refer to Note 6 — Loans and Leases to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).
ASSET QUALITY (continued)
Allowance for Credit Losses
The allowance for credit losses—which represents management’s best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance-sheet credit exposure, and specific borrower relationships—is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts.
The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic Research Department, and each of Northern Trust’s reporting segments.
As of September 30, 2022, the allowance for credit losses related to loans and leases, undrawn loan commitments and standby letters of credit, HTM debt securities, AFS debt securities, and other financial assets, was $138.7 million, $40.7 million, $15.0 million, $0.8 million and $0.7 million, respectively. As of December 31, 2021, the allowance for credit losses related to loans and leases, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $138.4 million, $34.1 million, $11.2 million, and $1.0 million, respectively. There was no allowance for credit losses related to AFS debt securities as of December 31, 2021. For additional information relating to the allowance for credit losses and the changes in the allowance for credit losses during the three and nine months ended September 30, 2022 and 2021 due to charge-offs, recoveries and provisions for credit losses, refer to Note 7 — Allowance for Credit Losses to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited). The following table shows the allowance evaluated on an individual and collective basis for the loans and leases portfolio by segment and class.
TABLE 27: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES FOR LOANS AND LEASES
| | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| ($ In Millions) | ALLOWANCE AMOUNT | PERCENT OF LOANS TO TOTAL LOANS | ALLOWANCE AMOUNT | PERCENT OF LOANS TO TOTAL LOANS |
| Evaluated on an Individual Basis | $ | 10.9 | | — | % | $ | 10.1 | | — | % |
| Evaluated on a Collective Basis | | | | |
| Commercial | | | | |
| Commercial and Institutional | 59.0 | | 28 | | 50.6 | | 27 | |
| Commercial Real Estate | 59.7 | | 10 | | 68.2 | | 11 | |
| Non-U.S. | 8.5 | | 11 | | 7.7 | | 5 | |
| Lease Financing, net | — | | — | | 0.4 | | — | |
| Other | — | | 3 | | — | | 2 | |
| Total Commercial | 127.2 | | 52 | | 126.9 | | 45 | |
| Personal | | | | |
| Private Client | 16.2 | | 32 | | 11.1 | | 38 | |
| Residential Real Estate | 23.9 | | 15 | | 23.3 | | 16 | |
| Non-U.S. | 1.2 | | 1 | | 1.1 | | 1 | |
| Other | — | | — | | — | | — | |
| Total Personal | 41.3 | | 48 | | 35.5 | | 55 | |
| Total Allowance Evaluated on a Collective Basis | $ | 168.5 | | | $ | 162.4 | | |
| Total Allowance for Credit Losses | $ | 179.4 | | | $ | 172.5 | | |
| Allowance Assigned to | | | | |
| Loans and Leases | $ | 138.7 | | | $ | 138.4 | | |
| Undrawn Commitments and Standby Letters of Credit | 40.7 | | | 34.1 | | |
| Total Allowance for Credit Losses | $ | 179.4 | | | $ | 172.5 | | |
| Allowance Assigned to Loans and Leases to Total Loans and Leases | 0.32 | % | | 0.34 | % | |
The following discusses the statement of cash flow activities for the nine months ended September 30, 2022 and 2021.
TABLE 28: CASH FLOW ACTIVITY SUMMARY
| | | | | | | | | | | | | | |
| | | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | | | 2022 | 2021 |
| Net cash provided by (used in): | | |
| Operating activities | $ | (1,759.6) | | $ | (685.9) | |
| Investing activities | 21,773.5 | | 188.4 | |
| Financing activities | (18,156.8) | | 430.0 | |
| Effect of Foreign Currency Exchange Rates on Cash | (421.1) | | (127.3) | |
| Change in Cash and Due from Banks | $ | 1,436.0 | | $ | (194.8) | |
Operating Activities
Net cash used in operating activities of $1.8 billion and $685.9 million for the nine months ended September 30, 2022 and 2021, respectively, was primarily attributable to higher net collateral deposited with derivative counterparties, partially offset by period earnings and the impact of higher non-cash charges such as amortization and depreciation.
Investing Activities
Net cash provided by investing activities of $21.8 billion for the nine months ended September 30, 2022 was primarily attributable to decreased levels of Federal Reserve and other central bank deposits and net proceeds from HTM debt securities, partially offset by higher levels of loans and leases.
Net cash provided by investing activities of $188.4 million for the nine months ended September 30, 2021 was primarily attributable to decreased levels of Federal Reserve and other central bank deposits, net proceeds from HTM debt securities, lower levels of interest-bearing deposits with banks, net changes in other investing activities, and lower levels of securities purchased under agreements to resell, partially offset by higher levels of loans and leases, net purchases of AFS debt securities and higher client security settlement receivables.
Financing Activities
Net cash used in financing activities of $18.2 billion for the nine months ended September 30, 2022 was primarily attributable to the decreased levels of total deposits, partially offset by increased levels of federal funds purchased and short-term other borrowings. The decrease in total deposits was primarily attributable to lower levels of non-U.S. office noninterest-bearing and interest-bearing deposits.
Net cash provided by financing activities of $430.0 million for the nine months ended September 30, 2021 was primarily attributable to increased levels of short-term borrowings and securities sold under agreements to repurchase, partially offset by repayments of senior notes, dividends paid on common stock, a decrease in total deposits, the repurchase of common stock pursuant to the Corporation’s share repurchase program, and a decrease in federal funds purchased. The decrease in total deposits was primarily attributable to lower levels of non-U.S. offices noninterest-bearing and interest-bearing client deposits, partially offset by an increase in domestic noninterest-bearing deposits and savings, money market, and other interest-bearing deposits.
The capital ratios of Northern Trust Corporation and its principal subsidiary, The Northern Trust Company, remained strong at September 30, 2022, exceeding the requirements for classification as “well-capitalized” under applicable U.S. regulatory requirements.
The results of the 2022 Dodd-Frank Act Stress Test, published by the Federal Reserve on June 23, 2022, resulted in Northern Trust’s stress capital buffer and effective Common Equity Tier 1 capital ratio minimum requirement remaining constant at 2.5% and 7%, respectively, for the annual Capital Plan cycle beginning on October 1, 2022.
An increase in accumulated other comprehensive loss, which was primarily due to an increase in net unrealized losses on the available for sale debt securities portfolio largely from higher interest rates, contributed to the current quarter’s change in capital ratios from the prior quarter.
The table below provides capital ratios, as well as the required minimum capital ratios, for Northern Trust Corporation and The Northern Trust Company determined by Basel III phased-in requirements.
TABLE 29: REGULATORY CAPITAL RATIOS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital Ratios —
Northern Trust Corporation | SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | |
| STANDARDIZED APPROACH | ADVANCED APPROACH | STANDARDIZED APPROACH | ADVANCED APPROACH | STANDARDIZED APPROACH | ADVANCED APPROACH | WELL-CAPITALIZED RATIOS | MINIMUM CAPITAL RATIOS |
| Common Equity Tier 1 Capital | 10.1 | % | 11.4 | % | 10.5 | % | 11.6 | % | 11.9 | % | 13.0 | % | N/A | 4.5 | % |
| Tier 1 Capital | 11.1 | | 12.5 | | 11.5 | | 12.7 | | 12.9 | | 14.1 | | 6.0 | 6.0 | |
| Total Capital | 12.2 | | 13.5 | | 12.6 | | 13.7 | | 14.3 | | 15.4 | | 10.0 | 8.0 | |
| Tier 1 Leverage | 7.0 | | 7.0 | | 6.7 | | 6.7 | | 7.1 | | 7.1 | | N/A | 4.0 | |
| Supplementary Leverage | N/A | 7.7 | | N/A | 7.6 | | N/A | 8.4 | | N/A | 3.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital Ratios — The Northern Trust Company | SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | |
| STANDARDIZED APPROACH | ADVANCED APPROACH | STANDARDIZED APPROACH | ADVANCED APPROACH | STANDARDIZED APPROACH | ADVANCED APPROACH | WELL-CAPITALIZED RATIOS | MINIMUM CAPITAL RATIOS |
| Common Equity Tier 1 Capital | 10.7 | % | 12.2 | % | 11.0 | % | 12.3 | % | 12.5 | % | 13.8 | % | 6.5 | % | 4.5 | % |
| Tier 1 Capital | 10.7 | | 12.2 | | 11.0 | | 12.3 | | 12.5 | | 13.8 | | 8.0 | | 6.0 | |
| Total Capital | 11.6 | | 13.0 | | 11.9 | | 13.1 | | 13.7 | | 14.9 | | 10.0 | | 8.0 | |
| Tier 1 Leverage | 6.7 | | 6.7 | | 6.3 | | 6.3 | | 6.8 | | 6.8 | | 5.0 | | 4.0 | |
| Supplementary Leverage | N/A | 7.4 | | N/A | 7.2 | | N/A | 8.1 | | 3.0 | | 3.0 | |
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In March 2022, the Financial Accounting Standards Board (FASB) issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method” (ASU 2022-01). The amendments in ASU 2022-01 expand the current last-of-layer hedging model from a single-layer method to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. In addition, ASU 2022-01 (1) expands the scope of the portfolio layer method to include non-prepayable assets, (2) specifies eligible hedging instruments in a single-layer hedge, (3) provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method and (4) specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. ASU 2022-01 is effective for interim and annual periods beginning after December 15, 2022, although early adoption is permitted. Upon adoption, ASU 2022-01 is not expected to have a significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (ASU 2022-02). The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings (TDRs) for creditors that have adopted CECL while enhancing disclosure requirements for certain loan refinancings and restructurings made to borrowers experiencing financial difficulty. In addition, ASU 2022-02 requires that a public business entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. ASU 2022-02 is effective for interim and annual periods beginning after December 15, 2022, although early adoption is permitted. Upon adoption, ASU 2022-02 is not expected to have a significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.
In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (ASU 2022-03). The amendments in ASU 2022-03 clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, ASU 2022-03 introduces new disclosure requirements to provide investors with information about contractual sale restrictions including the nature and remaining duration of these restrictions. ASU 2022-03 is effective for interim and annual periods beginning after December 15, 2023, although early adoption is permitted. Upon adoption, ASU 2022-03 is not expected to have a significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.
MARKET RISK MANAGEMENT
There are two types of market risk, interest rate risk associated with the banking book and trading risk. Interest rate risk associated with the banking book 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.
Northern Trust uses two primary measurement techniques to manage interest rate risk: Net Interest Income (NII) sensitivity and Market Value of Equity (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.
As part of its risk management activities, Northern Trust also measures daily the risk of loss associated with all non-U.S. currency positions using a Value-at-Risk (VaR) model and applying the historical simulation methodology. The following information about Northern Trust’s management of market risk should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2021.
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 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;
MARKET RISK MANAGEMENT (continued)
▪prepayments on mortgage loans and securities collateralized by mortgages are projected under each rate scenario using a third-party mortgage analytics system that incorporates market prepayment assumptions;
▪cash flows for structured securities are estimated using a third-party vendor in conjunction with the prepayments provided by the third-party mortgage analytics vendor;
▪nonmaturity deposit pricing is projected based on Northern Trust’s actual historical patterns and management judgment, depending upon the availability of historical data and current pricing strategies/or judgment; and
▪new business rates are based on current spreads to market indices.
The following table shows the estimated NII impact over the next twelve months of 100 and 200 basis point ramps upward and 100 basis point ramp downward movements in interest rates relative to forward rates as of September 30, 2022 and September 30, 2021. Each rate movement is assumed to occur gradually over a one-year period.
TABLE 30: NET INTEREST INCOME SENSITIVITY
| | | | | | | | |
| INCREASE (DECREASE) ESTIMATED IMPACT ON NEXT TWELVE MONTHS OF NET INTEREST INCOME |
| ($ In Millions) | SEPTEMBER 30, 2022 | SEPTEMBER 30, 2021 |
| Increase in Interest Rates Above Market Implied Forward Rates | | |
| 100 Basis Points | $ | 64 | | $ | 308 | |
| 200 Basis Points | 128 | | 534 | |
| Decrease in Interest Rates Below Market Implied Forward Rates | | |
| 100 Basis Points | $ | (70) | | $ | 36 | |
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:
▪the present value of nonmaturity deposits are estimated using dynamic decay methodologies or estimated remaining lives, which are based on a combination of Northern Trust’s actual historical runoff patterns and management judgment—some balances are assumed to be core and have longer lives while other balances are assumed to be temporary and have comparatively shorter lives;
▪the present values of most noninterest-related balances (such as receivables, equipment, and payables) are the same as their book values; and
▪Monte Carlo simulation is used to generate forward interest rate paths.
The following table shows the estimated impact on MVE of 100 and 200 basis point shocks up and a 100 basis point shock down from current market implied forward rates at September 30, 2022 and December 31, 2021.
TABLE 31: MARKET VALUE OF EQUITY SENSITIVITY
| | | | | | | | |
| INCREASE (DECREASE) ESTIMATED IMPACT ON MARKET VALUE OF EQUITY |
| ($ In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| Increase in Interest Rates Above Market Implied Forward Rates | | |
| 100 Basis Points | $ | (487) | | $ | 241 | |
| 200 Basis Points | (1,019) | | (60) | |
| Decrease in Interest Rates Below Market Implied Forward Rates | | |
| 100 Basis Points | $ | 503 | | $ | (384) | |
MARKET RISK MANAGEMENT (continued)
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 Value-At-Risk (VaR) — Northern Trust measures daily the risk of loss associated with all non-U.S. currency positions using a VaR model and applying the historical simulation methodology. This statistical model provides estimates, based on high confidence levels, of the potential loss in value that might be incurred if an adverse shift in non-U.S. currency exchange rates and interest 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.
Northern Trust monitors several variations of the global foreign exchange (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 foreign exchange (FX) drivers and only interest rate (IR) drivers, and look-back periods of one year, two years, and four years. Those alternative measures provide management an array of corroborating metrics and alternative perspectives on Northern Trust’s market risks.
During the three months ended September 30, 2022, Northern Trust did not incur an actual GFX trading loss in excess of the daily GFX VaR estimate.
The following table presents the levels of total regulatory VaR and its subcomponents for GFX in the periods 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 32: GLOBAL FOREIGN CURRENCY VALUE-AT-RISK
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ In Millions) | TOTAL VaR
(FX AND IR DRIVERS) | FX VaR
(FX DRIVERS ONLY) | IR VaR
(IR DRIVERS ONLY) |
| THREE MONTHS ENDED | SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 | SEPTEMBER 30, 2022 | JUNE 30, 2022 | SEPTEMBER 30, 2021 |
| High | $ | 0.2 | | $ | 0.2 | | $ | 0.3 | | $ | 0.2 | | $ | 0.2 | | $ | 0.2 | | $ | 0.1 | | $ | 0.2 | | $ | 0.2 | |
| Low | 0.1 | | 0.1 | | 0.1 | | — | | — | | — | | — | | — | | 0.1 | |
| Average | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | |
| Quarter-End | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | | 0.1 | |
RECONCILIATION TO FULLY TAXABLE EQUIVALENT
The following table presents a reconciliation of interest income, net interest income, net interest margin, and total revenue prepared in accordance with GAAP to such measures on an FTE basis, which are non-GAAP financial measures. Net interest margin is calculated by dividing annualized net interest income by average interest-earning assets. Management believes this presentation provides a clearer indication of these financial measures for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on net income.
TABLE 33: RECONCILIATION TO FULLY TAXABLE EQUIVALENT
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| ($ In Millions) | 2022 | 2021 | 2022 | 2021 |
| Net Interest Income | | | | |
| Interest Income - GAAP | $ | 799.3 | | $ | 351.3 | | $ | 1,707.6 | | $ | 1,044.3 | |
| Add: FTE Adjustment | 12.3 | | 10.7 | | 30.1 | | 25.6 | |
| Interest Income (FTE) - Non-GAAP | $ | 811.6 | | $ | 362.0 | | $ | 1,737.7 | | $ | 1,069.9 | |
| | | | |
| Net Interest Income - GAAP | $ | 513.0 | | $ | 346.4 | | $ | 1,352.7 | | $ | 1,022.1 | |
| Add: FTE Adjustment | 12.3 | | 10.7 | | 30.1 | | 25.6 | |
| Net Interest Income (FTE) - Non-GAAP | $ | 525.3 | | $ | 357.1 | | $ | 1,382.8 | | $ | 1,047.7 | |
| | | | | |
| Net Interest Margin - GAAP | 1.54 | % | 0.95 | % | 1.29 | % | 0.96 | % |
| Net Interest Margin (FTE) - Non-GAAP | 1.58 | % | 0.98 | % | 1.32 | % | 0.99 | % |
| | | | |
| Total Revenue | | | | |
| Total Revenue - GAAP | $ | 1,754.8 | | $ | 1,633.8 | | $ | 5,242.2 | | $ | 4,797.5 | |
| Add: FTE Adjustment | 12.3 | | 10.7 | | 30.1 | | 25.6 | |
| Total Revenue (FTE) - Non-GAAP | $ | 1,767.1 | | $ | 1,644.5 | | $ | 5,272.3 | | $ | 4,823.1 | |
FORWARD-LOOKING STATEMENTS
This report may include statements which constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified typically by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “likely,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements include statements, other than those related to historical facts, that relate to Northern Trust’s financial results and outlook; capital adequacy; dividend policy and share repurchase program; accounting estimates and assumptions; credit quality including allowance levels; future pension plan contributions; effective tax rate; anticipated expense levels; contingent liabilities; acquisitions; strategies; market and industry trends; and expectations regarding the impact of accounting pronouncements and legislation. These statements are based on Northern Trust’s current beliefs and expectations of future events or future results, and involve risks and uncertainties that are difficult to predict and subject to change. These statements are also based on assumptions about many important factors, including:
•financial market disruptions or economic recession in the United States or other countries across the globe resulting from any of a number of factors;
•volatility or changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets held in particular investment funds or client portfolios, including those funds, portfolios, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity;
•the impact of equity markets on fee revenue;
•geopolitical risks, risks related to global climate change and the risks of extraordinary events such as pandemics, natural disasters, terrorist events and war (including current events involving Ukraine and the Russian Federation), and the responses of the United States and other countries to those events;
•the downgrade of U.S. government-issued and other securities;
•changes in foreign exchange trading client volumes and volatility in foreign currency exchange rates, changes in the valuation of the U.S. dollar relative to other currencies in which Northern Trust records revenue or accrues expenses, and Northern Trust’s success in assessing and mitigating the risks arising from all such changes and volatility;
•a decline in the value of securities held in Northern Trust’s investment portfolio, particularly asset-backed securities, the liquidity and pricing of which may be negatively impacted by periods of economic turmoil and financial market disruptions;
•Northern Trust’s ability to address operating risks, including those related to cybersecurity, data security, human errors or omissions, pricing or valuation of securities, fraud, operational resiliency (including systems performance), failure to maintain sustainable business practices, and breakdowns in processes or internal controls;
•Northern Trust’s success in responding to and investing in changes and advancements in technology;
•a significant downgrade of any of Northern Trust’s debt ratings;
•the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business;
•uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate allowances therefor;
•the effectiveness of Northern Trust’s management of its human capital, including its success in recruiting and retaining necessary and diverse personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;
•Northern Trust’s success in controlling the costs and expenses of its business operations and the impacts of any broader inflationary environment thereon;
•the transition away from the London Interbank Offered Rate (LIBOR) or changes in the calculation of alternative interest rate benchmarks;
•the pace and extent of continued globalization of investment activity and growth in worldwide financial assets;
•changes in interest rates or in the monetary or other policies of various regulatory authorities or central banks;
•changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions, including Northern Trust;
•increased costs of compliance and other risks associated with changes in regulation, the current regulatory environment, and areas of increased regulatory emphasis and oversight in the United States and other countries, such as anti-money laundering, anti-bribery, and data privacy;
•failure to satisfy regulatory standards or to obtain regulatory approvals when required, including for the use and distribution of capital;
•changes in tax laws, accounting requirements or interpretations and other legislation in the United States or other countries that could affect Northern Trust or its clients;
•the impact of the ongoing COVID-19 pandemic—and governmental and societal responses thereto—on Northern Trust’s business, financial condition, and results of operations;
•the departure of the United Kingdom from the European Union, commonly referred to as “Brexit;”
•changes in the nature and activities of Northern Trust’s competition;
FORWARD-LOOKING STATEMENTS (continued)
•Northern Trust’s success in maintaining existing business and continuing to generate new business in existing and targeted markets and its ability to deploy deposits in a profitable manner consistent with its liquidity requirements;
•Northern Trust’s ability to address the complex needs of a global client base and manage compliance with legal, tax, regulatory and other requirements;
•Northern Trust’s ability to maintain a product mix that achieves acceptable margins;
•Northern Trust’s ability to continue to generate investment results that satisfy clients and to develop an array of investment products;
•uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and expected contributions, returns and payouts;
•Northern Trust’s success in continuing to enhance its risk management practices and controls and managing risks inherent in its businesses, including credit risk, operational risk, market and liquidity risk, fiduciary risk, compliance risk and strategic risk;
•risks and uncertainties inherent in the litigation and regulatory process, including the possibility that losses may be in excess of Northern Trust’s recorded liability and estimated range of possible loss for litigation exposures;
•risks associated with being a holding company, including Northern Trust’s dependence on dividends from its principal subsidiary;
•the risk of damage to Northern Trust’s reputation which may undermine the confidence of clients, counterparties, rating agencies, and stockholders; and
•other factors identified elsewhere in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021, including those factors described in Item 1A, “Risk Factors,” and other filings with the SEC, all of which are available on Northern Trust’s website.
Actual results may differ materially from those expressed or implied by forward-looking statements. The information contained herein is current only as of the date of that information. All forward-looking statements included in this document are based upon information presently available, and Northern Trust assumes no obligation to update its forward-looking statements.
Item 1. Consolidated Financial Statements (unaudited)
| | | | | |
| CONSOLIDATED BALANCE SHEETS (UNAUDITED) | NORTHERN TRUST CORPORATION |
| | | | | | | | |
| (In Millions Except Share Information) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| | |
| ASSETS | | |
| Cash and Due from Banks | $ | 4,492.8 | | $ | 3,056.8 | |
| Federal Reserve and Other Central Bank Deposits | 39,644.9 | | 64,582.2 | |
| Interest-Bearing Deposits with Banks | 1,542.3 | | 1,949.4 | |
| Federal Funds Sold | 30.1 | | — | |
| Securities Purchased under Agreements to Resell | 1,166.2 | | 686.4 | |
| Debt Securities | | |
Available for Sale (Amortized cost of $28,269.6 and $37,948.5) | 26,979.3 | | 38,010.5 | |
Held to Maturity (Fair value of $23,064.9 and $23,315.4) | 25,249.8 | | 23,564.5 | |
| Trading Account | 0.1 | | 0.3 | |
| Total Debt Securities | 52,229.2 | | 61,575.3 | |
| Loans and Leases | | |
| Commercial | 22,789.3 | | 18,487.4 | |
| Personal | 21,202.6 | | 21,993.2 | |
Total Loans and Leases (Net of unearned income of $9.1 and $10.4) | 43,991.9 | | 40,480.6 | |
| Allowance for Credit Losses | (154.4) | | (150.6) | |
| Buildings and Equipment | 469.2 | | 488.7 | |
| Client Security Settlement Receivables | 3,077.3 | | 1,941.2 | |
| Goodwill | 679.0 | | 706.2 | |
| Other Assets | 12,671.1 | | 8,573.6 | |
| Total Assets | $ | 159,839.6 | | $ | 183,889.8 | |
| LIABILITIES | | |
| Deposits | | |
| Demand and Other Noninterest-Bearing | $ | 18,951.7 | | $ | 22,028.2 | |
| Savings, Money Market and Other Interest-Bearing | 30,968.5 | | 35,003.1 | |
| Savings Certificates and Other Time | 1,217.1 | | 842.7 | |
| Non U.S. Offices — Noninterest-Bearing | 8,906.4 | | 26,287.3 | |
| — Interest-Bearing | 68,503.7 | | 75,767.1 | |
| Total Deposits | 128,547.4 | | 159,928.4 | |
| Federal Funds Purchased | 4,364.8 | | 0.2 | |
| Securities Sold Under Agreements to Repurchase | 561.4 | | 531.9 | |
| Other Borrowings | 7,153.6 | | 3,583.8 | |
| Senior Notes | 2,707.4 | | 2,505.5 | |
| Long-Term Debt | 1,068.3 | | 1,145.7 | |
| Other Liabilities | 4,406.3 | | 4,177.5 | |
| Total Liabilities | 148,809.2 | | 171,873.0 | |
| STOCKHOLDERS' EQUITY | | |
Preferred Stock, No Par Value; Authorized 10,000,000 shares: | | |
Series D, outstanding shares of 5,000 | 493.5 | | 493.5 | |
Series E, outstanding shares of 16,000 | 391.4 | | 391.4 | |
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; | | |
Outstanding shares of 208,415,673 and 207,761,875 | 408.6 | | 408.6 | |
| Additional Paid-In Capital | 963.6 | | 939.3 | |
| Retained Earnings | 13,806.3 | | 13,117.3 | |
| Accumulated Other Comprehensive Loss | (1,785.0) | | (35.6) | |
Treasury Stock (36,755,851 and 37,409,649 shares, at cost) | (3,248.0) | | (3,297.7) | |
| Total Stockholders’ Equity | 11,030.4 | | 12,016.8 | |
| Total Liabilities and Stockholders’ Equity | $ | 159,839.6 | | $ | 183,889.8 | |
See accompanying notes to the consolidated financial statements.
| | | | | |
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) | NORTHERN TRUST CORPORATION |
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions Except Share Information) | 2022 | 2021 | 2022 | 2021 |
| Noninterest Income | | | | |
| Trust, Investment and Other Servicing Fees | $ | 1,078.7 | | $ | 1,111.0 | | $ | 3,390.5 | | $ | 3,250.1 | |
| Foreign Exchange Trading Income | 64.7 | | 66.4 | | 223.2 | | 215.7 | |
| Treasury Management Fees | 9.3 | | 11.2 | | 31.0 | | 33.7 | |
| Security Commissions and Trading Income | 32.1 | | 36.5 | | 101.1 | | 104.3 | |
| Other Operating Income | 57.3 | | 62.3 | | 144.0 | | 171.6 | |
| Investment Security Gains (Losses), net | (0.3) | | — | | (0.3) | | — | |
| Total Noninterest Income | 1,241.8 | | 1,287.4 | | 3,889.5 | | 3,775.4 | |
| Net Interest Income | | | | |
| Interest Income | 799.3 | | 351.3 | | 1,707.6 | | 1,044.3 | |
| Interest Expense | 286.3 | | 4.9 | | 354.9 | | 22.2 | |
| Net Interest Income | 513.0 | | 346.4 | | 1,352.7 | | 1,022.1 | |
| Provision for Credit Losses | 0.5 | | (13.0) | | 7.0 | | (70.0) | |
| Net Interest Income after Provision for Credit Losses | 512.5 | | 359.4 | | 1,345.7 | | 1,092.1 | |
| Noninterest Expense | | | | |
| Compensation | 553.3 | | 496.0 | | 1,663.7 | | 1,500.8 | |
| Employee Benefits | 109.9 | | 101.7 | | 333.8 | | 323.5 | |
| Outside Services | 220.9 | | 210.7 | | 647.4 | | 625.2 | |
| Equipment and Software | 212.4 | | 185.2 | | 609.4 | | 540.2 | |
| Occupancy | 51.3 | | 53.9 | | 153.4 | | 156.9 | |
| Other Operating Expense | 82.0 | | 81.2 | | 251.6 | | 220.4 | |
| Total Noninterest Expense | 1,229.8 | | 1,128.7 | | 3,659.3 | | 3,367.0 | |
| Income before Income Taxes | 524.5 | | 518.1 | | 1,575.9 | | 1,500.5 | |
| Provision for Income Taxes | 129.7 | | 122.4 | | 395.6 | | 361.6 | |
| Net Income | $ | 394.8 | | $ | 395.7 | | $ | 1,180.3 | | $ | 1,138.9 | |
| Preferred Stock Dividends | 16.2 | | 16.2 | | 37.1 | | 37.1 | |
| Net Income Applicable to Common Stock | $ | 378.6 | | $ | 379.5 | | $ | 1,143.2 | | $ | 1,101.8 | |
| Per Common Share | | | | |
| Net Income – Basic | $ | 1.80 | | $ | 1.81 | | $ | 5.44 | | $ | 5.24 | |
| – Diluted | 1.80 | | 1.80 | | 5.43 | | 5.22 | |
| Average Number of Common Shares Outstanding | | | | |
| – Basic | 208,400,135 | | 208,116,009 | | 208,271,070 | | 208,199,352 | |
| – Diluted | 208,888,572 | | 208,923,306 | | 208,858,976 | | 209,002,530 | |
| | | | |
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CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED) | NORTHERN TRUST CORPORATION |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Net Income | $ | 394.8 | | $ | 395.7 | | $ | 1,180.3 | | $ | 1,138.9 | |
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | | | | |
| Net Unrealized Gains (Losses) on Available for Sale Debt Securities | (272.2) | | (89.6) | | (1,674.0) | | (358.4) | |
| Net Unrealized Gains (Losses) on Cash Flow Hedges | 2.1 | | 4.6 | | 5.1 | | 2.4 | |
| Net Foreign Currency Adjustments | 20.2 | | 3.8 | | 2.6 | | 10.9 | |
| Net Pension and Other Postretirement Benefit Adjustments | (24.5) | | 0.5 | | (83.1) | | 31.1 | |
| Other Comprehensive Income (Loss) | (274.4) | | (80.7) | | (1,749.4) | | (314.0) | |
| Comprehensive Income (Loss) | $ | 120.4 | | $ | 315.0 | | $ | (569.1) | | $ | 824.9 | |
See accompanying notes to the consolidated financial statements.
| | | | | |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED) | NORTHERN TRUST CORPORATION |
| | | | | | | | | | | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2022 |
| (In Millions Except Per Share Information) | PREFERRED STOCK | COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | RETAINED EARNINGS | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | TREASURY STOCK | TOTAL |
| Balance at December 31, 2021 | $ | 884.9 | | $ | 408.6 | | $ | 939.3 | | $ | 13,117.3 | | $ | (35.6) | | $ | (3,297.7) | | $ | 12,016.8 | |
| Net Income | — | | — | | — | | 389.3 | | — | | — | | 389.3 | |
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | | — | | — | | — | | (871.4) | | — | | (871.4) | |
| Dividends Declared: | | | | | | | |
Common Stock, $0.70 per share | — | | — | | — | | (147.8) | | — | | — | | (147.8) | |
| Preferred Stock | — | | — | | — | | (16.2) | | — | | — | | (16.2) | |
| Stock Awards and Options Exercised | — | | — | | (7.6) | | — | | — | | 80.5 | | 72.9 | |
| Stock Purchased | — | | — | | — | | — | | — | | (33.8) | | (33.8) | |
| Balance at March 31, 2022 | $ | 884.9 | | $ | 408.6 | | $ | 931.7 | | $ | 13,342.6 | | $ | (907.0) | | $ | (3,251.0) | | $ | 11,409.8 | |
| Net Income | — | | — | | — | | 396.2 | | — | | — | | 396.2 | |
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | | — | | — | | — | | (603.6) | | — | | (603.6) | |
| Dividends Declared: | | | | | | | |
Common Stock, $0.70 per share | — | | — | | — | | (148.0) | | — | | — | | (148.0) | |
| Preferred Stock | — | | — | | — | | (4.7) | | — | | — | | (4.7) | |
| Stock Awards and Options Exercised | — | | — | | 19.4 | | — | | — | | 0.9 | | 20.3 | |
| Stock Purchased | — | | — | | — | | — | | — | | (0.3) | | (0.3) | |
| Balance at June 30, 2022 | $ | 884.9 | | $ | 408.6 | | $ | 951.1 | | $ | 13,586.1 | | $ | (1,510.6) | | $ | (3,250.4) | | $ | 11,069.7 | |
| Net Income | — | | — | | — | | 394.8 | | — | | — | | 394.8 | |
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | | — | | — | | — | | (274.4) | | — | | (274.4) | |
| Dividends Declared: | | | | | | | |
Common Stock, $0.75 per share | — | | — | | — | | (158.4) | | — | | — | | (158.4) | |
| Preferred Stock | — | | — | | — | | (16.2) | | — | | — | | (16.2) | |
| Stock Awards and Options Exercised | — | | — | | 12.5 | | — | | — | | 3.6 | | 16.1 | |
| Stock Purchased | — | | — | | | — | | — | | (1.2) | | (1.2) | |
| Balance at September 30, 2022 | $ | 884.9 | | $ | 408.6 | | $ | 963.6 | | $ | 13,806.3 | | $ | (1,785.0) | | $ | (3,248.0) | | $ | 11,030.4 | |
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See accompanying notes to the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2021 |
| (In Millions Except Per Share Information) | PREFERRED STOCK | COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | RETAINED EARNINGS | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | TREASURY STOCK | TOTAL |
| Balance at December 31, 2020 | $ | 884.9 | | $ | 408.6 | | $ | 963.6 | | $ | 12,207.7 | | $ | 428.0 | | $ | (3,204.5) | | $ | 11,688.3 | |
| Net Income | — | | — | | — | | 375.1 | | — | | — | | 375.1 | |
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | | — | | — | | — | | (362.1) | | — | | (362.1) | |
| Dividends Declared: | | | | | | | |
Common Stock, $0.70 per share | — | | — | | — | | (151.0) | | — | | — | | (151.0) | |
| Preferred Stock | — | | — | | — | | (16.2) | | — | | — | | (16.2) | |
| Stock Awards and Options Exercised | — | | — | | (49.5) | | — | | — | | 108.9 | | 59.4 | |
| Stock Purchased | — | | — | | — | | — | | — | | (135.6) | | (135.6) | |
| Balance at March 31, 2021 | $ | 884.9 | | $ | 408.6 | | $ | 914.1 | | $ | 12,415.6 | | $ | 65.9 | | $ | (3,231.2) | | $ | 11,457.9 | |
| Net Income | — | | — | | — | | 368.1 | | — | | — | | 368.1 | |
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | | — | | — | | — | | 128.8 | | — | | 128.8 | |
| Dividends Declared: | | | | | | | |
Common Stock, $0.70 per share | — | | — | | — | | (148.1) | | — | | — | | (148.1) | |
| Preferred Stock | — | | — | | — | | (4.7) | | — | | — | | (4.7) | |
| Stock Awards and Options Exercised | — | | — | | 7.0 | | — | | — | | 44.2 | | 51.2 | |
| Stock Purchased | — | | — | | — | | — | | — | | (30.2) | | (30.2) | |
| Balance at June 30, 2021 | $ | 884.9 | | $ | 408.6 | | $ | 921.1 | | $ | 12,630.9 | | $ | 194.7 | | $ | (3,217.2) | | $ | 11,823.0 | |
| Net Income | — | | — | | — | | 395.7 | | — | | — | | 395.7 | |
| Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) | — | | — | | — | | — | | (80.7) | | — | | (80.7) | |
| Dividends Declared: | | | | | | | |
Common Stock, $0.70 per share | — | | — | | — | | (148.0) | | — | | — | | (148.0) | |
| Preferred Stock | — | | — | | — | | (16.2) | | — | | — | | (16.2) | |
| Stock Awards and Options Exercised | — | | — | | 13.9 | | — | | — | | 11.1 | | 25.0 | |
| Stock Purchased | — | | — | | — | | — | | — | | (100.0) | | (100.0) | |
| Balance at September 30, 2021 | $ | 884.9 | | $ | 408.6 | | $ | 935.0 | | $ | 12,862.4 | | $ | 114.0 | | $ | (3,306.1) | | $ | 11,898.8 | |
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See accompanying notes to the consolidated financial statements.
| | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | NORTHERN TRUST CORPORATION |
| | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | |
| Net Income | $ | 1,180.3 | | $ | 1,138.9 | |
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | | |
| Investment Security (Losses) Gains, net | 0.3 | | — | |
| Amortization and Accretion of Securities and Unearned Income, net | 51.5 | | 75.3 | |
| Provision for Credit Losses | 7.0 | | (70.0) | |
| Depreciation and Amortization | 405.4 | | 382.8 | |
| Pension Plan Contributions | (20.7) | | (6.7) | |
| Change in Receivables | (107.8) | | (139.3) | |
| Change in Interest Payable | 92.6 | | 3.8 | |
| Change in Collateral With Derivative Counterparties, net | (3,089.5) | | (2,101.2) | |
| Other Operating Activities, net | (278.7) | | 30.5 | |
| Net Cash Used in Operating Activities | (1,759.6) | | (685.9) | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| Change in Federal Funds Sold | (30.1) | | — | |
| Change in Securities Purchased under Agreements to Resell | (550.6) | | 711.2 | |
| Change in Interest-Bearing Deposits with Banks | 193.7 | | 1,371.0 | |
| Net Change in Federal Reserve and Other Central Bank Deposits | 22,777.0 | | 4,689.0 | |
| Purchases of Held to Maturity Debt Securities | (27,309.4) | | (40,859.6) | |
| Proceeds from Maturity and Redemption of Held to Maturity Debt Securities | 31,071.5 | | 43,934.8 | |
| Purchases of Available for Sale Debt Securities | (3,777.9) | | (9,811.6) | |
| Proceeds from Maturity and Redemption of Available for Sale Debt Securities | 5,524.9 | | 6,229.6 | |
| Change in Loans and Leases | (3,607.7) | | (5,721.5) | |
| Purchases of Buildings and Equipment | (70.7) | | (65.0) | |
| Purchases and Development of Computer Software | (425.2) | | (278.7) | |
| Change in Client Security Settlement Receivables | (1,170.3) | | (814.1) | |
| Bank-Owned Life Insurance Policy Premiums | (500.0) | | — | |
| Other Investing Activities, net | (351.7) | | 803.3 | |
| Net Cash Provided by Investing Activities | 21,773.5 | | 188.4 | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| Change in Deposits | (26,117.2) | | (271.9) | |
| Change in Federal Funds Purchased | 4,364.6 | | (260.0) | |
| Change in Securities Sold under Agreements to Repurchase | 29.4 | | 533.8 | |
| Change in Short-Term Other Borrowings | 3,565.8 | | 1,609.1 | |
| Proceeds from Senior Notes | 995.4 | | — | |
| Repayments of Senior Notes | (500.0) | | (500.0) | |
| | |
| Treasury Stock Purchased | (35.3) | | (265.8) | |
| Net Proceeds from Stock Options | 3.4 | | 48.8 | |
| Cash Dividends Paid on Common Stock | (437.5) | | (437.8) | |
| Cash Dividends Paid on Preferred Stock | (25.6) | | (25.6) | |
| Other Financing Activities, net | 0.2 | | (0.6) | |
| Net Cash (Used in) Provided by Financing Activities | (18,156.8) | | 430.0 | |
| Effect of Foreign Currency Exchange Rates on Cash | (421.1) | | (127.3) | |
| Change in Cash and Due from Banks | 1,436.0 | | (194.8) | |
| Cash and Due from Banks at Beginning of Period | 3,056.8 | | 4,389.5 | |
| Cash and Due from Banks at End of Period | $ | 4,492.8 | | $ | 4,194.7 | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | |
| Interest Paid | $ | 263.4 | | $ | 17.7 | |
| Income Taxes Paid | 295.3 | | 267.8 | |
| Transfers from Loans to OREO | — | | 10.1 | |
| Transfers from Available for Sale Debt Securities to Held to Maturity Debt Securities | 6,623.3 | | 6,864.1 | |
See accompanying notes to the consolidated financial statements.
Notes to Consolidated Financial Statements (unaudited)
Note 1 – Basis of Presentation
The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its wholly-owned subsidiary, The Northern Trust Company (Bank), and various other wholly-owned subsidiaries of the Corporation and Bank. Throughout the notes to the consolidated financial statements, the term “Northern Trust” refers to the Corporation and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements, as of and for the periods ended September 30, 2022 and 2021, have not been audited by the Corporation’s independent registered public accounting firm. In the opinion of management, all accounting entries and adjustments, including normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. The accounting and financial reporting policies of Northern Trust conform to U.S. generally accepted accounting principles (GAAP) and reporting practices prescribed for the banking industry. The consolidated statements of income include results of acquired subsidiaries from the dates of acquisition. Certain prior-period balances have been reclassified to conform with the current year’s presentation. During the first quarter of 2022, the Corporation changed the name of the Corporate & Institutional Services (C&IS) segment to “Asset Servicing.” Accordingly, the disclosures herein and all future disclosures regarding the Corporation’s reporting segments filed with, or furnished to, the SEC will refer to this segment as Asset Servicing. For a description of Northern Trust’s significant accounting policies, refer to Note 1 — Summary of Significant Accounting Policies included under Item 8. Financial Statements and Supplementary Data in the Annual Report on Form 10-K for the year ended December 31, 2021.
Note 2 – Recent Accounting Pronouncements
On January 1, 2022, Northern Trust adopted Accounting Standards Update (ASU) No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contract in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06). ASU 2020-06 simplifies the convertible instrument accounting framework through the elimination of the beneficial conversion and cash conversion accounting models used to account for convertible debt and convertible preferred stock. ASU 2020-06 also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions in Accounting Standards Codification 815—Derivatives and Hedging. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. Upon adoption of ASU 2020-06, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated statements of income.
On January 1, 2022, Northern Trust adopted ASU No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (ASU 2021-10). ASU 2021-10 requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy to other accounting guidance within Topic 958, Not-for-Profit Entities, or International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance. Upon adoption of ASU 2021-10, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated statements of income.
On March 31, 2022, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 121 (SAB 121) which expresses the SEC staff’s view regarding the accounting for entities that have obligations to safeguard “crypto-assets” held for their platform users. SAB 121 requires that entities that perform custodial activities for crypto-assets, whether directly or through an agent acting on its behalf, should recognize a liability and a corresponding asset in respect of the crypto-assets safeguarded for their platform users, with the liability and asset measured at the fair value of the crypto-assets. SAB 121 further requires an entity to provide certain disclosures related to safeguarding obligations for crypto-assets. The guidance is effective for interim and annual periods ending after June 15, 2022, with retrospective application as of the beginning of the fiscal year to which the interim or annual period relates. The release of SAB 121 did not have an impact to Northern Trust’s consolidated balance sheets or consolidated statements of income.
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 3 – Fair Value Measurements
Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. No transfers into or out of Level 3 occurred during the nine months ended September 30, 2022 or the year ended December 31, 2021.
Level 1 — Quoted, active market prices for identical assets or liabilities.
Northern Trust’s Level 1 assets are comprised of available for sale (AFS) investments in U.S. Treasury securities.
Level 2 — Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets.
Northern Trust’s Level 2 assets include AFS and trading account debt securities, the fair values of which are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and third-party prices. If a security price obtained from a pricing vendor is determined to exceed predetermined tolerance levels that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated, an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of September 30, 2022, Northern Trust’s AFS debt securities portfolio included 1,172 Level 2 debt securities with an aggregate market value of $24.4 billion. All 1,172 debt securities were valued by external pricing vendors. As of December 31, 2021, Northern Trust’s AFS debt securities portfolio included 2,547 Level 2 debt securities with an aggregate market value of $35.6 billion. All 2,547 debt securities were valued by external pricing vendors. Trading account debt securities, which totaled $0.1 million and $0.3 million as of September 30, 2022 and December 31, 2021, respectively, were all valued using external pricing vendors.
Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting arrangements or similar agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been considered material.
Level 3 — Valuation techniques in which one or more significant inputs are unobservable in the marketplace.
Northern Trust’s Level 3 liabilities consist of swaps that Northern Trust entered into with the purchaser of 1.1 million and 1.0 million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern Trust and sold in June 2016 and 2015, respectively. Pursuant to the swaps, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-dilutive adjustments to the ratio. The swaps also require periodic payments from Northern Trust to the counterparty calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swaps is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. See “Visa Class B Common Shares” under Note 21 — Commitments and Contingent Liabilities for further information.
Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values.
The following table presents the fair values of Northern Trust’s Level 3 liabilities as of September 30, 2022 and December 31, 2021, as well as the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for such liabilities as of such dates.
Notes to Consolidated Financial Statements (unaudited) (continued)
TABLE 34: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS
| | | | | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | |
| FINANCIAL INSTRUMENT | FAIR VALUE | VALUATION TECHNIQUE | UNOBSERVABLE INPUTS | INPUT VALUES | WEIGHTED-AVERAGE INPUT VALUES(1) |
| Swaps Related to Sale of Certain Visa Class B Common Shares | $27.6 million | Discounted Cash Flow | Conversion Rate | 1.61x | 1.61x |
| Visa Class A Appreciation | 9.41% | 9.41% |
| Expected Duration | 12 | - | 33 months | 20 months |
(1) Weighted average of expected duration based on scenario probability. | | | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 | |
| FINANCIAL INSTRUMENT | FAIR VALUE | VALUATION TECHNIQUE | UNOBSERVABLE INPUTS | INPUT VALUES | WEIGHTED-AVERAGE INPUT VALUES(1) |
| Swaps Related to Sale of Certain Visa Class B Common Shares | $37.5 million | Discounted Cash Flow | Conversion Rate | 1.62x | 1.62x |
| Visa Class A Appreciation | 10.10% | 10.10% |
| Expected Duration | 12 | - | 33 months | 20 months |
(1) Weighted average of expected duration based on scenario probability.The following table presents assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, segregated by fair value hierarchy level.
TABLE 35: RECURRING BASIS HIERARCHY LEVELING
| | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | NETTING | ASSETS/LIABILITIES AT FAIR VALUE |
| Debt Securities | | | | | |
| Available for Sale | | | | | |
| U.S. Government | $ | 2,544.0 | | $ | — | | $ | — | | $ | — | | $ | 2,544.0 | |
| Obligations of States and Political Subdivisions | — | | 837.9 | | — | | — | | 837.9 | |
| Government Sponsored Agency | — | | 11,898.7 | | — | | — | | 11,898.7 | |
| Non-U.S. Government | — | | 276.6 | | — | | — | | 276.6 | |
| Corporate Debt | — | | 1,840.5 | | — | | — | | 1,840.5 | |
| Covered Bonds | — | | 411.5 | | — | | — | | 411.5 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | — | | 2,488.3 | | — | | — | | 2,488.3 | |
| Other Asset-Backed | — | | 5,294.0 | | — | | — | | 5,294.0 | |
| Commercial Mortgage-Backed | — | | 1,387.8 | | — | | — | | 1,387.8 | |
| Total Available for Sale | 2,544.0 | | 24,435.3 | | — | | — | | 26,979.3 | |
| Trading Account | — | | 0.1 | | — | | — | | 0.1 | |
| Total Available for Sale and Trading Debt Securities | 2,544.0 | | 24,435.4 | | — | | — | | 26,979.4 | |
| Other Assets | | | | | |
| Derivative Assets | | | | | |
| Foreign Exchange Contracts | — | | 6,150.7 | | — | | (2,351.5) | | 3,799.2 | |
| Interest Rate Contracts | — | | 207.5 | | — | | (129.4) | | 78.1 | |
Other Financial Derivatives(2) | — | | 1.9 | | — | | (1.9) | | — | |
| Total Derivative Assets | — | | 6,360.1 | | — | | (2,482.8) | | 3,877.3 | |
| Other Liabilities | | | | | |
| Derivative Liabilities | | | | | |
| Foreign Exchange Contracts | — | | 5,661.6 | | — | | (5,249.2) | | 412.4 | |
| Interest Rate Contracts | — | | 469.3 | | — | | (18.9) | | 450.4 | |
Other Financial Derivatives(1) | — | | — | | 27.6 | | — | | 27.6 | |
| Total Derivative Liabilities | $ | — | | $ | 6,130.9 | | $ | 27.6 | | $ | (5,268.1) | | $ | 890.4 | |
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of September 30, 2022, derivative assets and liabilities shown above also include reductions of $359.3 million and $3.1 billion, respectively, as a result of cash collateral received from and deposited with derivative counterparties.
(1)This line consists of swaps related to the sale of certain Visa Class B common shares.
(2)This line consists of total return swap contracts.
Notes to Consolidated Financial Statements (unaudited) (continued)
| | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 |
| (In Millions) | LEVEL 1 | LEVEL 2 | LEVEL 3 | NETTING | ASSETS/LIABILITIES AT FAIR VALUE |
| Debt Securities | | | | | |
| Available for Sale | | | | | |
| U.S. Government | $ | 2,426.1 | | $ | — | | $ | — | | $ | — | | $ | 2,426.1 | |
| Obligations of States and Political Subdivisions | — | | 3,876.1 | | — | | — | | 3,876.1 | |
| Government Sponsored Agency | — | | 18,075.6 | | — | | — | | 18,075.6 | |
| Non-U.S. Government | — | | 374.0 | | — | | — | | 374.0 | |
| Corporate Debt | — | | 2,341.7 | | — | | — | | 2,341.7 | |
| Covered Bonds | — | | 505.6 | | — | | — | | 505.6 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | — | | 3,045.1 | | — | | — | | 3,045.1 | |
| Other Asset-Backed | — | | 5,941.6 | | — | | — | | 5,941.6 | |
| Commercial Mortgage-Backed | — | | 1,424.7 | | — | | — | | 1,424.7 | |
| Total Available for Sale | 2,426.1 | | 35,584.4 | | — | | — | | 38,010.5 | |
| Trading Account | — | | 0.3 | | — | | — | | 0.3 | |
| Total Available for Sale and Trading Debt Securities | 2,426.1 | | 35,584.7 | | — | | — | | 38,010.8 | |
| Other Assets | | | | | |
| Derivative Assets | | | | | |
| Foreign Exchange Contracts | — | | 2,207.4 | | — | | (1,530.7) | | 676.7 | |
| Interest Rate Contracts | — | | 140.0 | | — | | (3.1) | | 136.9 | |
| Total Derivative Assets | — | | 2,347.4 | | — | | (1,533.8) | | 813.6 | |
| Other Liabilities | | | | | |
| Derivative Liabilities | | | | | |
| Foreign Exchange Contracts | — | | 1,998.8 | | — | | (1,234.5) | | 764.3 | |
| Interest Rate Contracts | — | | 98.9 | | — | | (48.1) | | 50.8 | |
Other Financial Derivatives(1) | — | | — | | 37.5 | | (0.9) | | 36.6 | |
| Total Derivative Liabilities | $ | — | | $ | 2,097.7 | | $ | 37.5 | | $ | (1,283.5) | | $ | 851.7 | |
Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2021, derivative assets and liabilities shown above also include reductions of $389.4 million and $139.0 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.
(1) This line consists of swaps related to the sale of certain Visa Class B common shares.
The following table presents the changes in Level 3 liabilities for the three and nine months ended September 30, 2022 and 2021.
TABLE 36: CHANGES IN LEVEL 3 LIABILITIES | | | | | | | | |
| (In Millions) | SWAPS RELATED TO SALE OF CERTAIN VISA CLASS B COMMON SHARES |
| THREE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 |
Fair Value at July 1 | $ | 31.1 | | $ | 38.4 | |
| Total (Gains) Losses: | | |
Included in Earnings(1) | 1.1 | | 3.6 | |
| Purchases, Issues, Sales, and Settlements | | |
| Settlements | (4.6) | | (5.3) | |
Fair Value at September 30 | $ | 27.6 | | $ | 36.7 | |
(1) (Gains) losses are recorded in Other Operating Income on the consolidated statements of income. | | | | | | | | |
| | |
| NINE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 |
| Fair Value at January 1 | $ | 37.5 | | $ | 35.3 | |
| Total (Gains) Losses: | | |
Included in Earnings(1) | 11.2 | | 15.7 | |
| Purchases, Issues, Sales, and Settlements | | |
| Settlements | (21.1) | | (14.3) | |
Fair Value at September 30 | $ | 27.6 | | $ | 36.7 | |
(1) (Gains) losses are recorded in Other Operating Income on the consolidated statements of income.
Notes to Consolidated Financial Statements (unaudited) (continued)
Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to separately disclose these subsequent fair value measurements and to classify them under the fair value hierarchy.
Assets measured at fair value on a nonrecurring basis at September 30, 2022 and December 31, 2021, all of which were categorized as Level 3 under the fair value hierarchy, were comprised of nonaccrual loans whose values were based on real estate and other available collateral, and of other real estate owned (OREO) properties.
Fair values of real estate loan collateral were estimated using a market approach typically supported by third-party valuations and property-specific fees and taxes. The fair values of real estate loan collateral were subject to adjustments to reflect management’s judgment as to realizable value and consisted of discount factors ranging from 15.0% to 20.0% with a weighted average based on fair values of 17.2% and 15.4% as of September 30, 2022 and December 31, 2021, respectively. Other loan collateral, which typically consists of accounts receivable, inventory and equipment, is valued using a market approach adjusted for asset-specific characteristics and in limited instances third-party valuations are used. OREO assets are carried at the lower of cost or fair value less estimated costs to sell, with fair value typically based on third-party appraisals.
Collateral-dependent nonaccrual loans that have been adjusted to fair value totaled $6.9 million and $15.0 million at September 30, 2022 and December 31, 2021, respectively.
The following table presents the fair values of Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021, as well as the valuation technique, significant unobservable inputs and quantitative information used to develop the significant unobservable inputs for such assets as of such dates.
TABLE 37: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS
| | | | | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | |
| FINANCIAL INSTRUMENT | FAIR VALUE(1) | VALUATION TECHNIQUE | UNOBSERVABLE INPUTS | INPUT VALUES | WEIGHTED-AVERAGE INPUT VALUES |
| Loans | $6.9 million | Market Approach | Discount factor applied to real estate collateral-dependent loans to reflect realizable value | 15.0 | % | - | 20.0% | 17.2% |
| | | | | | | |
(1) Includes real estate collateral-dependent loans and other collateral-dependent loans.
| | | | | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 | |
| FINANCIAL INSTRUMENT | FAIR VALUE(1) | VALUATION TECHNIQUE | UNOBSERVABLE INPUTS | INPUT VALUES | WEIGHTED-AVERAGE INPUT VALUES |
| Loans | $15.0 million | Market Approach | Discount factor applied to real estate collateral-dependent loans to reflect realizable value | 15.0 | % | - | 20.0% | 15.4% |
| | | | | | | |
(1) Includes real estate collateral-dependent loans and other collateral-dependent loans.
Notes to Consolidated Financial Statements (unaudited) (continued)
The following tables present the book value and estimated fair value, including the fair value hierarchy level, of Northern Trust’s financial instruments that are not measured at fair value on the consolidated balance sheets as of September 30, 2022 and December 31, 2021. The following tables exclude those items measured at fair value on a recurring basis.
TABLE 38: FAIR VALUE OF FINANCIAL INSTRUMENTS | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| | | ESTIMATED FAIR VALUE |
| (In Millions) | BOOK VALUE | TOTAL ESTIMATED FAIR VALUE | LEVEL 1 | LEVEL 2 | LEVEL 3 |
| FINANCIAL ASSETS | | | |
| Cash and Due from Banks | $ | 4,492.8 | | $ | 4,492.8 | | $ | 4,492.8 | | $ | — | | $ | — | |
| Federal Reserve and Other Central Bank Deposits | 39,644.9 | | 39,644.9 | | — | | 39,644.9 | | — | |
| Interest-Bearing Deposits with Banks | 1,542.3 | | 1,542.3 | | — | | 1,542.3 | | — | |
| Federal Funds Sold | 30.1 | | 30.1 | | — | | 30.1 | | — | |
| Securities Purchased under Agreements to Resell | 1,166.2 | | 1,166.2 | | — | | 1,166.2 | | — | |
| Debt Securities - Held to Maturity | 25,249.8 | | 23,064.9 | | 57.9 | | 23,007.0 | | — | |
| Loans (excluding Leases) | | | | | |
| Held for Investment | 43,853.2 | | 43,450.6 | | — | | — | | 43,450.6 | |
| | | | | |
| Other Assets | 1,401.3 | | 1,387.7 | | 103.4 | | 1,284.3 | | — | |
| FINANCIAL LIABILITIES | | | | | |
| Deposits | | | | | |
| Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing | $ | 58,826.6 | | $ | 58,826.6 | | $ | 58,826.6 | | $ | — | | $ | — | |
| Savings Certificates and Other Time | 1,217.1 | | 1,204.5 | | — | | 1,204.5 | | — | |
| Non U.S. Offices Interest-Bearing | 68,503.7 | | 68,503.7 | | — | | 68,503.7 | | — | |
| Federal Funds Purchased | 4,364.8 | | 4,364.8 | | — | | 4,364.8 | | — | |
| Securities Sold Under Agreements to Repurchase | 561.4 | | 561.4 | | — | | 561.4 | | — | |
| Other Borrowings | 7,153.6 | | 7,149.3 | | — | | 7,149.3 | | — | |
| Senior Notes | 2,707.4 | | 2,671.9 | | — | | 2,671.9 | | — | |
| Long-Term Debt | 1,068.3 | | 1,045.4 | | — | | 1,045.4 | | — | |
| Unfunded Commitments | 258.2 | | 258.2 | | — | | 258.2 | | — | |
| Other Liabilities | 80.8 | | 80.8 | | — | | — | | 80.8 | |
| | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 | |
| | | ESTIMATED FAIR VALUE | |
| (In Millions) | BOOK VALUE | TOTAL ESTIMATED FAIR VALUE | LEVEL 1 | LEVEL 2 | LEVEL 3 | |
| FINANCIAL ASSETS | | | | | | |
| Cash and Due from Banks | $ | 3,056.8 | | $ | 3,056.8 | | $ | 3,056.8 | | $ | — | | $ | — | | |
| Federal Reserve and Other Central Bank Deposits | 64,582.2 | | 64,582.2 | | — | | 64,582.2 | | — | | |
| Interest-Bearing Deposits with Banks | 1,949.4 | | 1,949.4 | | — | | 1,949.4 | | — | | |
| Securities Purchased under Agreements to Resell | 686.4 | | 686.4 | | — | | 686.4 | | — | | |
| Debt Securities - Held to Maturity | 23,564.5 | | 23,315.4 | | 47.0 | | 23,268.4 | | — | | |
| Loans (excluding Leases) | | | | | | |
| Held for Investment | 40,319.3 | | 40,208.2 | | — | | — | | 40,208.2 | | |
| Held for Sale | 12.3 | | 24.5 | | — | | 24.5 | | — | | |
| Other Assets | 1,275.3 | | 1,279.8 | | 119.1 | | 1,160.7 | | — | | |
| FINANCIAL LIABILITIES | | | | | | |
| Deposits | | | | | | |
| Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing | $ | 83,318.6 | | $ | 83,318.6 | | $ | 83,318.6 | | $ | — | | $ | — | | |
| Savings Certificates and Other Time | 842.7 | | 843.8 | | — | | 843.8 | | — | | |
| Non U.S. Offices Interest-Bearing | 75,767.1 | | 75,767.1 | | — | | 75,767.1 | | — | | |
| Federal Funds Purchased | 0.2 | | 0.2 | | — | | 0.2 | | — | | |
| Securities Sold Under Agreements to Repurchase | 531.9 | | 531.9 | | — | | 531.9 | | — | | |
| Other Borrowings | 3,583.8 | | 3,583.9 | | — | | 3,583.9 | | — | | |
| Senior Notes | 2,505.5 | | 2,591.4 | | — | | 2,591.4 | | — | | |
| Long-Term Debt | 1,145.7 | | 1,189.4 | | — | | 1,189.4 | | — | | |
| Unfunded Commitments | 289.3 | | 289.3 | | — | | 289.3 | | — | | |
| Other Liabilities | 75.5 | | 75.5 | | — | | — | | 75.5 | | |
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 4 – Securities
Available for Sale Debt Securities. The following tables provide the amortized cost and fair values as of September 30, 2022 and December 31, 2021, and remaining maturities of AFS debt securities as of September 30, 2022.
TABLE 39: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES
| | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE |
| U.S. Government | $ | 2,641.3 | | $ | 2.6 | | $ | 99.9 | | $ | 2,544.0 | |
| Obligations of States and Political Subdivisions | 963.4 | | — | | 125.5 | | 837.9 | |
| Government Sponsored Agency | 12,192.9 | | 5.7 | | 299.9 | | 11,898.7 | |
| Non-U.S. Government | 305.2 | | — | | 28.6 | | 276.6 | |
| Corporate Debt | 1,943.6 | | 0.2 | | 103.3 | | 1,840.5 | |
| Covered Bonds | 427.4 | | 0.1 | | 16.0 | | 411.5 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 2,662.1 | | 0.3 | | 174.1 | | 2,488.3 | |
| Other Asset-Backed | 5,636.7 | | — | | 342.7 | | 5,294.0 | |
| Commercial Mortgage-Backed | 1,497.0 | | 0.1 | | 109.3 | | 1,387.8 | |
| Total | $ | 28,269.6 | | $ | 9.0 | | $ | 1,299.3 | | $ | 26,979.3 | |
| | | | | | | | | | | | | | |
| DECEMBER 31, 2021 |
| (In Millions) | AMORTIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE |
| U.S. Government | $ | 2,406.2 | | $ | 29.3 | | $ | 9.4 | | $ | 2,426.1 | |
| Obligations of States and Political Subdivisions | 3,841.0 | | 73.7 | | 38.6 | | 3,876.1 | |
| Government Sponsored Agency | 18,092.1 | | 93.7 | | 110.2 | | 18,075.6 | |
| Non-U.S. Government | 383.4 | | 0.1 | | 9.5 | | 374.0 | |
| Corporate Debt | 2,319.8 | | 31.6 | | 9.7 | | 2,341.7 | |
| Covered Bonds | 502.6 | | 3.9 | | 0.9 | | 505.6 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 3,052.4 | | 28.1 | | 35.4 | | 3,045.1 | |
| Other Asset-Backed | 5,962.0 | | 11.3 | | 31.7 | | 5,941.6 | |
| Commercial Mortgage-Backed | 1,389.0 | | 38.9 | | 3.2 | | 1,424.7 | |
| Total | $ | 37,948.5 | | $ | 310.6 | | $ | 248.6 | | $ | 38,010.5 | |
TABLE 40: REMAINING MATURITY OF AVAILABLE FOR SALE DEBT SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | ONE YEAR OR LESS | ONE TO FIVE YEARS | FIVE TO TEN YEARS | OVER TEN YEARS | TOTAL |
| (In Millions) | AMORTIZED COST | FAIR VALUE | AMORTIZED COST | FAIR VALUE | AMORTIZED COST | FAIR VALUE | AMORTIZED COST | FAIR VALUE | AMORTIZED COST | FAIR VALUE |
| U.S. Government | $ | 1,272.3 | | $ | 1,274.8 | | $ | 1,120.4 | | $ | 1,059.4 | | $ | 248.6 | | $ | 209.8 | | $ | — | | $ | — | | $ | 2,641.3 | | $ | 2,544.0 | |
| Obligations of States and Political Subdivisions | — | | — | | 146.6 | | 134.7 | | 774.7 | | 668.1 | | 42.1 | | 35.1 | | 963.4 | | 837.9 | |
| Government Sponsored Agency | 2,372.3 | | 2,331.9 | | 5,644.6 | | 5,527.7 | | 3,308.3 | | 3,205.4 | | 867.7 | | 833.7 | | 12,192.9 | | 11,898.7 | |
| Non-U.S. Government | 32.8 | | 32.5 | | 200.6 | | 182.6 | | 71.8 | | 61.5 | | — | | — | | 305.2 | | 276.6 | |
| Corporate Debt | 509.6 | | 502.0 | | 1,413.9 | | 1,322.6 | | 18.2 | | 14.4 | | 1.9 | | 1.5 | | 1,943.6 | | 1,840.5 | |
| Covered Bonds | 136.0 | | 135.6 | | 291.4 | | 275.9 | | — | | — | | — | | — | | 427.4 | | 411.5 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 358.1 | | 354.7 | | 2,070.3 | | 1,942.9 | | 233.7 | | 190.7 | | — | | — | | 2,662.1 | | 2,488.3 | |
| Other Asset-Backed | 688.1 | | 661.7 | | 3,478.5 | | 3,217.5 | | 1,246.1 | | 1,197.7 | | 224.0 | | 217.1 | | 5,636.7 | | 5,294.0 | |
| Commercial Mortgage-Backed | 8.2 | | 7.7 | | 1,203.3 | | 1,131.6 | | 285.5 | | 248.5 | | — | | — | | 1,497.0 | | 1,387.8 | |
| Total | $ | 5,377.4 | | $ | 5,300.9 | | $ | 15,569.6 | | $ | 14,794.9 | | $ | 6,186.9 | | $ | 5,796.1 | | $ | 1,135.7 | | $ | 1,087.4 | | $ | 28,269.6 | | $ | 26,979.3 | |
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.
Notes to Consolidated Financial Statements (unaudited) (continued)
Available for Sale Debt Securities with Unrealized Losses. The following table provides information regarding AFS debt securities with no credit losses reported that had been in a continuous unrealized loss position for less than twelve months and for twelve months or longer as of September 30, 2022 and December 31, 2021.
TABLE 41: AVAILABLE FOR SALE DEBT SECURITIES IN UNREALIZED LOSS POSITION WITH NO CREDIT LOSSES REPORTED | | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL |
| (In Millions) | FAIR
VALUE | UNREALIZED
LOSSES | FAIR
VALUE | UNREALIZED
LOSSES | FAIR
VALUE | UNREALIZED
LOSSES |
| U.S. Government | $ | 1,198.6 | | $ | 97.2 | | $ | 70.6 | | $ | 2.7 | | $ | 1,269.2 | | $ | 99.9 | |
| Obligations of States and Political Subdivisions | 743.9 | | 108.0 | | 94.0 | | 17.5 | | 837.9 | | 125.5 | |
| Government Sponsored Agency | 8,370.4 | | 239.9 | | 2,063.3 | | 60.0 | | 10,433.7 | | 299.9 | |
| Non-U.S. Government | 152.6 | | 16.3 | | 124.1 | | 12.3 | | 276.7 | | 28.6 | |
| Corporate Debt | 1,410.9 | | 79.5 | | 209.7 | | 8.6 | | 1,620.6 | | 88.1 | |
| Covered Bonds | 233.6 | | 14.5 | | 73.4 | | 1.5 | | 307.0 | | 16.0 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 1,571.1 | | 142.4 | | 620.2 | | 31.7 | | 2,191.3 | | 174.1 | |
| Other Asset-Backed | 4,598.7 | | 302.9 | | 645.2 | | 39.8 | | 5,243.9 | | 342.7 | |
| Commercial Mortgage-Backed | 1,173.4 | | 94.6 | | 196.9 | | 14.7 | | 1,370.3 | | 109.3 | |
| Total | $ | 19,453.2 | | $ | 1,095.3 | | $ | 4,097.4 | | $ | 188.8 | | $ | 23,550.6 | | $ | 1,284.1 | |
Note: Five corporate debt AFS securities with a fair value of $134.9 million and unrealized losses of $15.2 million have been excluded from the table above as these AFS securities have a $0.8 million allowance for credit losses reported as of September 30, 2022. Refer to the discussion further below and Note 7 - Allowance for Credit Losses for further information.
| | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 | LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL |
| (In Millions) | FAIR
VALUE | UNREALIZED
LOSSES | FAIR
VALUE | UNREALIZED
LOSSES | FAIR
VALUE | UNREALIZED
LOSSES |
| U.S. Government | $ | 239.0 | | $ | 9.4 | | $ | — | | $ | — | | $ | 239.0 | | $ | 9.4 | |
| Obligations of States and Political Subdivisions | 1,699.5 | | 37.4 | | 31.6 | | 1.2 | | 1,731.1 | | 38.6 | |
| Government Sponsored Agency | 8,207.3 | | 90.2 | | 1,821.4 | | 20.0 | | 10,028.7 | | 110.2 | |
| Non-U.S. Government | 230.0 | | 9.5 | | — | | — | | 230.0 | | 9.5 | |
| Corporate Debt | 693.7 | | 9.7 | | — | | — | | 693.7 | | 9.7 | |
| Covered Bonds | 92.1 | | 0.9 | | — | | — | | 92.1 | | 0.9 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 1,116.8 | | 31.9 | | 172.3 | | 3.5 | | 1,289.1 | | 35.4 | |
| Other Asset-Backed | 3,815.5 | | 31.4 | | 11.7 | | 0.3 | | 3,827.2 | | 31.7 | |
| Commercial Mortgage-Backed | 566.8 | | 3.2 | | — | | — | | 566.8 | | 3.2 | |
| Total | $ | 16,660.7 | | $ | 223.6 | | $ | 2,037.0 | | $ | 25.0 | | $ | 18,697.7 | | $ | 248.6 | |
As of September 30, 2022, 1,153 AFS debt securities with a combined fair value of $23.6 billion were in an unrealized loss position, with their unrealized losses totaling $1.3 billion. As of September 30, 2022, unrealized losses related to AFS debt securities of $342.7 million and $299.9 million related to other asset-backed and government-sponsored agency securities, respectively, are primarily attributable to changes in market interest rates and credit spreads since their purchase.
As of December 31, 2021, 1,233 AFS debt securities with a combined fair value of $18.7 billion were in an unrealized loss position, with their unrealized losses totaling $248.6 million. As of December 31, 2021, unrealized losses related to AFS debt securities of $110.2 million related to government-sponsored agency securities, which are primarily attributable to changes in market interest rates and credit spreads since their purchase.
12% and 14% of the AFS corporate debt securities portfolio were backed by guarantees provided by U.S. and non-U.S. governmental entities as of September 30, 2022 and December 31, 2021, respectively. The remaining unrealized losses on Northern Trust’s AFS debt securities portfolio as of September 30, 2022 and December 31, 2021 are attributable to changes in overall market interest rates or credit spreads.
As of September 30, 2022, Northern Trust did not intend to sell any AFS debt securities in an unrealized loss position and it was more likely than not that Northern Trust would not be required to sell any such investment before the recovery of its amortized cost basis, which may be maturity.
AFS debt securities impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible credit losses. A determination as to whether a security’s decline in market value is related to credit impairment takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is credit-related include, but are not limited to, the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer, which may indicate adverse credit conditions; Northern Trust’s intent regarding the sale of the security as of the
Notes to Consolidated Financial Statements (unaudited) (continued)
balance sheet date; and the likelihood that Northern Trust will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if a credit loss has occurred.
There was a $0.9 million release of credit reserves and an $0.8 million provision for credit losses for AFS securities for the three and nine months ended September 30, 2022, respectively. There was no provision for credit losses for AFS securities for the three and nine months ended September 30, 2021. There was an $0.8 million allowance for credit losses for AFS securities as of September 30, 2022 which was primarily corporate debt securities and no allowance for credit losses for AFS securities as of December 31, 2021. The process for identifying credit losses for AFS securities is based on the best estimate of cash flows to be collected from the security, discounted using the security’s effective interest rate. If the present value of the expected cash flows is found to be less than the current amortized cost of the security, an allowance for credit losses is generally recorded equal to the difference between the two amounts, limited to the amount the amortized cost basis exceeds the fair value of the security. For additional information, please refer to Note 7 — Allowance for Credit Losses.
Held to Maturity Debt Securities. The following tables provide the amortized cost and fair values as of September 30, 2022 and December 31, 2021, and remaining maturities of held to maturity (HTM) debt securities as of September 30, 2022.
TABLE 42: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF HELD TO MATURITY DEBT SECURITIES
| | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| (In Millions) | AMORTIZED
COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR
VALUE |
| U.S Government | $ | 57.9 | | $ | — | | $ | — | | $ | 57.9 | |
| Obligations of States and Political Subdivisions | 2,558.5 | | — | | 133.5 | | 2,425.0 | |
| Government Sponsored Agency | 9,627.1 | | — | | 1,049.2 | | 8,577.9 | |
| Non-U.S. Government | 2,844.9 | | 0.1 | | 134.3 | | 2,710.7 | |
| Corporate Debt | 798.2 | | — | | 48.6 | | 749.6 | |
| Covered Bonds | 2,466.3 | | 0.1 | | 144.5 | | 2,321.9 | |
| Certificates of Deposit | 475.5 | | 0.1 | | 33.3 | | 442.3 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 5,621.8 | | 1.1 | | 491.4 | | 5,131.5 | |
| Other Asset-Backed | 292.2 | | — | | 1.4 | | 290.8 | |
| Other | 507.4 | | — | | 150.1 | | 357.3 | |
| Total | $ | 25,249.8 | | $ | 1.4 | | $ | 2,186.3 | | $ | 23,064.9 | |
| | | | | | | | | | | | | | |
| DECEMBER 31, 2021 |
| (In Millions) | AMORTIZED
COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR
VALUE |
| U.S. Government | $ | 47.0 | | $ | — | | $ | — | | $ | 47.0 | |
| Obligations of States and Political Subdivisions | 0.8 | | — | | — | | 0.8 | |
| Government Sponsored Agency | 5,927.6 | | 1.1 | | 106.1 | | 5,822.6 | |
| Non-U.S. Government | 5,773.3 | | 3.9 | | 9.8 | | 5,767.4 | |
| Corporate Debt | 901.8 | | 2.5 | | 6.5 | | 897.8 | |
| Covered Bonds | 2,942.4 | | 8.3 | | 9.6 | | 2,941.1 | |
| Certificates of Deposit | 674.7 | | — | | — | | 674.7 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 6,098.0 | | 14.3 | | 80.0 | | 6,032.3 | |
| Other Asset-Backed | 682.6 | | 1.0 | | — | | 683.6 | |
| Other | 516.3 | | 3.4 | | 71.6 | | 448.1 | |
| Total | $ | 23,564.5 | | $ | 34.5 | | $ | 283.6 | | $ | 23,315.4 | |
As of September 30, 2022, the $25.2 billion HTM debt securities portfolio had unrealized losses of $1.0 billion and $491.4 million related to government-sponsored agency and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase. As of December 31, 2021, the $23.6 billion HTM debt securities portfolio had unrealized losses of $106.1 million, $80.0 million and $71.6 million related to government-sponsored agency, sub-sovereign, supranational and non-U.S. agency bonds, and other residential mortgage-backed securities, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase.
Notes to Consolidated Financial Statements (unaudited) (continued)
TABLE 43: REMAINING MATURITY OF HELD TO MATURITY DEBT SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | ONE YEAR OR LESS | ONE TO FIVE YEARS | FIVE TO TEN YEARS | OVER TEN YEARS | TOTAL |
| (In Millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| U.S. Government | $ | 57.9 | | $ | 57.9 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 57.9 | | $ | 57.9 | |
| Obligations of States and Political Subdivisions | 26.9 | | 26.3 | | 671.9 | | 648.6 | | 1,351.1 | | 1,278.7 | | 508.6 | | 471.4 | | 2,558.5 | | 2,425.0 | |
| Government Sponsored Agency | 949.3 | | 843.8 | | 2,991.7 | | 2,667.4 | | 3,784.6 | | 3,387.6 | | 1,901.5 | | 1,679.1 | | 9,627.1 | | 8,577.9 | |
| Non-U.S. Government | 1,444.7 | | 1,444.1 | | 1,264.5 | | 1,153.1 | | 135.7 | | 113.5 | | — | | — | | 2,844.9 | | 2,710.7 | |
| Corporate Debt | 206.3 | | 205.1 | | 578.0 | | 533.5 | | 13.9 | | 11.0 | | — | | — | | 798.2 | | 749.6 | |
| Covered Bonds | 509.4 | | 507.3 | | 1,489.7 | | 1,417.3 | | 467.2 | | 397.3 | | — | | — | | 2,466.3 | | 2,321.9 | |
| Certificates of Deposit | 475.5 | | 442.3 | | — | | — | | — | | — | | — | | — | | 475.5 | | 442.3 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 841.9 | | 837.4 | | 4,512.3 | | 4,074.3 | | 267.6 | | 219.8 | | — | | — | | 5,621.8 | | 5,131.5 | |
| Other Asset-Backed | 95.1 | | 94.8 | | 121.0 | | 120.3 | | 76.1 | | 75.7 | | — | | — | | 292.2 | | 290.8 | |
| Other | 29.6 | | 28.8 | | 299.2 | | 259.0 | | 33.7 | | 24.3 | | 144.9 | | 45.2 | | 507.4 | | 357.3 | |
| Total | $ | 4,636.6 | | $ | 4,487.8 | | $ | 11,928.3 | | $ | 10,873.5 | | $ | 6,129.9 | | $ | 5,507.9 | | $ | 2,555.0 | | $ | 2,195.7 | | $ | 25,249.8 | | $ | 23,064.9 | |
Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.HTM debt securities consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the three and nine months ended September 30, 2022, for capital management purposes, the Corporation transferred government sponsored agency and obligations of states and political subdivisions securities that had a fair value of $6.6 billion from the AFS to HTM classification, all of which were transferred during the third quarter of 2022. During the three months ended September 30, 2021, no securities were transferred from AFS to HTM. During the nine months ended September 30, 2021, the Corporation transferred government sponsored agency securities that had a fair value of $6.9 billion from AFS to HTM for capital management purposes, all of which were transferred during the second quarter of 2021. Upon transfer of a debt security from the AFS to HTM classification, the amortized cost is reset to fair value. Any net unrealized gain or loss at the date of transfer will remain in Accumulated Other Comprehensive Income (Loss) (AOCI) and be amortized into Net Interest Income over the remaining life of the securities using the effective interest method. The amortization of amounts retained in AOCI will offset the effect on interest income of the amortization of the premium or discount resulting from transferring the securities at fair value.
Credit Quality Indicators. The following table provides the amortized cost of HTM debt securities by credit rating.
TABLE 44: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING
| | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| (In Millions) | AAA | AA | A | BBB | NOT RATED | TOTAL |
| U.S. Government | $ | 57.9 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 57.9 | |
| Obligations of States and Political Subdivisions | 924.1 | | 1,634.4 | | — | | — | | — | | 2,558.5 | |
| Government Sponsored Agency | 9,627.1 | | — | | — | | — | | — | | 9,627.1 | |
| Non-U.S. Government | 818.8 | | 856.2 | | 874.0 | | 295.9 | | — | | 2,844.9 | |
| Corporate Debt | 2.0 | | 326.3 | | 469.9 | | — | | — | | 798.2 | |
| Covered Bonds | 2,466.3 | | — | | — | | — | | — | | 2,466.3 | |
| Certificates of Deposit | — | | — | | — | | — | | 475.5 | | 475.5 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 4,050.9 | | 1,543.3 | | 26.6 | | 1.0 | | — | | 5,621.8 | |
| Other Asset-Backed | 292.2 | | — | | — | | — | | — | | 292.2 | |
| Other | 64.2 | | — | | — | | — | | 443.2 | | 507.4 | |
| Total | $ | 18,303.5 | | $ | 4,360.2 | | $ | 1,370.5 | | $ | 296.9 | | $ | 918.7 | | $ | 25,249.8 | |
| Percent of Total | 72 | % | 17 | % | 6 | % | 1 | % | 4 | % | 100 | % |
Notes to Consolidated Financial Statements (unaudited) (continued)
| | | | | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 |
| (In Millions) | AAA | AA | A | BBB | NOT RATED | TOTAL |
| U.S. Government | $ | 47.0 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 47.0 | |
| Obligations of States and Political Subdivisions | — | | 0.8 | | — | | — | | — | | 0.8 | |
| Government Sponsored Agency | 5,927.6 | | — | | — | | — | | — | | 5,927.6 | |
| Non-U.S. Government | 398.0 | | 942.6 | | 4,088.8 | | 343.9 | | — | | 5,773.3 | |
| Corporate Debt | 2.3 | | 386.7 | | 512.8 | | — | | — | | 901.8 | |
| Covered Bonds | 2,942.4 | | — | | — | | — | | — | | 2,942.4 | |
| Certificates of Deposit | — | | — | | — | | — | | 674.7 | | 674.7 | |
| Sub-Sovereign, Supranational and Non-U.S. Agency Bonds | 4,207.6 | | 1,858.0 | | 31.3 | | 1.1 | | — | | 6,098.0 | |
| Other Asset-Backed | 682.6 | | — | | — | | — | | — | | 682.6 | |
| Other | — | | — | | — | | — | | 516.3 | | 516.3 | |
| Total | $ | 14,207.5 | | $ | 3,188.1 | | $ | 4,632.9 | | $ | 345.0 | | $ | 1,191.0 | | $ | 23,564.5 | |
| Percent of Total | 60 | % | 14 | % | 20 | % | 1 | % | 5 | % | 100 | % |
Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. Northern Trust maintains a high quality debt securities portfolio, with 95% and 94% of the HTM portfolio at September 30, 2022 and December 31, 2021, respectively, comprised of securities rated A or higher. The remaining HTM debt securities portfolio was comprised of 1% rated BBB at both September 30, 2022 and December 31, 2021, respectively, and 4% and 5% was not rated by Moody’s, S&P Global, or Fitch Ratings at both September 30, 2022 and December 31, 2021, respectively. Securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security.
Investment Security Gains and Losses. During the three and nine months ended September 30, 2022, gross and net investment security losses were $0.3 million. During the three and nine months ended September 30, 2021, gross and net investment security gains were less than $0.1 million.
Note 5 – Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. Securities sold under agreements to repurchase are either directly held by, or pledged to the counterparty until the repurchase. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when the Fixed Income Clearing Corporation (FICC) is the counterparty.
The following table provides information regarding repurchase agreements that are accounted for as secured borrowings as of September 30, 2022 and December 31, 2021.
TABLE 45: REPURCHASE AGREEMENTS ACCOUNTED FOR AS SECURED BORROWINGS
| | | | | | | | | | | | | | | | | | | | |
| REMAINING CONTRACTUAL MATURITY OF THE AGREEMENTS |
| SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| ($ In Millions) | OVERNIGHT AND CONTINUOUS | UP TO 30
DAYS | TOTAL | OVERNIGHT AND CONTINUOUS | UP TO 30
DAYS | TOTAL |
| U.S. Treasury and Agency Securities | $ | 561.4 | | $ | — | | $ | 561.4 | | $ | 32.4 | | $ | 499.5 | | $ | 531.9 | |
| Total Borrowings | 561.4 | | — | | 561.4 | | 32.4 | | 499.5 | | 531.9 | |
| Net Amount of Recognized Liabilities for Repurchase Agreements in Note 23 | 561.4 | | — | | 561.4 | | 32.4 | | 499.5 | | 531.9 | |
| Amounts related to agreements not included in Note 23 | — | | — | | — | | — | | — | | — | |
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 6 – Loans and Leases
Amounts outstanding for Loans and Leases, by segment and class, are shown in the following table.
TABLE 46: LOANS AND LEASES
| | | | | | | | |
| (In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| Commercial | | |
| Commercial and Institutional | $ | 12,413.5 | | $ | 11,489.2 | |
| Commercial Real Estate | 4,570.8 | | 4,326.3 | |
| Non-U.S. | 4,617.3 | | 1,990.2 | |
| Lease Financing, net | — | | 11.0 | |
| Other | 1,187.7 | | 670.7 | |
| Total Commercial | 22,789.3 | | 18,487.4 | |
| Personal | | |
| Private Client | 13,945.2 | | 15,256.3 | |
| Residential Real Estate | 6,445.9 | | 6,319.9 | |
| Non-U.S. | 616.4 | | 381.8 | |
| Other | 195.1 | | 35.2 | |
| Total Personal | 21,202.6 | | 21,993.2 | |
| Total Loans and Leases | $ | 43,991.9 | | $ | 40,480.6 | |
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. Northern Trust’s equity credit line products generally have draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest-only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding balance to an amortizing payment loan. As of September 30, 2022 and December 31, 2021, equity credit lines totaled $247.1 million and $258.2 million, respectively, and equity credit lines for which first liens were held by Northern Trust represented 97% of the total equity credit lines as of both September 30, 2022 and December 31, 2021.
Included within the non-U.S., commercial-other and personal-other classes are short-duration advances primarily related to the processing of custodied client investments, totaling $4.2 billion at September 30, 2022 and $1.6 billion at December 31, 2021, respectively. Demand deposit overdrafts reclassified as loan balances totaled $99.0 million and $8.0 million at September 30, 2022 and December 31, 2021, respectively.
There were no loans classified as held for sale at September 30, 2022 as compared to $12.3 million at December 31, 2021, which related to the decision to exit a non-strategic loan portfolio. Loans classified as held for sale are recorded at the lower of cost or fair value.
As of September 30, 2022, there were no leases outstanding. As of December 31, 2021, there were no leases classified as held for sale.
Notes to Consolidated Financial Statements (unaudited) (continued)
Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels.
As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting and management reporting. Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s borrower rating models, by loan and lease class.
•Commercial and Institutional: leverage, profit margin, liquidity, asset size and capital levels;
•Commercial Real Estate: debt service coverage, loan-to-value ratio, leasing status and guarantor support;
•Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels;
•Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels;
•Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio;
•Private Client: cash-flow-to-debt and net worth ratios, leverage and liquidity; and
•Personal-Other: cash-flow-to-debt and net worth ratios.
While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required. Risk ratings are generally validated at least annually.
Loan and lease segment and class balances as of September 30, 2022 and December 31, 2021 are provided in the following table, segregated by borrower ratings into “1 to 3,” “4 to 5” and “6 to 9” (watch list and nonaccrual status) categories by year of origination at amortized cost basis. Loans that are held for investment are reported at the principal amount outstanding, net of unearned income.
Notes to Consolidated Financial Statements (unaudited) (continued)
TABLE 47: CREDIT QUALITY INDICATOR AT AMORTIZED COST BASIS BY ORIGINATION YEAR
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | TERM LOANS AND LEASES | REVOLVING LOANS | REVOLVING LOANS CONVERTED TO TERM LOANS | |
| (In Millions) | 2022 | 2021 | 2020 | 2019 | 2018 | PRIOR | TOTAL |
| Commercial | | | | | | | | | |
| Commercial and Institutional | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | $ | 642.9 | | $ | 1,154.0 | | $ | 287.6 | | $ | 141.3 | | $ | 52.0 | | $ | 505.7 | | $ | 6,013.5 | | $ | 17.6 | | $ | 8,814.6 | |
| 4 to 5 Category | 616.2 | | 820.7 | | 274.7 | | 235.2 | | 152.4 | | 218.4 | | 1,091.9 | | 33.4 | | 3,442.9 | |
| 6 to 9 Category | 23.5 | | 30.9 | | — | | 17.3 | | 20.7 | | 0.1 | | 63.5 | | — | | 156.0 | |
| Total Commercial and Institutional | 1,282.6 | | 2,005.6 | | 562.3 | | 393.8 | | 225.1 | | 724.2 | | 7,168.9 | | 51.0 | | 12,413.5 | |
| Commercial Real Estate | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 299.0 | | 367.8 | | 218.5 | | 98.0 | | 24.9 | | 46.0 | | 202.0 | | — | | 1,256.2 | |
| 4 to 5 Category | 642.2 | | 933.3 | | 600.3 | | 528.9 | | 174.1 | | 276.1 | | 70.1 | | 18.5 | | 3,243.5 | |
| 6 to 9 Category | 7.8 | | 11.2 | | — | | 49.6 | | — | | — | | 2.5 | | — | | 71.1 | |
| Total Commercial Real Estate | 949.0 | | 1,312.3 | | 818.8 | | 676.5 | | 199.0 | | 322.1 | | 274.6 | | 18.5 | | 4,570.8 | |
| Non-U.S. | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 2,145.0 | | 46.5 | | 120.2 | | 13.8 | | — | | 6.0 | | 1,047.7 | | — | | 3,379.2 | |
| 4 to 5 Category | 814.0 | | — | | — | | — | | — | | 286.4 | | 94.7 | | 1.8 | | 1,196.9 | |
| 6 to 9 Category | 1.3 | | — | | — | | 23.1 | | — | | — | | 16.8 | | — | | 41.2 | |
| Total Non-U.S. | 2,960.3 | | 46.5 | | 120.2 | | 36.9 | | — | | 292.4 | | 1,159.2 | | 1.8 | | 4,617.3 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 912.4 | | — | | — | | — | | — | | — | | — | | — | | 912.4 | |
| 4 to 5 Category | 275.3 | | — | | — | | — | | — | | — | | — | | — | | 275.3 | |
| Total Other | 1,187.7 | | — | | — | | — | | — | | — | | — | | — | | 1,187.7 | |
| Total Commercial | 6,379.6 | | 3,364.4 | | 1,501.3 | | 1,107.2 | | 424.1 | | 1,338.7 | | 8,602.7 | | 71.3 | | 22,789.3 | |
| Personal | | | | | | | | | |
| Private Client | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 356.6 | | 251.6 | | 47.8 | | 337.7 | | 13.1 | | 28.0 | | 5,815.4 | | 44.8 | | 6,895.0 | |
| 4 to 5 Category | 304.4 | | 691.1 | | 208.2 | | 224.9 | | 45.7 | | 151.1 | | 5,166.5 | | 216.3 | | 7,008.2 | |
| 6 to 9 Category | 21.8 | | — | | 0.1 | | — | | 19.1 | | — | | 1.0 | | — | | 42.0 | |
| Total Private Client | 682.8 | | 942.7 | | 256.1 | | 562.6 | | 77.9 | | 179.1 | | 10,982.9 | | 261.1 | | 13,945.2 | |
| Residential Real Estate | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 813.7 | | 726.3 | | 603.8 | | 195.8 | | 109.0 | | 723.6 | | 143.5 | | — | | 3,315.7 | |
| 4 to 5 Category | 280.6 | | 616.0 | | 596.0 | | 285.3 | | 171.3 | | 943.9 | | 185.1 | | 1.0 | | 3,079.2 | |
| 6 to 9 Category | — | | 7.0 | | 1.5 | | 1.1 | | 1.3 | | 38.1 | | 2.0 | | — | | 51.0 | |
| Total Residential Real Estate | 1,094.3 | | 1,349.3 | | 1,201.3 | | 482.2 | | 281.6 | | 1,705.6 | | 330.6 | | 1.0 | | 6,445.9 | |
| Non-U.S. | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 3.0 | | — | | — | | 0.9 | | 4.6 | | 2.4 | | 226.5 | | — | | 237.4 | |
| 4 to 5 Category | 23.9 | | 44.4 | | — | | 20.6 | | 3.2 | | 30.0 | | 248.9 | | 7.8 | | 378.8 | |
| 6 to 9 Category | — | | — | | — | | — | | — | | 0.2 | | — | | — | | 0.2 | |
| Total Non-U.S. | 26.9 | | 44.4 | | — | | 21.5 | | 7.8 | | 32.6 | | 475.4 | | 7.8 | | 616.4 | |
| Other | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 70.0 | | — | | — | | — | | — | | — | | — | | — | | 70.0 | |
| 4 to 5 Category | 125.1 | | — | | — | | — | | — | | — | | — | | — | | 125.1 | |
| 6 to 9 Category | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Total Other | 195.1 | | — | | — | | — | | — | | — | | — | | — | | 195.1 | |
| Total Personal | 1,999.1 | | 2,336.4 | | 1,457.4 | | 1,066.3 | | 367.3 | | 1,917.3 | | 11,788.9 | | 269.9 | | 21,202.6 | |
| Total Loans and Leases | $ | 8,378.7 | | $ | 5,700.8 | | $ | 2,958.7 | | $ | 2,173.5 | | $ | 791.4 | | $ | 3,256.0 | | $ | 20,391.6 | | $ | 341.2 | | $ | 43,991.9 | |
Notes to Consolidated Financial Statements (unaudited) (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | TERM LOANS AND LEASES | REVOLVING LOANS | REVOLVING LOANS CONVERTED TO TERM LOANS | |
| (In Millions) | 2021 | 2020 | 2019 | 2018 | 2017 | PRIOR | TOTAL |
| Commercial | | | | | | | | | |
| Commercial and Institutional | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | $ | 1,042.0 | | $ | 310.2 | | $ | 468.9 | | $ | 163.9 | | $ | 55.4 | | $ | 541.6 | | $ | 4,946.0 | | $ | 0.1 | | $ | 7,528.1 | |
| 4 to 5 Category | 993.4 | | 441.7 | | 406.7 | | 193.6 | | 243.3 | | 230.2 | | 1,217.8 | | 33.1 | | 3,759.8 | |
| 6 to 9 Category | 44.0 | | 6.0 | | 47.1 | | 30.2 | | 9.9 | | 1.9 | | 62.2 | | — | | 201.3 | |
| Total Commercial and Institutional | 2,079.4 | | 757.9 | | 922.7 | | 387.7 | | 308.6 | | 773.7 | | 6,226.0 | | 33.2 | | 11,489.2 | |
| Commercial Real Estate | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 472.0 | | 298.7 | | 279.8 | | 65.8 | | 16.6 | | 79.5 | | 67.5 | | 2.9 | | 1,282.8 | |
| 4 to 5 Category | 912.7 | | 644.8 | | 491.5 | | 205.4 | | 89.6 | | 390.6 | | 182.3 | | 20.5 | | 2,937.4 | |
| 6 to 9 Category | 50.1 | | — | | 50.6 | | — | | — | | 2.9 | | 2.5 | | — | | 106.1 | |
| Total Commercial Real Estate | 1,434.8 | | 943.5 | | 821.9 | | 271.2 | | 106.2 | | 473.0 | | 252.3 | | 23.4 | | 4,326.3 | |
| Non-U.S. | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 816.5 | | 68.9 | | 38.4 | | — | | 9.1 | | — | | 582.0 | | — | | 1,514.9 | |
| 4 to 5 Category | 167.0 | | — | | — | | 1.9 | | — | | 191.9 | | 73.3 | | 1.8 | | 435.9 | |
| 6 to 9 Category | 2.9 | | — | | 23.1 | | — | | — | | — | | 13.4 | | — | | 39.4 | |
| Total Non-U.S. | 986.4 | | 68.9 | | 61.5 | | 1.9 | | 9.1 | | 191.9 | | 668.7 | | 1.8 | | 1,990.2 | |
| Lease Financing, net | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 6 to 9 Category | — | | — | | — | | — | | — | | 11.0 | | — | | — | | 11.0 | |
| Total Lease Financing, net | — | | — | | — | | — | | — | | 11.0 | | — | | — | | 11.0 | |
| Other | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 551.5 | | — | | — | | — | | — | | — | | — | | — | | 551.5 | |
| 4 to 5 Category | 119.2 | | — | | — | | — | | — | | — | | — | | — | | 119.2 | |
| Total Other | 670.7 | | — | | — | | — | | — | | — | | — | | — | | 670.7 | |
| Total Commercial | 5,171.3 | | 1,770.3 | | 1,806.1 | | 660.8 | | 423.9 | | 1,449.6 | | 7,147.0 | | 58.4 | | 18,487.4 | |
| Personal | | | | | | | | | |
| Private Client | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 432.5 | | 116.6 | | 90.3 | | 14.9 | | 39.3 | | 129.8 | | 7,592.8 | | 44.7 | | 8,460.9 | |
| 4 to 5 Category | 567.8 | | 335.2 | | 396.9 | | 213.3 | | 55.0 | | 39.9 | | 4,979.8 | | 178.3 | | 6,766.2 | |
| 6 to 9 Category | 1.9 | | 2.4 | | 3.0 | | 20.4 | | — | | — | | 1.5 | | — | | 29.2 | |
| Total Private Client | 1,002.2 | | 454.2 | | 490.2 | | 248.6 | | 94.3 | | 169.7 | | 12,574.1 | | 223.0 | | 15,256.3 | |
| Residential Real Estate | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 1,018.1 | | 660.3 | | 213.0 | | 110.4 | | 139.8 | | 763.1 | | 161.5 | | — | | 3,066.2 | |
| 4 to 5 Category | 434.0 | | 676.6 | | 325.5 | | 190.9 | | 172.1 | | 1,145.9 | | 218.1 | | 2.2 | | 3,165.3 | |
| 6 to 9 Category | 0.3 | | 9.9 | | 6.5 | | 5.3 | | 6.3 | | 55.1 | | 5.0 | | — | | 88.4 | |
| Total Residential Real Estate | 1,452.4 | | 1,346.8 | | 545.0 | | 306.6 | | 318.2 | | 1,964.1 | | 384.6 | | 2.2 | | 6,319.9 | |
| Non-U.S. | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 27.5 | | — | | 1.2 | | — | | — | | 1.0 | | 44.1 | | — | | 73.8 | |
| 4 to 5 Category | 36.1 | | — | | 20.6 | | 10.4 | | — | | 3.8 | | 229.1 | | 7.8 | | 307.8 | |
| 6 to 9 Category | — | | — | | — | | — | | — | | 0.2 | | — | | — | | 0.2 | |
| Total Non-U.S. | 63.6 | | — | | 21.8 | | 10.4 | | — | | 5.0 | | 273.2 | | 7.8 | | 381.8 | |
| Other | | | | | | | | | |
| Risk Rating: | | | | | | | | | |
| 1 to 3 Category | 13.4 | | — | | — | | — | | — | | — | | — | | — | | 13.4 | |
| 4 to 5 Category | 21.8 | | — | | — | | — | | — | | — | | — | | — | | 21.8 | |
| Total Other | 35.2 | | — | | — | | — | | — | | — | | — | | — | | 35.2 | |
| Total Personal | 2,553.4 | | 1,801.0 | | 1,057.0 | | 565.6 | | 412.5 | | 2,138.8 | | 13,231.9 | | 233.0 | | 21,993.2 | |
| Total Loans and Leases | $ | 7,724.7 | | $ | 3,571.3 | | $ | 2,863.1 | | $ | 1,226.4 | | $ | 836.4 | | $ | 3,588.4 | | $ | 20,378.9 | | $ | 291.4 | | $ | 40,480.6 | |
Notes to Consolidated Financial Statements (unaudited) (continued)
Loans and leases in the “1 to 3” category are expected to exhibit minimal to modest probabilities of default and are characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and capital levels. Borrowers assigned these ratings are anticipated to experience very little to moderate financial pressure in adverse down-cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a minimal to modest likelihood of loss.
Loans and leases in the “4 to 5” category are expected to exhibit moderate to acceptable probabilities of default and are characterized by borrowers with less financial flexibility than those in the “1 to 3” category. Cash flows and capital levels are generally sufficient to allow for borrowers to meet current requirements, but have fewer financial resources to manage through economic downturns. As a result of these characteristics, borrowers within this category exhibit a moderate likelihood of loss.
Loans and leases in the watch list category have elevated credit risk profiles that are monitored through internal watch lists, and consist of credits with borrower ratings of “6 to 9.” These credits, which include all nonaccrual credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default. Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable likelihood of loss.
Past Due Status. Past due status is based on the length of time from the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans and leases that are 29 days past due or less are reported as current.
The following table provides balances and delinquency status of accrual and nonaccrual loans and leases by segment and class, as well as the other real estate owned and nonaccrual asset balances, as of September 30, 2022 and December 31, 2021.
TABLE 48: DELINQUENCY STATUS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ACCRUAL | | | NONACCRUAL WITH NO ALLOWANCE |
| (In Millions) | CURRENT | 30 – 59 DAYS
PAST DUE | 60 – 89 DAYS
PAST DUE | 90 DAYS
OR MORE
PAST DUE | TOTAL ACCRUAL | NONACCRUAL | TOTAL LOANS
AND LEASES |
| September 30, 2022 | | | | | | | | |
| Commercial | | | | | | | | |
| Commercial and Institutional | $ | 11,949.8 | | $ | 269.9 | | $ | 174.0 | | $ | 1.4 | | $ | 12,395.1 | | $ | 18.4 | | $ | 12,413.5 | | $ | 4.6 | |
| Commercial Real Estate | 4,517.5 | | 4.5 | | 3.3 | | 3.6 | | 4,528.9 | | 41.9 | | 4,570.8 | | 37.9 | |
| Non-U.S. | 4,591.9 | | 25.4 | | — | | — | | 4,617.3 | | — | | 4,617.3 | | — | |
| | | | | | | | |
| Other | 1,187.7 | | — | | — | | — | | 1,187.7 | | — | | 1,187.7 | | — | |
| Total Commercial | 22,246.9 | | 299.8 | | 177.3 | | 5.0 | | 22,729.0 | | 60.3 | | 22,789.3 | | 42.5 | |
| Personal | | | | | | | | |
| Private Client | 13,750.8 | | 112.0 | | 37.2 | | 45.2 | | 13,945.2 | | — | | 13,945.2 | | — | |
| Residential Real Estate | 6,425.3 | | 0.7 | | 2.5 | | 1.3 | | 6,429.8 | | 16.1 | | 6,445.9 | | 16.1 | |
| Non-U.S. | 616.4 | | — | | — | | — | | 616.4 | | — | | 616.4 | | — | |
| Other | 195.1 | | — | | — | | — | | 195.1 | | — | | 195.1 | | — | |
| Total Personal | 20,987.6 | | 112.7 | | 39.7 | | 46.5 | | 21,186.5 | | 16.1 | | 21,202.6 | | 16.1 | |
| Total Loans and Leases | $ | 43,234.5 | | $ | 412.5 | | $ | 217.0 | | $ | 51.5 | | $ | 43,915.5 | | $ | 76.4 | | $ | 43,991.9 | | $ | 58.6 | |
| Other Real Estate Owned | $ | — | | | |
| Total Nonaccrual Assets | $ | 76.4 | | | |
Notes to Consolidated Financial Statements (unaudited) (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ACCRUAL | | | NONACCRUAL WITH NO ALLOWANCE |
| (In Millions) | CURRENT | 30 – 59 DAYS
PAST DUE | 60 – 89 DAYS
PAST DUE | 90 DAYS
OR MORE
PAST DUE | TOTAL ACCRUAL | NONACCRUAL | TOTAL LOANS
AND LEASES |
| December 31, 2021 | | | | | | | | |
| Commercial | | | | | | | | |
| Commercial and Institutional | $ | 11,434.7 | | $ | 32.5 | | $ | 2.1 | | $ | 0.4 | | $ | 11,469.7 | | $ | 19.5 | | $ | 11,489.2 | | $ | 8.8 | |
| Commercial Real Estate | 4,256.6 | | 3.1 | | — | | — | | 4,259.7 | | 66.6 | | 4,326.3 | | 52.3 | |
| Non-U.S. | 1,990.2 | | — | | — | | — | | 1,990.2 | | — | | 1,990.2 | | — | |
| Lease Financing, net | 11.0 | | — | | — | | — | | 11.0 | | — | | 11.0 | | — | |
| Other | 670.7 | | — | | — | | — | | 670.7 | | — | | 670.7 | | — | |
| Total Commercial | 18,363.2 | | 35.6 | | 2.1 | | 0.4 | | 18,401.3 | | 86.1 | | 18,487.4 | | 61.1 | |
| Personal | | | | | | | | |
| Private Client | 14,927.3 | | 229.5 | | 71.8 | | 27.7 | | 15,256.3 | | — | | 15,256.3 | | — | |
| Residential Real Estate | 6,273.2 | | 7.0 | | 3.3 | | 0.2 | | 6,283.7 | | 36.2 | | 6,319.9 | | 36.2 | |
| Non-U.S | 381.6 | | 0.2 | | — | | — | | 381.8 | | — | | 381.8 | | — | |
| Other | 35.2 | | — | | — | | — | | 35.2 | | — | | 35.2 | | — | |
| Total Personal | 21,617.3 | | 236.7 | | 75.1 | | 27.9 | | 21,957.0 | | 36.2 | | 21,993.2 | | 36.2 | |
| Total Loans and Leases | $ | 39,980.5 | | $ | 272.3 | | $ | 77.2 | | $ | 28.3 | | $ | 40,358.3 | | $ | 122.3 | | $ | 40,480.6 | | $ | 97.3 | |
| Other Real Estate Owned | $ | 3.0 | | | |
| Total Nonaccrual Assets | $ | 125.3 | | | |
Interest income that would have been recorded for nonaccrual loans and leases in accordance with their original terms was $1.1 million and $3.2 million for the three and nine months ended September 30, 2022, and $1.5 million and $3.2 million for the three and nine months ended September 30, 2021, respectively.
Collateral Dependent Financial Assets. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Most of Northern Trust’s collateral dependent credit exposure relates to its residential real estate portfolio for which the collateral is usually the underlying real estate property. For collateral-dependent financial assets, it is Northern Trust’s policy to reserve or charge-off the difference between the amortized cost basis of the loan and the value of the collateral. The collateral-dependent financial asset balance as of September 30, 2022 was immaterial to Northern Trust’s financial statements.
Recognition of Income. Interest income on loans and leases is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. Loans meeting such criteria are classified as nonaccrual and interest income is recorded on a cash basis. At the time a loan is determined to be nonaccrual, interest accrued but not collected is reversed against interest income in the current period. Interest collected on nonaccrual loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt. Management’s assessment of the indicators of loan and lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent resumption of income recognition, do not meaningfully vary between loan and lease classes. Nonaccrual loans are returned to accrual status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to accrual status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate primarily to expected payment performance. Loans are eligible to be returned to accrual status when: (i) no principal or interest that is due is unpaid and repayment of the remaining contractual principal and interest is expected or (ii) the loan has otherwise become well-secured (possessing realizable value sufficient to discharge the debt, including accrued interest, in full) and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current status in the near future). A loan that has not been brought fully current may be restored to accrual status provided there has been a sustained period of repayment performance (generally a minimum of six payment periods) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time. Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial condition and prospects of repayment under the revised terms and there has been a sustained period of repayment performance (generally a minimum of six payment periods) under the revised terms.
Nonaccrual Loans and Troubled Debt Restructurings (TDRs). A loan that has been modified as a concession by Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties is referred to as a troubled debt restructuring (TDR). All TDRs are reported starting in the calendar year of their restructuring. In subsequent years, a TDR may cease being reported if the loan was modified at a market rate and has performed according to the modified terms for at least six payment
Notes to Consolidated Financial Statements (unaudited) (continued)
periods. A loan that has been modified at a below market rate will return to accrual status if it satisfies the six-payment-period performance requirement.
The expected credit loss is measured based upon the present value of expected future cash flows, discounted at the effective interest rate based on the original contractual rate. If a loan’s contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, the loan’s effective interest rate is calculated based on the factor as it changes over the life of the loan. Northern Trust elected not to project changes in the factor for purposes of estimating expected future cash flows. Further, Northern Trust elected not to adjust the effective interest rate for prepayments. If the loan is collateral dependent, the expected loss is measured based on the fair value of the collateral at the reporting date.
If the loan valuation is less than the recorded value of the loan, either an allowance is established or a charge-off is recorded for the difference. Smaller balance (individually less than $1 million) homogeneous loans are collectively evaluated. Northern Trust’s accounting policies for material nonaccrual loans is consistent across all classes of loans and leases.
All loans and leases with TDR modifications are evaluated for additional expected credit losses. The nature and extent of further deterioration in credit quality, including a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses.
Included within nonaccrual loans were $68.0 million and $76.7 million of nonaccrual TDRs, and $8.2 million and $16.5 million of accrual TDRs as of September 30, 2022 and December 31, 2021, respectively.
There were $0.2 million of aggregate undrawn loan commitments and standby letters of credit at both September 30, 2022 and December 31, 2021, respectively, issued to borrowers with TDR modifications of loans.
The following table provides, by segment and class, the number of TDR modifications of loans and leases during the three- and nine- months ended September 30, 2022 and 2021, and the recorded investments and unpaid principal balances as of September 30, 2022 and 2021.
TABLE 49: TROUBLED DEBT RESTRUCTURINGS
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2022 | NINE MONTHS ENDED SEPTEMBER 30, 2022 |
| ($ In Millions) | NUMBER OF
LOANS AND
LEASES | RECORDED
INVESTMENT | UNPAID
PRINCIPAL
BALANCE | NUMBER OF
LOANS AND
LEASES | RECORDED
INVESTMENT | UNPAID
PRINCIPAL
BALANCE |
| Commercial | | | | | | |
| Commercial and Institutional | 1 | | $ | 0.1 | | $ | 0.1 | | 2 | | $ | 0.6 | | $ | 0.6 | |
| Commercial Real Estate | 1 | | 31.6 | | 32.5 | | 1 | | 31.6 | | 32.5 | |
| Total Commercial | 2 | | 31.7 | | 32.6 | | 3 | | 32.2 | | 33.1 | |
| Personal | | | | | | |
| Residential Real Estate | 1 | | 0.1 | | 0.1 | | 3 | | 0.2 | | 0.2 | |
| Total Personal | 1 | | 0.1 | | 0.1 | | 3 | | 0.2 | | 0.2 | |
| Total Loans and Leases | 3 | | $ | 31.8 | | $ | 32.7 | | 6 | | $ | 32.4 | | $ | 33.3 | |
Note: Period-end balances reflect all pay downs and charge-offs during the period.
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2021 | NINE MONTHS ENDED SEPTEMBER 30, 2021 |
| ($ In Millions) | NUMBER OF
LOANS AND
LEASES | RECORDED
INVESTMENT | UNPAID
PRINCIPAL
BALANCE | NUMBER OF
LOANS AND
LEASES | RECORDED
INVESTMENT | UNPAID
PRINCIPAL
BALANCE |
| Commercial | | | | | | |
| Commercial and Institutional | — | | $ | — | | $ | — | | 6 | | $ | 19.6 | | $ | 19.6 | |
| Commercial Real Estate | — | | — | | — | | 2 | | 28.3 | | 34.5 | |
| Total Commercial | — | | — | | — | | 8 | | 47.9 | | 54.1 | |
| Personal | | | | | | |
| Residential Real Estate | 1 | | 0.2 | | 0.2 | | 8 | | 1.0 | | 1.2 | |
| Total Personal | 1 | | 0.2 | | 0.2 | | 8 | | 1.0 | | 1.2 | |
| Total Loans and Leases | 1 | | $ | 0.2 | | $ | 0.2 | | 16 | | $ | 48.9 | | $ | 55.3 | |
Note: Period-end balances reflect all pay downs and charge-offs during the period.
TDR modifications involve extensions of term, deferrals of principal, interest rate concessions, and other modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-troubled situations.
During the three months ended September 30, 2022, the TDR loan modification within residential real estate was an other modification. During the nine months ended September 30, 2022, the TDR loan modifications within residential real estate were deferred principal, interest rate concession, extension of term and other modifications. During the three months ended
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2022, the TDR loan modification within commercial and institutional was an interest rate concession and extension of term. During the nine months ended September 30, 2022, the TDR loan modifications within commercial and institutional included an interest rate concession, extension of term and an other modification. During the three and nine months ended September 30, 2022, the TDR loan modification within commercial real estate was an interest rate concession and other modification.
During the three months ended September 30, 2021, the TDR loan modification within residential real estate was an extension of term. During the nine months ended September 30, 2021, the TDR loan modifications within residential real estate were other modifications, deferred principal and extension of term. During the nine months ended September 30, 2021, the TDR loan modifications within commercial and institutional was deferred principal. During the nine months ended September 30, 2021, the TDR modification of loans within commercial real estate were deferred principal, interest rate concessions, and extension of term.
There were no residential real estate loan TDR modifications during the twelve months ended June 30, 2022, which subsequently had a payment default during the three and nine months ended September 30, 2022.
There was one residential real estate loan TDR modification during the twelve months ended June 30, 2021, which subsequently had a payment default during the three and nine months ended September 30, 2021. The total recorded investment for this loan was approximately $0.1 million and the unpaid principal balance for this loan was approximately $0.1 million.
Northern Trust may obtain physical possession of real estate via foreclosure on an in-substance repossession. As of September 30, 2022, Northern Trust held foreclosed real estate properties with an immaterial carrying value as a result of obtaining physical possession. In addition, as of September 30, 2022, Northern Trust had loans with a carrying value of $1.2 million for which formal foreclosure proceedings were in process.
Note 7 – Allowance for Credit Losses
Allowance and Provision for Credit Losses. The allowance for credit losses—which represents management’s best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance-sheet credit exposures, and specific borrower relationships—is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts.
The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic Research Department, and each of Northern Trust’s reporting segments. The Credit Loss Reserve Committee determines the probability weights applied to each forecast approved by Northern Trust’s Macroeconomic Scenario Development Committee, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s qualitative adjustment framework.
The Provision for Credit Losses on the consolidated statements of income represents the change in the Allowance for Credit Losses on the consolidated balance sheets after accounting for net charge-offs or recoveries and is the charge to current period earnings. It represents the amount needed to maintain the Allowance for Credit Losses on the consolidated balance sheets at an appropriate level to absorb lifetime expected credit losses related to financial assets in scope. Actual losses may vary from current estimates and the amount of the Provision for Credit Losses may be either greater or less than actual net charge-offs.
The Provision for Credit Losses, excluding the release of credit reserves for available for sale debt securities of $0.9 million, was a provision of $1.4 million in the current quarter, as compared to a $13.0 million release of credit reserves in the prior-year quarter. The provision was primarily due to an increase in the collective basis reserve for loans driven by a weaker macroeconomic outlook, partially offset by improvements in credit quality, mainly within the commercial and institutional loan portfolio. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics. There were net charge-offs of $4.5 million during the three months ended September 30, 2022, as compared to net recoveries of $1.1 million for the three months ended September 30, 2021.
The Provision for Credit Losses, excluding the provision for available for sale debt securities of $0.8 million, was a provision of $6.2 million for the nine months ended September 30, 2022, as compared to a $70.0 million release of credit reserves in the prior-year period. The provision for loans and undrawn commitments and standby letters of credit was primarily due to an increase in the collective basis reserve, driven by a weaker macroeconomic outlook, partially offset by improvements in credit
Notes to Consolidated Financial Statements (unaudited) (continued)
quality mainly within the commercial and institutional and commercial real estate portfolios during the nine months ended September 30, 2022. The provision for HTM Debt Securities was primarily due to the transfer of $6.6 billion fair value of AFS debt securities to HTM. There were net recoveries of $4.2 million during the nine months ended September 30, 2022, as compared to net recoveries of $5.2 million for the prior-year period. For further detail, please see the Allowance for the Loan and Lease Portfolio and the Allowance for Held to Maturity Debt Securities Portfolio sections below.
The following table provides information regarding changes in the total allowance for credit losses during the three and nine months ended September 30, 2022 and 2021.
TABLE 50: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
| | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2022 |
| (In Millions) | LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | HELD TO MATURITY DEBT SECURITIES | OTHER FINANCIAL ASSETS | TOTAL |
| Balance at Beginning of Period | $ | 138.2 | | $ | 43.5 | | $ | 15.4 | | $ | 1.1 | | $ | 198.2 | |
| Charge-Offs | (5.4) | | — | | — | | — | | (5.4) | |
| Recoveries | 0.9 | | — | | — | | — | | 0.9 | |
| Net Recoveries (Charge-Offs) | (4.5) | | — | | — | | — | | (4.5) | |
Provision for Credit Losses(1) | 5.0 | | (2.8) | | (0.4) | | (0.4) | | 1.4 | |
| Balance at End of Period | $ | 138.7 | | $ | 40.7 | | $ | 15.0 | | $ | 0.7 | | $ | 195.1 | |
(1) The table excludes a release of credit reserves of $0.9 million for the three months ended September 30, 2022 for AFS debt securities. See further detail in Note 4 - Securities. | | | | | | | | | | | | | | | | | |
| | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2022 |
| (In Millions) | LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | HELD TO MATURITY DEBT SECURITIES | OTHER FINANCIAL ASSETS | TOTAL |
| Balance at Beginning of Period | $ | 138.4 | | $ | 34.1 | | $ | 11.2 | | $ | 1.0 | | $ | 184.7 | |
| Charge-Offs | (5.5) | | — | | — | | — | | (5.5) | |
| Recoveries | 9.7 | | — | | — | | — | | 9.7 | |
| Net Recoveries (Charge-Offs) | 4.2 | | — | | — | | — | | 4.2 | |
Provision for Credit Losses(1) | (3.9) | | 6.6 | | 3.8 | | (0.3) | | 6.2 | |
| Balance at End of Period | $ | 138.7 | | $ | 40.7 | | $ | 15.0 | | $ | 0.7 | | $ | 195.1 | |
(1) The table excludes a provision of $0.8 million for the nine months ended September 30, 2022 for AFS debt securities. See further detail in Note 4 - Securities.
| | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2021 |
| (In Millions) | LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | HELD TO MATURITY DEBT SECURITIES | OTHER FINANCIAL ASSETS | TOTAL |
| Balance at Beginning of Period | $ | 148.8 | | $ | 46.5 | | $ | 10.5 | | $ | 1.2 | | $ | 207.0 | |
| Charge-Offs | — | | — | | — | | — | | — | |
| Recoveries | 1.1 | | — | | — | | — | | 1.1 | |
| Net Recoveries (Charge-Offs) | 1.1 | | — | | — | | — | | 1.1 | |
| Provision for Credit Losses | (6.0) | | (6.7) | | (0.1) | | (0.2) | | (13.0) | |
| Balance at End of Period | $ | 143.9 | | $ | 39.8 | | $ | 10.4 | | $ | 1.0 | | $ | 195.1 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2021 |
| (In Millions) | LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT | HELD TO MATURITY DEBT SECURITIES | OTHER FINANCIAL ASSETS | TOTAL |
| Balance at Beginning of Period | $ | 190.7 | | $ | 61.1 | | $ | 7.3 | | $ | 0.8 | | $ | 259.9 | |
| Charge-Offs | (0.4) | | — | | — | | — | | (0.4) | |
| Recoveries | 5.6 | | — | | — | | — | | 5.6 | |
| Net Recoveries (Charge-Offs) | 5.2 | | — | | — | | — | | 5.2 | |
| Provision for Credit Losses | (52.0) | | (21.3) | | 3.1 | | 0.2 | | (70.0) | |
| Balance at End of Period | $ | 143.9 | | $ | 39.8 | | $ | 10.4 | | $ | 1.0 | | $ | 195.1 | |
Notes to Consolidated Financial Statements (unaudited) (continued)
The portion of the allowance assigned to loans and leases, HTM debt securities, and other financial assets is presented as a contra asset in Allowance for Credit Losses on the consolidated balance sheets. The portion of the allowance assigned to undrawn loan commitments and standby letters of credit is reported in Other Liabilities on the consolidated balance sheets. For credit exposure and the associated allowance related to fee receivables, please refer to Note 14 — Revenue from Contracts with Clients. For information related to the allowance for AFS debt securities, please refer to Note 4 — Securities. For all other financial assets recognized at amortized cost, which include Cash and Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, and Other Assets, please refer to the Allowance for Other Financial Assets section within this footnote.
Forecasting and Reversion. Estimating expected lifetime credit losses requires the consideration of the effect of future economic conditions. Northern Trust employs multiple scenarios over a reasonable and supportable period (currently two years) to project future conditions. Key variables determined to be relevant for projecting credit losses on the portfolios in scope include macroeconomic factors, such as corporate profits, unemployment, and real estate price indices, as well as financial market factors such as equity prices, volatility, and credit spreads. For periods beyond the reasonable and supportable period, Northern Trust reverts to its own historical loss experiences on a straight-line basis over four quarters. While uncertainty and volatility have increased recently due to geopolitical events and higher levels of inflation and interest rates, the primary forecast in the current quarter provides for continued economic growth, recognizing the current strength of the labor market, consumer spending, and business investment. An alternative scenario is also considered, which reflects a recession that incorporates the experiences of a wider set of historical economic cycles.
Contractual Term. Northern Trust estimates expected credit losses over the contractual term of the financial assets adjusted for prepayments, unless prepayments are not relevant to specific portfolios or sub-portfolios. Extension and renewal options are typically not considered since it is not Northern Trust’s practice to enter into arrangements where the borrower has the unconditional option to renew, or a conditional extension option whereby the conditions are beyond Northern Trust’s control.
Allowance for the Loan and Lease Portfolio. The following table provides information regarding changes in the total allowance for credit losses related to loans and leases, including undrawn loan commitments and standby letters of credit, by segment during the three and nine months ended September 30, 2022 and 2021.
TABLE 51: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO LOANS AND LEASES
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2022 |
| LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT |
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL |
| Balance at Beginning of Period | $ | 102.5 | | $ | 35.7 | | $ | 138.2 | | $ | 40.3 | | $ | 3.2 | | $ | 43.5 | |
| Charge-Offs | (4.9) | | (0.5) | | (5.4) | | — | | — | | — | |
| Recoveries | 0.3 | | 0.6 | | 0.9 | | — | | — | | — | |
| Net Recoveries (Charge-Offs) | (4.6) | | 0.1 | | (4.5) | | — | | — | | — | |
| Provision for Credit Losses | 2.7 | | 2.3 | | 5.0 | | (2.8) | | — | | (2.8) | |
| Balance at End of Period | $ | 100.6 | | $ | 38.1 | | $ | 138.7 | | $ | 37.5 | | $ | 3.2 | | $ | 40.7 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2022 |
| LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT |
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL |
| Balance at Beginning of Period | $ | 105.6 | | $ | 32.8 | | $ | 138.4 | | $ | 31.4 | | $ | 2.7 | | $ | 34.1 | |
| Charge-Offs | (4.9) | | (0.6) | | (5.5) | | — | | — | | — | |
| Recoveries | 2.7 | | 7.0 | | 9.7 | | — | | — | | — | |
| Net Recoveries (Charge-Offs) | (2.2) | | 6.4 | | 4.2 | | — | | — | | — | |
| Provision for Credit Losses | (2.8) | | (1.1) | | (3.9) | | 6.1 | | 0.5 | | 6.6 | |
| Balance at End of Period | $ | 100.6 | | $ | 38.1 | | $ | 138.7 | | $ | 37.5 | | $ | 3.2 | | $ | 40.7 | |
Notes to Consolidated Financial Statements (unaudited) (continued)
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2021 |
| LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT |
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL |
| Balance at Beginning of Period | $ | 118.0 | | $ | 30.8 | | $ | 148.8 | | $ | 43.6 | | $ | 2.9 | | $ | 46.5 | |
| Charge-Offs | — | | — | | — | | — | | — | | — | |
| Recoveries | 0.4 | | 0.7 | | 1.1 | | — | | — | | — | |
| Net Recoveries (Charge-Offs) | 0.4 | | 0.7 | | 1.1 | | — | | — | | — | |
| Provision for Credit Losses | (2.7) | | (3.3) | | (6.0) | | (6.4) | | (0.3) | | (6.7) | |
| Balance at End of Period | $ | 115.7 | | $ | 28.2 | | $ | 143.9 | | $ | 37.2 | | $ | 2.6 | | $ | 39.8 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2021 |
| LOANS AND LEASES | UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT |
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL |
| Balance at Beginning of Period | $ | 142.2 | | $ | 48.5 | | $ | 190.7 | | $ | 57.6 | | $ | 3.5 | | $ | 61.1 | |
| Charge-Offs | — | | (0.4) | | (0.4) | | — | | — | | — | |
| Recoveries | 0.9 | | 4.7 | | 5.6 | | — | | — | | — | |
| Net Recoveries (Charge-Offs) | 0.9 | | 4.3 | | 5.2 | | — | | — | | — | |
| Provision for Credit Losses | (27.4) | | (24.6) | | (52.0) | | (20.4) | | (0.9) | | (21.3) | |
| Balance at End of Period | $ | 115.7 | | $ | 28.2 | | $ | 143.9 | | $ | 37.2 | | $ | 2.6 | | $ | 39.8 | |
Allowance Related to Credit Exposure Evaluated on a Collective Basis. Expected credit losses are measured on a collective basis as long as the financial assets included in the respective pool share similar risk characteristics. If financial assets are deemed to not share similar risk characteristics, an individual assessment is warranted.
The allowance estimation methodology for the collective assessment is primarily based on internally developed loss data specific to the Northern Trust financial asset portfolio from a historical observation period that includes both expansionary and recessionary periods. The estimation methodology and the related qualitative adjustment framework segregate the loan and lease portfolio into homogenous segments based on similar risk characteristics or risk monitoring methods.
Northern Trust utilizes a quantitative probability of default/loss given default approach for the calculation of its credit allowance on a collective basis. For each of the different parameters, specific credit models or qualitative estimation methodologies for the individual loan segments were developed. For each segment, the probability of default and the loss given default are applied to the exposure at default for each projected quarter to determine the quantitative component of the allowance. The quantitative allowance is then reviewed within the qualitative adjustment framework, through which management applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology, and environmental factors that are not fully contemplated in the forecast to compute an adjustment to the quantitative allowance for each segment of the loan portfolio.
Allowance Related to Credit Exposure Evaluated on an Individual Basis. The allowance is determined through an individual evaluation of loans, leases, and lending-related commitments that have defaulted, generally those with borrower ratings of 8 and 9, that is based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay. For defaulted loans for which the amount of allowance, if any, is determined based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and utilized by management. These appraisals are generally less than twelve months old and are subject to adjustments to reflect management’s judgment as to the realizable value of the collateral.
Notes to Consolidated Financial Statements (unaudited) (continued)
The following table provides information regarding the recorded investments in loans and leases and the allowance for credit losses for loans and leases and undrawn loan commitments and standby letters of credit by segment as of September 30, 2022 and December 31, 2021.
TABLE 52: RECORDED INVESTMENTS IN LOANS AND LEASES
| | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| (In Millions) | COMMERCIAL | PERSONAL | TOTAL | COMMERCIAL | PERSONAL | TOTAL |
| Loans and Leases | | | | | | |
| Evaluated on an Individual Basis | $ | 64.6 | | $ | 43.3 | | $ | 107.9 | | $ | 92.1 | | $ | 74.5 | | $ | 166.6 | |
| Evaluated on a Collective Basis | 22,724.7 | | 21,159.3 | | 43,884.0 | | 18,395.3 | | 21,918.7 | | 40,314.0 | |
| Total Loans and Leases | 22,789.3 | | 21,202.6 | | 43,991.9 | | 18,487.4 | | 21,993.2 | | 40,480.6 | |
| Allowance for Credit Losses on Loans and Leases | | | | | | |
| Evaluated on an Individual Basis | 10.9 | | — | | 10.9 | | 10.1 | | — | | 10.1 | |
| Evaluated on a Collective Basis | 89.7 | | 38.1 | | 127.8 | | 95.5 | | 32.8 | | 128.3 | |
| Allowance Assigned to Loans and Leases | 100.6 | | 38.1 | | 138.7 | | 105.6 | | 32.8 | | 138.4 | |
| Allowance for Undrawn Loan Commitments and Standby Letters of Credit | | | | | | |
| Evaluated on an Individual Basis | — | | — | | — | | — | | — | | — | |
| Evaluated on a Collective Basis | 37.5 | | 3.2 | | 40.7 | | 31.4 | | 2.7 | | 34.1 | |
| Allowance Assigned to Undrawn Loan Commitments and Standby Letters of Credit | 37.5 | | 3.2 | | 40.7 | | 31.4 | | 2.7 | | 34.1 | |
| Total Allowance Assigned to Loans and Leases and Undrawn Loan Commitments and Standby Letters of Credit | $ | 138.1 | | $ | 41.3 | | $ | 179.4 | | $ | 137.0 | | $ | 35.5 | | $ | 172.5 | |
Northern Trust analyzes its exposure to credit losses from both on-balance-sheet and off-balance-sheet activity using a consistent methodology for the quantitative framework as well as the qualitative framework. For purposes of estimating the allowance for credit losses for undrawn loan commitments and standby letters of credit, the exposure at default includes an estimated drawdown of unused credit based on credit utilization factors, resulting in a proportionate amount of expected credit losses.
Allowance for Held to Maturity Debt Securities Portfolio. The following table provides information regarding changes in the total allowance for credit losses for HTM debt securities during the three and nine months ended September 30, 2022 and 2021.
TABLE 53: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO HELD TO MATURITY DEBT SECURITIES
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2022 |
| (In Millions) | CORPORATE DEBT | NON-U.S. GOVERNMENT | SUB-SOVEREIGN, SUPRANATIONAL, AND NON-U.S. AGENCY BONDS | COVERED BONDS | OTHER | TOTAL |
| Balance at Beginning of Period | $ | 1.8 | | $ | 3.8 | | $ | 4.8 | | $ | 0.1 | | $ | 4.9 | | $ | 15.4 | |
| Provision for Credit Losses | (0.3) | | (0.7) | | (1.0) | | — | | 1.6 | | (0.4) | |
| Balance at End of Period | $ | 1.5 | | $ | 3.1 | | $ | 3.8 | | $ | 0.1 | | $ | 6.5 | | $ | 15.0 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2022 |
| (In Millions) | CORPORATE DEBT | NON-U.S. GOVERNMENT | SUB-SOVEREIGN, SUPRANATIONAL, AND NON-U.S. AGENCY BONDS | COVERED BONDS | OTHER | TOTAL |
| Balance at Beginning of Period | $ | 1.4 | | $ | 1.9 | | $ | 3.0 | | $ | 0.1 | | $ | 4.8 | | $ | 11.2 | |
| Provision for Credit Losses | 0.1 | | 1.2 | | 0.8 | | — | | 1.7 | | 3.8 | |
| Balance at End of Period | $ | 1.5 | | $ | 3.1 | | $ | 3.8 | | $ | 0.1 | | $ | 6.5 | | $ | 15.0 | |
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2021 |
| (In Millions) | CORPORATE DEBT | NON-U.S. GOVERNMENT | SUB-SOVEREIGN, SUPRANATIONAL, AND NON-U.S. AGENCY BONDS | COVERED BONDS | OTHER | TOTAL |
| Balance at Beginning of Period | $ | 1.6 | | $ | 1.5 | | $ | 2.6 | | $ | 0.1 | | $ | 4.7 | | $ | 10.5 | |
| Provision for Credit Losses | (0.2) | | (0.1) | | 0.2 | | — | | — | | (0.1) | |
| Balance at End of Period | $ | 1.4 | | $ | 1.4 | | $ | 2.8 | | $ | 0.1 | | $ | 4.7 | | $ | 10.4 | |
Notes to Consolidated Financial Statements (unaudited) (continued)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2021 |
| (In Millions) | CORPORATE DEBT | NON-U.S. GOVERNMENT | SUB-SOVEREIGN, SUPRANATIONAL, AND NON-U.S. AGENCY BONDS | COVERED BONDS | OTHER | TOTAL |
| Balance at Beginning of Period | $ | 0.8 | | $ | 0.2 | | $ | 1.2 | | $ | 0.1 | | $ | 5.0 | | $ | 7.3 | |
| Provision for Credit Losses | 0.6 | | 1.2 | | 1.6 | | — | | (0.3) | | 3.1 | |
| Balance at End of Period | $ | 1.4 | | $ | 1.4 | | $ | 2.8 | | $ | 0.1 | | $ | 4.7 | | $ | 10.4 | |
HTM debt securities classified as U.S. government, government sponsored agency, and certain securities classified as obligations of states and political subdivisions are considered to be guarantees of the U.S. government or an agency of the U.S. government and therefore an allowance for credit losses is not estimated for such investments as the expected probability of non-payment of the amortized cost basis is zero.
HTM debt securities classified as “other asset-backed securities” represent pools of underlying receivables from which the cash flows are used to pay the bonds that vary in seniority. Utilizing a qualitative estimation approach, the allowance for other asset-backed securities is assessed by evaluating underlying pool performance based on delinquency rates and available credit support.
HTM debt securities classified as “other” relate to investments purchased by Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income communities within Northern Trust’s market area. The allowance for CRA investments is assessed using a qualitative estimation approach primarily based on internal historical performance experience and default history of the underlying CRA portfolios to determine a quantitative component of the allowance.
The allowance estimation methodology for all other HTM debt securities is developed using a combination of external and internal data. The estimation methodology groups securities with shared characteristics for which the probability of default and the loss given default are applied to the total exposure at default to determine a quantitative component of the allowance.
Allowance for Other Financial Assets. The allowance for Other Financial Assets consists of the allowance for Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, and Other Assets. The Other Assets category includes other miscellaneous credit exposures reported in Other Assets on the consolidated balance sheets. The allowance estimation methodology for Other Financial Assets primarily utilizes a similar approach as the one used for the HTM debt securities portfolio. It consists of a combination of externally and internally developed loss data, adjusted for the appropriate contractual term. Northern Trust’s portfolio of Other Financial Assets is composed mostly of institutions within the “1 to 3” internal borrower rating category and is expected to exhibit minimal to modest likelihood of loss. The Allowance for Credit Losses related to Other Financial Assets was $0.7 million and $1.0 million as of September 30, 2022 and December 31, 2021, respectively.
Accrued Interest. Accrued interest balances are reported within Other Assets on the consolidated balance sheets. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables related to its loan and securities portfolio as its policy is to write-off uncollectible accrued interest receivable balances in a timely manner. Accrued interest is written off by reversing interest income during the quarter the financial asset is moved from an accrual to a nonaccrual status.
The following table provides the amount of accrued interest excluded from the amortized cost basis of the following portfolios.
TABLE 54: ACCRUED INTEREST
| | | | | | | | |
| (In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| Loans and Leases | $ | 140.8 | | $ | 62.6 | |
| Debt Securities | | |
| Held to Maturity | 73.0 | | 30.4 | |
| Available for Sale | 114.5 | | 129.7 | |
| Other Financial Assets | 28.4 | | 2.3 | |
| Total | $ | 356.7 | | $ | 225.0 | |
The amount of accrued interest reversed through interest income for loans and leases was immaterial for the three and nine months ended September 30, 2022 and 2021, and there was no accrued interest reversed through interest income related to any other financial assets for the three and nine months ended September 30, 2022 and 2021.
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 8 – Pledged and Restricted Assets
Pledged Assets. Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements and borrowings, as well as for other purposes, including support for securities settlement, primarily related to client activities, and for derivative contracts. Collateral required for these purposes totaled $12.1 billion and $5.6 billion at September 30, 2022 and December 31, 2021, respectively.
The following table presents Northern Trust's pledged assets.
TABLE 55: TYPE OF PLEDGED ASSETS
| | | | | | | | |
| (In Billions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| Securities | | |
| Obligations of States and Political Subdivisions | $ | 3.2 | | $ | 3.7 | |
| Government Sponsored Agency and Other Securities | 30.8 | | 35.6 | |
| Loans | 12.2 | | 15.3 | |
| Total Pledged Assets | $ | 46.2 | | $ | 54.6 | |
The following table presents the AFS debt securities pledged as collateral that are included in pledged assets.
TABLE 56: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES INCLUDED IN PLEDGED ASSETS
| | | | | | | | | | | | | | |
| SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE | DERIVATIVE CONTRACTS |
| (In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| Debt Securities | | | | |
| Available for Sale | $ | 551.7 | | $ | 524.1 | | $ | 24.3 | | $ | 17.6 | |
The secured parties to these transactions have the right to repledge or sell the securities as it relates to $551.7 million and $524.1 million of the pledged collateral as of September 30, 2022 and December 31, 2021, respectively.
Northern Trust accepts financial assets as collateral that it may, in some instances, be permitted to repledge or sell. The collateral is generally obtained under certain reverse repurchase agreements and derivative contracts.
The following table presents the fair value of securities accepted as collateral.
TABLE 57: ACCEPTED COLLATERAL
| | | | | | | | |
| (In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
Collateral that may be repledged or sold | | |
Reverse repurchase agreements (1) | $ | 7,704.2 | | $ | 1,457.0 | |
| Derivative contracts | 12.1 | | 2.8 | |
| Collateral that may not be repledged or sold | | |
| Reverse repurchase agreements | 450.0 | | 650.0 | |
| Total Collateral Accepted | $ | 8,166.3 | | $ | 2,109.8 | |
(1) The fair value of securities collateral that was repledged or sold totaled $7.0 billion and $1.4 billion at September 30, 2022 and December 31, 2021, respectively.
Restricted Assets. As a result of the economic environment arising from the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement to zero percent on March 26, 2020. There were no deposits required to meet Federal Reserve Bank reserve requirements for both the nine months ended September 30, 2022 and September 30, 2021.
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 9 – Goodwill and Other Intangibles
Goodwill. Changes by reporting segment in the carrying amount of Goodwill for the nine months ended September 30, 2022, including the effect of foreign exchange rates on non-U.S. dollar denominated balances, were as follows.
TABLE 58: GOODWILL
| | | | | | | | | | | |
| (In Millions) | ASSET
SERVICING | WEALTH MANAGEMENT | TOTAL |
| Balance at December 31, 2021 | $ | 625.7 | | $ | 80.5 | | $ | 706.2 | |
| | | |
| Foreign Exchange Rates | (26.9) | | (0.3) | | (27.2) | |
| Balance at September 30, 2022 | $ | 598.8 | | $ | 80.2 | | $ | 679.0 | |
Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization as of September 30, 2022 and December 31, 2021 were as follows.
TABLE 59: OTHER INTANGIBLE ASSETS
| | | | | | | | |
| (In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| Gross Carrying Amount | $ | 186.1 | | $ | 206.4 | |
| Less: Accumulated Amortization | 112.2 | | 114.8 | |
| Net Book Value | $ | 73.9 | | $ | 91.6 | |
Other intangible assets consist primarily of the value of acquired client relationships and are included within Other Assets on the consolidated balance sheets. Amortization expense related to other intangible assets totaled $2.2 million and $7.1 million for the three and nine months ended September 30, 2022, respectively, and $3.4 million and $11.6 million for the three and nine months ended September 30, 2021, respectively. Amortization for the remainder of 2022 and for the years 2023, 2024, 2025, and 2026 is estimated to be $2.1 million, $8.6 million, $8.5 million, $7.9 million, and $7.5 million, respectively.
Capitalized Software. The gross carrying amount and accumulated amortization of capitalized software as of September 30, 2022 and December 31, 2021 were as follows.
TABLE 60: CAPITALIZED SOFTWARE
| | | | | | | | |
| (In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| Gross Carrying Amount | $ | 3,434.1 | | $ | 2,982.1 | |
| Less: Accumulated Amortization | 1,614.8 | | 1,299.5 | |
| Net Book Value | $ | 1,819.3 | | $ | 1,682.6 | |
Capitalized software, which is included in Other Assets on the consolidated balance sheets, consists primarily of purchased software, software licenses, and allowable internal costs, including compensation relating to software developed for internal use. Fees paid for the use of software licenses that are not hosted by Northern Trust are expensed as incurred. Amortization expense, which is included in Equipment and Software on the consolidated statements of income, totaled $111.1 million and $317.0 million for the three and nine months ended September 30, 2022, respectively and $98.1 million and $288.0 million for the three and nine months ended September 30, 2021, respectively.
Note 10 – Reporting Segments
Northern Trust is organized around its two client-focused reporting segments: Asset Servicing and Wealth Management. Asset management and related services are provided to Asset Servicing 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 Asset Servicing and Wealth Management.
Reporting segment financial information, presented on an internal management reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Additionally, segment information is presented on an FTE basis as management believes an FTE presentation provides a clearer indication of net interest income. The adjustment to an FTE basis has no impact on Net Income.
Notes to Consolidated Financial Statements (unaudited) (continued)
Revenues, expenses and average assets are allocated to Asset Servicing 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.
Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.
The following table presents the earnings contributions and average assets of Northern Trust’s reporting segments for the three and nine months ended September 30, 2022 and 2021.
TABLE 61: RESULTS OF REPORTING SEGMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ In Millions) | ASSET SERVICING | WEALTH MANAGEMENT | OTHER | RECONCILING ITEMS | TOTAL CONSOLIDATED |
| THREE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| Noninterest Income | | | | | | | | | | |
| Trust, Investment and Other Servicing Fees | $ | 603.2 | | $ | 630.2 | | $ | 475.5 | | $ | 480.8 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,078.7 | | $ | 1,111.0 | |
| Foreign Exchange Trading Income | 63.7 | | 63.2 | | 1.0 | | 3.2 | | — | | — | | — | | — | | 64.7 | | 66.4 | |
| Other Noninterest Income | 62.5 | | 65.6 | | 37.0 | | 48.0 | | (1.1) | | (3.6) | | — | | — | | 98.4 | | 110.0 | |
| Total Noninterest Income | 729.4 | | 759.0 | | 513.5 | | 532.0 | | (1.1) | | (3.6) | | — | | — | | 1,241.8 | | 1,287.4 | |
| Net Interest Income | 303.3 | | 158.9 | | 222.0 | | 198.2 | | — | | — | | (12.3) | | (10.7) | | 513.0 | | 346.4 | |
| Revenue | 1,032.7 | | 917.9 | | 735.5 | | 730.2 | | (1.1) | | (3.6) | | (12.3) | | (10.7) | | 1,754.8 | | 1,633.8 | |
| Provision for Credit Losses | (5.1) | | (6.9) | | 5.6 | | (6.1) | | — | | — | | — | | — | | 0.5 | | (13.0) | |
| Noninterest Expense | 760.4 | | 716.6 | | 449.0 | | 410.9 | | 20.4 | | 1.2 | | — | | — | | 1,229.8 | | 1,128.7 | |
| Income before Income Taxes | 277.4 | | 208.2 | | 280.9 | | 325.4 | | (21.5) | | (4.8) | | (12.3) | | (10.7) | | 524.5 | | 518.1 | |
| Provision for Income Taxes | 67.7 | | 50.0 | | 79.6 | | 84.3 | | (5.3) | | (1.2) | | (12.3) | | (10.7) | | 129.7 | | 122.4 | |
| Net Income | $ | 209.7 | | $ | 158.2 | | $ | 201.3 | | $ | 241.1 | | $ | (16.2) | | $ | (3.6) | | $ | — | | $ | — | | $ | 394.8 | | $ | 395.7 | |
| Percentage of Consolidated Net Income | 53 | % | 40 | % | 51 | % | 61 | % | (4) | % | (1) | % | N/A | N/A | 100 | % | 100 | % |
| Average Assets | $ | 109,677.2 | | $ | 119,951.9 | | $ | 36,725.0 | | $ | 36,500.9 | | $ | — | | $ | — | | N/A | N/A | $ | 146,402.2 | | $ | 156,452.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| ($ In Millions) | ASSET SERVICING | WEALTH MANAGEMENT | OTHER | RECONCILING ITEMS | TOTAL CONSOLIDATED |
NINE MONTHS ENDED
SEPTEMBER 30, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| Noninterest Income | | | | | | | | | | |
| Trust, Investment and Other Servicing Fees | $ | 1,908.4 | | $ | 1,862.2 | | $ | 1,482.1 | | $ | 1,387.9 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 3,390.5 | | $ | 3,250.1 | |
| Foreign Exchange Trading Income | 215.9 | | 205.6 | | 7.3 | | 10.1 | | — | | — | | — | | — | | 223.2 | | 215.7 | |
| Other Noninterest Income | 185.4 | | 194.8 | | 101.6 | | 130.5 | | (11.2) | | (15.7) | | — | | — | | 275.8 | | 309.6 | |
| Total Noninterest Income | 2,309.7 | | 2,262.6 | | 1,591.0 | | 1,528.5 | | (11.2) | | (15.7) | | — | | — | | 3,889.5 | | 3,775.4 | |
| Net Interest Income | 748.5 | | 472.7 | | 634.3 | | 575.0 | | — | | — | | (30.1) | | (25.6) | | 1,352.7 | | 1,022.1 | |
| Revenue | 3,058.2 | | 2,735.3 | | 2,225.3 | | 2,103.5 | | (11.2) | | (15.7) | | (30.1) | | (25.6) | | 5,242.2 | | 4,797.5 | |
| Provision for Credit Losses | 3.8 | | (29.1) | | 3.2 | | (40.9) | | — | | — | | — | | — | | 7.0 | | (70.0) | |
| Noninterest Expense | 2,269.4 | | 2,133.3 | | 1,333.2 | | 1,212.5 | | 56.7 | | 21.2 | | — | | — | | 3,659.3 | | 3,367.0 | |
| Income before Income Taxes | 785.0 | | 631.1 | | 888.9 | | 931.9 | | (67.9) | | (36.9) | | (30.1) | | (25.6) | | 1,575.9 | | 1,500.5 | |
| Provision for Income Taxes | 194.0 | | 153.1 | | 248.6 | | 243.3 | | (16.9) | | (9.2) | | (30.1) | | (25.6) | | 395.6 | | 361.6 | |
| Net Income | $ | 591.0 | | $ | 478.0 | | $ | 640.3 | | $ | 688.6 | | $ | (51.0) | | $ | (27.7) | | $ | — | | $ | — | | $ | 1,180.3 | | $ | 1,138.9 | |
| Percentage of Consolidated Net Income | 50 | % | 42 | % | 54 | % | 60 | % | (4) | % | (2) | % | N/A | N/A | 100 | % | 100 | % |
| Average Assets | $ | 117,251.0 | | $ | 119,859.4 | | $ | 36,901.1 | | $ | 34,821.9 | | $ | — | | $ | — | | N/A | N/A | $ | 154,152.1 | | $ | 154,681.3 | |
Note: Segment results are stated on an FTE basis. The FTE adjustments are eliminated in the reconciling items column with the Corporation’s total consolidated financial results stated on a GAAP basis. The adjustment to an FTE basis has no impact on net income.
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 11 – Stockholders’ Equity
Preferred Stock. The Corporation is authorized to issue 10 million shares of preferred stock without par value. The Board of Directors is authorized to fix the particular designations, preferences and relative, participating, optional and other special rights and qualifications, limitations or restrictions for each series of preferred stock issued.
As of September 30, 2022, 5,000 shares of Series D Non-Cumulative Perpetual Preferred Stock (Series D Preferred Stock) and 16,000 shares of Series E Non-Cumulative Perpetual Preferred Stock (Series E Preferred Stock) were outstanding.
Series D Preferred Stock. As of September 30, 2022, the Corporation had issued and outstanding 500,000 depositary shares, each representing a 1/100th ownership interest in a share of Series D Preferred Stock, issued in August 2016. Equity related to Series D Preferred Stock as of September 30, 2022 and December 31, 2021 was $493.5 million. Shares of the Series D Preferred Stock have no par value and a liquidation preference of $100,000 (equivalent to $1,000 per depositary share).
Dividends on the Series D Preferred Stock, which are not mandatory, accrue and are payable on the liquidation preference amount, on a non-cumulative basis, at a rate per annum equal to (i) 4.60% from the original issue date of the Series D Preferred Stock to but excluding October 1, 2026; and (ii) a floating rate equal to three-month LIBOR plus 3.202% from and including October 1, 2026. Fixed rate dividends are payable in arrears on the first day of April and October of each year, through and including October 1, 2026, and floating rate dividends will be payable in arrears on the first day of January, April, July and October of each year, commencing on January 1, 2027. On July 19, 2022, the Corporation declared a cash dividend of $2,300 per share of Series D Preferred Stock payable on October 1, 2022, to stockholders of record as of September 15, 2022.
Series E Preferred Stock. As of September 30, 2022, the Corporation had issued and outstanding 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Preferred Stock, issued in November 2019. Equity related to Series E Preferred Stock as of September 30, 2022 and December 31, 2021 was $391.4 million. Shares of the Series E Preferred Stock have no par value and a liquidation preference of $25,000 (equivalent to $25 per depositary share).
Dividends on the Series E Preferred Stock, which are not mandatory, will accrue and be payable on the liquidation preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January, April, July and October of each year, at a rate per annum equal to 4.70%. On July 19, 2022, the Corporation declared a cash dividend of $293.75 per share of Series E Preferred Stock payable on October 1, 2022, to stockholders of record as of September 15, 2022.
Common Stock. In October 2021, the Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. Shares are repurchased by the Corporation to, among other things, manage the Corporation’s capital levels. Repurchased shares are used for general purposes, including the issuance of shares under stock option and other incentive plans. The repurchase authorization approved by the Board of Directors has no expiration date. For the three and nine months ended September 30, 2022, the Corporation repurchased 11,080 and 309,334 shares of common stock, respectively, at a total cost of $1.2 million ($96.43 average price per share) and $35.2 million ($113.89 average price per share), respectively, all of which were related to share-based compensation to satisfy tax withholding obligations. For the three and nine months ended September 30, 2021, the Corporation repurchased 859,587 and 2,511,564 shares of common stock, respectively, at a total cost of $100.0 million ($116.34 average price per share) and $265.8 million ($105.84 average price per share), respectively. Shares withheld related to share-based compensation were 11,169 and 378,346, for the three and nine months ended September 30, 2021.
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 12 – Accumulated Other Comprehensive Income (Loss)
The following tables summarize the components of Accumulated Other Comprehensive Income (Loss) (AOCI) at September 30, 2022 and 2021, and changes during the three and nine months then ended.
TABLE 62: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2022 |
| (In Millions) | NET UNREALIZED GAINS (LOSSES) ON AVAILABLE FOR SALE DEBT SECURITIES(1) | NET UNREALIZED (LOSSES) GAINS ON CASH FLOW HEDGES | NET FOREIGN CURRENCY ADJUSTMENT | NET PENSION AND OTHER POSTRETIREMENT BENEFIT ADJUSTMENTS | TOTAL |
| Balance at June 30, 2022 | $ | (1,294.7) | | $ | 0.6 | | $ | 137.6 | | $ | (354.1) | | $ | (1,510.6) | |
| Net Change | (272.2) | | 2.1 | | 20.2 | | (24.5) | | (274.4) | |
| Balance at September 30, 2022 | $ | (1,566.9) | | $ | 2.7 | | $ | 157.8 | | $ | (378.6) | | $ | (1,785.0) | |
(1) The balance at September 30, 2022 includes after-tax net unamortized losses related to AFS securities that have been transferred to HTM debt securities. Refer to Note 4 - Securities for further information.
| | | | | | | | | | | | | | | | | |
| | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2022 |
| (In Millions) | NET UNREALIZED GAINS (LOSSES) ON AVAILABLE FOR SALE DEBT SECURITIES(1) | NET UNREALIZED (LOSSES) GAINS ON CASH FLOW HEDGES | NET FOREIGN CURRENCY ADJUSTMENT | NET PENSION AND OTHER POSTRETIREMENT BENEFIT ADJUSTMENTS | TOTAL |
| Balance at December 31, 2021 | $ | 107.1 | | $ | (2.4) | | $ | 155.2 | | $ | (295.5) | | $ | (35.6) | |
| Net Change | (1,674.0) | | 5.1 | | 2.6 | | (83.1) | | (1,749.4) | |
| Balance at September 30, 2022 | $ | (1,566.9) | | $ | 2.7 | | $ | 157.8 | | $ | (378.6) | | $ | (1,785.0) | |
(1) The balance at September 30, 2022 includes after-tax net unamortized losses related to AFS securities that have been transferred to HTM debt securities. Refer to Note 4 - Securities for further information.
| | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, 2021 |
| (In Millions) | NET UNREALIZED GAINS (LOSSES) ON AVAILABLE FOR SALE DEBT SECURITIES(1) | NET UNREALIZED (LOSSES) GAINS ON CASH FLOW HEDGES | NET FOREIGN CURRENCY ADJUSTMENT | NET PENSION AND OTHER POSTRETIREMENT BENEFIT ADJUSTMENTS | TOTAL |
| Balance at June 30, 2021 | $ | 373.0 | | $ | (5.4) | | $ | 151.8 | | $ | (324.7) | | $ | 194.7 | |
| Net Change | (89.6) | | 4.6 | | 3.8 | | 0.5 | | (80.7) | |
| Balance at September 30, 2021 | $ | 283.4 | | $ | (0.8) | | $ | 155.6 | | $ | (324.2) | | $ | 114.0 | |
(1) The balance at September 30, 2021 includes after-tax net unamortized gains related to AFS securities that have been transferred to HTM debt securities. Refer to Note 4 - Securities for further information.
| | | | | | | | | | | | | | | | | |
| | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, 2021 |
| (In Millions) | NET UNREALIZED GAINS (LOSSES) ON AVAILABLE FOR SALE DEBT SECURITIES(1) | NET UNREALIZED (LOSSES) GAINS ON CASH FLOW HEDGES | NET FOREIGN CURRENCY ADJUSTMENT | NET PENSION AND OTHER POSTRETIREMENT BENEFIT ADJUSTMENTS | TOTAL |
| Balance at December 31, 2020 | $ | 641.8 | | $ | (3.2) | | $ | 144.7 | | $ | (355.3) | | $ | 428.0 | |
| Net Change | (358.4) | | 2.4 | | 10.9 | | 31.1 | | (314.0) | |
| Balance at September 30, 2021 | $ | 283.4 | | $ | (0.8) | | $ | 155.6 | | $ | (324.2) | | $ | 114.0 | |
(1) The balance at September 30, 2021 includes after-tax net unamortized gains related to AFS securities that have been transferred to HTM debt securities. Refer to Note 4 - Securities for further information.
Notes to Consolidated Financial Statements (unaudited) (continued)
TABLE 63: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 |
| (In Millions) | PRE-TAX | TAX | AFTER TAX | PRE-TAX | TAX | AFTER TAX |
| Unrealized Gains (Losses) on Available for Sale Debt Securities | | | | | | |
| Unrealized Gains (Losses) on Available for Sale Debt Securities | $ | (385.6) | | $ | 97.5 | | $ | (288.1) | | $ | (107.0) | | $ | 26.9 | | $ | (80.1) | |
| Reclassification Adjustments for (Gains) Losses Included in Net Income: | | | | | | |
Interest Income on Debt Securities(1) | 21.0 | | (5.3) | | 15.7 | | (12.7) | | 3.2 | | (9.5) | |
Net Losses on Debt Securities(2) | 0.3 | | (0.1) | | 0.2 | | — | | — | | — | |
| Net Change | $ | (364.3) | | $ | 92.1 | | $ | (272.2) | | $ | (119.7) | | $ | 30.1 | | $ | (89.6) | |
| Unrealized Gains (Losses) on Cash Flow Hedges | | | | | | |
| Foreign Exchange Contracts | $ | 2.2 | | $ | (0.6) | | $ | 1.6 | | $ | 5.5 | | $ | (1.4) | | $ | 4.1 | |
Reclassification Adjustment for (Gains) Losses Included in Net Income(3) | 0.6 | | (0.1) | | 0.5 | | 0.7 | | (0.2) | | 0.5 | |
| Net Change | $ | 2.8 | | $ | (0.7) | | $ | 2.1 | | $ | 6.2 | | $ | (1.6) | | $ | 4.6 | |
| Foreign Currency Adjustments | | | | | | |
| Foreign Currency Translation Adjustments | $ | (168.1) | | $ | 3.9 | | $ | (164.2) | | $ | (64.5) | | $ | 3.5 | | $ | (61.0) | |
| Long-Term Intra-Entity Foreign Currency Transaction Gains (Losses) | (2.0) | | 0.5 | | (1.5) | | (0.1) | | — | | (0.1) | |
| Net Investment Hedge Gains (Losses) | 248.4 | | (62.5) | | 185.9 | | 86.7 | | (21.8) | | 64.9 | |
| Net Change | $ | 78.3 | | $ | (58.1) | | $ | 20.2 | | $ | 22.1 | | $ | (18.3) | | $ | 3.8 | |
| Pension and Other Postretirement Benefit Adjustments | | | | | | |
| Net Actuarial Gains (Losses) | $ | (51.6) | | $ | 13.0 | | $ | (38.6) | | $ | (15.5) | | $ | 3.9 | | $ | (11.6) | |
Reclassification Adjustment for (Gains) Losses Included in Net Income(4) | | | | | | |
| Amortization of Net Actuarial Loss | 1.9 | | (0.4) | | 1.5 | | 9.5 | | (2.5) | | 7.0 | |
| Amortization of Prior Service Cost (Credit) | (0.2) | | 0.1 | | (0.1) | | (0.2) | | 0.1 | | (0.1) | |
| Settlement Loss | 17.0 | | (4.3) | | 12.7 | | 6.7 | | (1.5) | | 5.2 | |
| Net Change | $ | (32.9) | | $ | 8.4 | | $ | (24.5) | | $ | 0.5 | | $ | — | | $ | 0.5 | |
| Total Net Change | $ | (316.1) | | $ | 41.7 | | $ | (274.4) | | $ | (90.9) | | $ | 10.2 | | $ | (80.7) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 |
| (In Millions) | PRE-TAX | TAX | AFTER TAX | PRE-TAX | TAX | AFTER TAX |
| Unrealized Gains (Losses) on Available for Sale Debt Securities | | | | | | |
| Unrealized Gains (Losses) on Available for Sale Debt Securities | $ | (2,288.3) | | $ | 587.4 | | $ | (1,700.9) | | $ | (453.6) | | $ | 116.4 | | $ | (337.2) | |
| Reclassification Adjustments for (Gains) Losses Included in Net Income: | | | | | | |
Interest Income on Debt Securities(1) | 35.7 | | (9.0) | | 26.7 | | (28.3) | | 7.1 | | (21.2) | |
Net Gains on Debt Securities(2) | 0.3 | | (0.1) | | 0.2 | | — | | — | | — | |
| Net Change | $ | (2,252.3) | | $ | 578.3 | | $ | (1,674.0) | | $ | (481.9) | | $ | 123.5 | | $ | (358.4) | |
| Unrealized Gains (Losses) on Cash Flow Hedges | | | | | | |
| Foreign Exchange Contracts | $ | 3.0 | | $ | (0.8) | | $ | 2.2 | | $ | 7.2 | | $ | (1.8) | | $ | 5.4 | |
| | | | | | |
Reclassification Adjustment for (Gains) Losses Included in Net Income(3) | 3.8 | | (0.9) | | 2.9 | | (4.0) | | 1.0 | | (3.0) | |
| Net Change | $ | 6.8 | | $ | (1.7) | | $ | 5.1 | | $ | 3.2 | | $ | (0.8) | | $ | 2.4 | |
| Foreign Currency Adjustments | | | | | | |
| Foreign Currency Translation Adjustments | $ | (382.1) | | $ | 4.5 | | $ | (377.6) | | $ | (111.7) | | $ | 4.8 | | $ | (106.9) | |
| Long-Term Intra-Entity Foreign Currency Transaction Gains (Losses) | (3.8) | | 1.0 | | (2.8) | | 0.1 | | (0.1) | | — | |
| Net Investment Hedge Gains (Losses) | 512.1 | | (129.1) | | 383.0 | | 157.3 | | (39.5) | | 117.8 | |
| Net Change | $ | 126.2 | | $ | (123.6) | | $ | 2.6 | | $ | 45.7 | | $ | (34.8) | | $ | 10.9 | |
| Pension and Other Postretirement Benefit Adjustments | | | | | | |
| Net Actuarial Gains (Losses) | $ | (165.2) | | $ | 41.2 | | $ | (124.0) | | $ | (17.2) | | $ | 5.1 | | $ | (12.1) | |
Reclassification Adjustment for (Gains) Losses Included in Net Income(4) | | | | | | |
| Amortization of Net Actuarial Loss | 17.1 | | (4.2) | | 12.9 | | 32.8 | | (8.1) | | 24.7 | |
| Amortization of Prior Service Cost (Credit) | (0.7) | | 0.2 | | (0.5) | | (0.8) | | 0.2 | | (0.6) | |
| Settlement Loss | $ | 38.0 | | $ | (9.5) | | $ | 28.5 | | 25.2 | | (6.1) | | 19.1 | |
| Net Change | $ | (110.8) | | $ | 27.7 | | $ | (83.1) | | $ | 40.0 | | $ | (8.9) | | $ | 31.1 | |
| Total Net Change | $ | (2,230.1) | | $ | 480.7 | | $ | (1,749.4) | | $ | (393.0) | | $ | 79.0 | | $ | (314.0) | |
(1) The before-tax reclassification adjustment is related to the unrealized gains (losses) amortization on AFS debt securities that were transferred to HTM debt securities during the second quarter of 2021 and third quarter of 2022. Refer to Note 4 - Securities for further information.
(2) The realized gains (losses) on AFS debt securities before-tax reclassification adjustment is recorded in Investment Security Gains (Losses), net on the consolidated statements of income.
(3) See Note 22 - Derivative Financial Instruments for the location of the reclassification adjustment related to cash flow hedges.
(4) The pension and other postretirement benefit adjustments before-tax reclassification adjustment is recorded in Employee Benefits expense on the consolidated statements of income.
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 13 – Net Income Per Common Share
The computations of net income per common share are presented in the following table.
TABLE 64: NET INCOME PER COMMON SHARE
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| ($ In Millions Except Per Common Share Information) | 2022 | 2021 | 2022 | 2021 |
| Basic Net Income Per Common Share | | | | |
| Average Number of Common Shares Outstanding | 208,400,135 | | 208,116,009 | | 208,271,070 | | 208,199,352 | |
| Net Income | $ | 394.8 | | $ | 395.7 | | $ | 1,180.3 | | $ | 1,138.9 | |
| Less: Dividends on Preferred Stock | 16.2 | | 16.2 | | 37.1 | | 37.1 | |
| Net Income Applicable to Common Stock | 378.6 | | 379.5 | | 1,143.2 | | 1,101.8 | |
| Less: Earnings Allocated to Participating Securities | 3.2 | | 3.0 | | 9.5 | | 9.9 | |
| Earnings Allocated to Common Shares Outstanding | 375.4 | | 376.5 | | 1,133.7 | | 1,091.9 | |
| Basic Net Income Per Common Share | $ | 1.80 | | $ | 1.81 | | $ | 5.44 | | $ | 5.24 | |
| Diluted Net Income Per Common Share | | | | |
| Average Number of Common Shares Outstanding | 208,400,135 | | 208,116,009 | | 208,271,070 | | 208,199,352 | |
| Plus: Dilutive Effect of Share-based Compensation | 488,437 | | 807,297 | | 587,906 | | 803,178 | |
| Average Common and Potential Common Shares | 208,888,572 | | 208,923,306 | | 208,858,976 | | 209,002,530 | |
| Earnings Allocated to Common and Potential Common Shares | $ | 375.4 | | $ | 376.5 | | $ | 1,133.7 | | $ | 1,091.9 | |
| Diluted Net Income Per Common Share | 1.80 | | 1.80 | | 5.43 | | 5.22 | |
Note: For the three and nine months ended September 30, 2022 and 2021, there were no common stock equivalents excluded in the computation of diluted net income per share.
Note 14 – Revenue from Contracts with Clients
Trust, Investment, and Other Servicing Fees. Custody and Fund Administration income is comprised of revenues received from our core asset servicing business for providing custody, fund administration, and middle-office-related services, primarily to Asset Servicing clients. Investment Management and Advisory income contains revenue received from providing asset management and related services to Wealth Management and Asset Servicing clients and to Northern Trust sponsored funds. Securities Lending income represents revenues generated from securities lending arrangements that Northern Trust enters into as agent, mainly with Asset Servicing clients. Other income largely consists of revenues received from providing employee benefit, investment risk and analytic and other services to Asset Servicing and Wealth Management clients.
Other Noninterest Income. Treasury management income represents revenues received from providing cash and liquidity management services to Asset Servicing and Wealth Management clients. The portion of Security Commissions and Trading Income that relates to revenue from contracts with clients is primarily comprised of commissions earned from providing securities brokerage services to Wealth Management and Asset Servicing clients. The portion of Other Operating Income that relates to revenue from contracts with clients is mainly comprised of service fees for banking-related services provided to Wealth Management and Asset Servicing clients.
Performance Obligations. Clients are typically charged monthly or quarterly in arrears based on the fee arrangement agreed to with each client; payment terms will vary depending on the client and services offered.
Substantially all revenues generated from contracts with clients for asset servicing, asset management, securities lending, treasury management and banking-related services are recognized on an accrual basis, over the period in which services are provided. The nature of Northern Trust’s performance obligations is to provide a series of distinct services in which the customer simultaneously receives and consumes the benefits of the promised services as they are performed. Fee arrangements are mainly comprised of variable amounts based on market value of client assets managed and serviced, transaction volumes, number of accounts, and securities lending volume and spreads. Revenue is recognized using the output method in an amount that reflects the consideration to which Northern Trust expects to be entitled in exchange for providing each month or quarter of service. For contracts with multiple performance obligations, revenue is allocated to each performance obligation based on the price agreed to with the client, representing its relative standalone selling price.
Security brokerage revenue is primarily represented by securities commissions received in exchange for providing trade execution related services. Control is transferred at a point in time, on the trade date of the transaction, and fees are typically variable based on transaction volumes and security types.
Northern Trust’s contracts with its clients are typically open-ended arrangements and are therefore considered to have an original duration of less than one year. Northern Trust has elected the practical expedient to not disclose the value of remaining performance obligations for contracts with an original expected duration of one year or less.
Notes to Consolidated Financial Statements (unaudited) (continued)
The following table presents revenues disaggregated by major revenue source.
TABLE 65: REVENUE DISAGGREGATION
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Noninterest Income | | | | |
| Trust, Investment and Other Servicing Fees | | | | |
| Custody and Fund Administration | $ | 435.0 | | $ | 485.9 | | $ | 1,383.4 | | $ | 1,434.8 | |
| Investment Management and Advisory | 565.3 | | 549.2 | | 1,765.8 | | 1,586.8 | |
| Securities Lending | 21.7 | | 20.2 | | 62.2 | | 58.0 | |
| Other | 56.7 | | 55.7 | | 179.1 | | 170.5 | |
| Total Trust, Investment and Other Servicing Fees | $ | 1,078.7 | | $ | 1,111.0 | | $ | 3,390.5 | | $ | 3,250.1 | |
| Other Noninterest Income | | | | |
| Foreign Exchange Trading Income | $ | 64.7 | | $ | 66.4 | | $ | 223.2 | | $ | 215.7 | |
| Treasury Management Fees | 9.3 | | 11.2 | | 31.0 | | 33.7 | |
| Security Commissions and Trading Income | 32.1 | | 36.5 | | 101.1 | | 104.3 | |
| Other Operating Income | 57.3 | | 62.3 | | 144.0 | | 171.6 | |
| Investment Security Gains (Losses), net | (0.3) | | — | | (0.3) | | — | |
| Total Other Noninterest Income | $ | 163.1 | | $ | 176.4 | | $ | 499.0 | | $ | 525.3 | |
| Total Noninterest Income | $ | 1,241.8 | | $ | 1,287.4 | | $ | 3,889.5 | | $ | 3,775.4 | |
On the consolidated statements of income, Trust, Investment and Other Servicing Fees and Treasury Management Fees represent revenue from contracts with clients. For the three months ended September 30, 2022, revenue from contracts with clients also includes $27.5 million of the $32.1 million total Security Commissions and Trading Income and $8.9 million of the $57.3 million total Other Operating Income. For the nine months ended September 30, 2022, revenue from contracts with clients also includes $86.4 million of the $101.1 million total Security Commissions and Trading Income and $28.3 million of the $144.0 million total Other Operating Income.
For the three months ended September 30, 2021, revenue from contracts with clients also includes $26.1 million of the $36.5 million total Security Commissions and Trading Income and $14.0 million of the $62.3 million total Other Operating Income. For the nine months ended September 30, 2021, revenue from contracts with clients also includes $82.0 million of the $104.3 million total Security Commissions and Trading Income and $39.5 million of the $171.6 million total Other Operating Income.
Receivables Balances. The table below represents receivables balances from contracts with clients, which are included in Other Assets on the consolidated balance sheets, at September 30, 2022 and December 31, 2021.
TABLE 66: CLIENT RECEIVABLES
| | | | | | | | |
| (In Millions) | SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
Trust Fees Receivable, net(1) | $ | 954.1 | | $ | 925.2 | |
| Other | 142.5 | | 126.9 | |
| Total Client Receivables | $ | 1,096.6 | | $ | 1,052.1 | |
(1) Trust Fees Receivable is net of a $14.9 million and $10.9 million fee receivable allowance as of September 30, 2022 and December 31, 2021, respectively.
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 15 – Net Interest Income
The components of Net Interest Income were as follows:
TABLE 67: NET INTEREST INCOME
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Interest Income | | | | |
| Federal Reserve and Other Central Bank Deposits and Other | $ | 135.5 | | $ | 4.2 | | $ | 212.3 | | $ | 5.6 | |
Interest-Bearing Due from and Deposits with Banks(2) | 14.5 | | 1.9 | | 23.6 | | 7.0 | |
| Securities Purchased under Agreements to Resell | 30.5 | | 0.8 | | 38.4 | | 2.7 | |
| Securities — Taxable | 238.6 | | 162.9 | | 604.8 | | 502.5 | |
— Nontaxable(1) | 0.4 | | 0.3 | | 1.1 | | 1.1 | |
| Loans and Leases | 379.8 | | 181.2 | | 827.4 | | 525.4 | |
| Total Interest Income | $ | 799.3 | | $ | 351.3 | | $ | 1,707.6 | | $ | 1,044.3 | |
| Interest Expense | | | | |
| Deposits | $ | 177.3 | | $ | (16.3) | | $ | 184.6 | | $ | (44.5) | |
| Federal Funds Purchased | 9.9 | | — | | 12.7 | | (0.4) | |
| Securities Sold Under Agreements to Repurchase | 25.5 | | 0.1 | | 31.8 | | 0.1 | |
| Other Borrowings | 35.7 | | 3.6 | | 47.2 | | 10.3 | |
| Senior Notes | 28.6 | | 11.7 | | 57.1 | | 39.2 | |
| Long-Term Debt | 9.3 | | 5.3 | | 21.5 | | 15.9 | |
| Floating Rate Capital Debt | — | | 0.5 | | — | | 1.6 | |
| Total Interest Expense | $ | 286.3 | | $ | 4.9 | | $ | 354.9 | | $ | 22.2 | |
| Net Interest Income | $ | 513.0 | | $ | 346.4 | | $ | 1,352.7 | | $ | 1,022.1 | |
(1) Nontaxable Securities represent securities that are exempt from U.S. federal income taxes.
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
Note 16 – Other Operating Income
The components of Other Operating Income were as follows:
TABLE 68: OTHER OPERATING INCOME
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Loan Service Fees | $ | 17.8 | | $ | 16.1 | | $ | 52.6 | | $ | 49.3 | |
| Banking Service Fees | 12.2 | | 12.6 | | 37.8 | | 37.8 | |
| Other Income | 27.3 | | 33.6 | | 53.6 | | 84.5 | |
| Total Other Operating Income | $ | 57.3 | | $ | 62.3 | | $ | 144.0 | | $ | 171.6 | |
Note 17 – Other Operating Expense
The components of Other Operating Expense were as follows:
TABLE 69: OTHER OPERATING EXPENSE
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| ($ In Millions) | 2022 | 2021 | 2022 | 2021 |
| Business Promotion | $ | 20.1 | | $ | 27.2 | | $ | 49.0 | | $ | 44.0 | |
| Staff Related | 7.8 | | 10.3 | | 16.9 | | 26.9 | |
| FDIC Insurance Premiums | 3.7 | | 3.5 | | 14.1 | | 11.2 | |
| Other Intangibles Amortization | 2.2 | | 3.4 | | 7.1 | | 11.6 | |
| Other Expenses | 48.2 | | 36.8 | | 164.5 | | 126.7 | |
| Total Other Operating Expense | $ | 82.0 | | $ | 81.2 | | $ | 251.6 | | $ | 220.4 | |
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 18 – Pension and Postretirement Health Care
The following table sets forth the net periodic pension and postretirement benefit expense for Northern Trust’s U.S. Qualified Plan, Non-U.S. Pension Plans, U.S. Non-Qualified Plan, and postretirement health care plan for the three and nine months ended September 30, 2022 and 2021.
TABLE 70: NET PERIODIC PENSION EXPENSE (BENEFIT)
| | | | | | | | | | | | | | |
| U.S. QUALIFIED PLAN | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Service Cost | $ | 11.1 | | $ | 13.1 | | $ | 37.5 | | $ | 39.5 | |
| Interest Cost | 12.5 | | 10.4 | | 33.1 | | 30.0 | |
| Expected Return on Plan Assets | (21.9) | | (20.0) | | (62.3) | | (60.2) | |
| Amortization | | | | |
| Net Actuarial Loss | — | | 7.1 | | 11.4 | | 25.9 | |
| Prior Service Cost (Credit) | — | | (0.1) | | (0.1) | | (0.3) | |
| Net Periodic Pension Expense | $ | 1.7 | | $ | 10.5 | | $ | 19.6 | | $ | 34.9 | |
| Settlement Expense | 17.0 | | 6.9 | | 37.3 | | 24.5 | |
| Total Pension Expense | $ | 18.7 | | $ | 17.4 | | $ | 56.9 | | $ | 59.4 | |
| | | | | | | | | | | | | | |
| NON-U.S. PENSION PLANS | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Service Cost | $ | 0.4 | | $ | 0.5 | | $ | 1.3 | | $ | 1.6 | |
| Interest Cost | 0.6 | | 0.5 | | 1.9 | | 1.6 | |
| Expected Return on Plan Assets | (0.7) | | (0.6) | | (2.2) | | (1.9) | |
| Amortization | | | | |
| Net Actuarial Loss | 0.2 | | 0.3 | | 0.6 | | 0.8 | |
| Prior Service Cost | — | | — | | — | | 0.1 | |
| Net Periodic Pension Expense | $ | 0.5 | | $ | 0.7 | | $ | 1.6 | | $ | 2.2 | |
| Settlement Expense | — | | (0.2) | | 0.7 | | 0.7 | |
| Total Pension Expense | $ | 0.5 | | $ | 0.5 | | $ | 2.3 | | $ | 2.9 | |
| | | | | | | | | | | | | | |
| U.S. NON-QUALIFIED PLAN | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Service Cost | $ | 1.4 | | $ | 1.3 | | $ | 4.2 | | $ | 3.9 | |
| Interest Cost | 1.0 | | 0.9 | | 3.0 | | 2.8 | |
| Amortization | | | | |
| Net Actuarial Loss | 1.8 | | 2.1 | | 5.4 | | 6.2 | |
| Prior Service Cost | — | | 0.1 | | — | | 0.1 | |
| Net Periodic Pension Expense | $ | 4.2 | | $ | 4.4 | | $ | 12.6 | | $ | 13.0 | |
| | | | | | | | | | | | | | |
| POSTRETIREMENT HEALTH CARE PLAN | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Service Cost | $ | — | | $ | — | | $ | — | | $ | — | |
| Interest Cost | 0.1 | | — | | 0.3 | | 0.2 | |
| Amortization | | | | |
| Net Actuarial (Gain) | (0.1) | | — | | (0.3) | | (0.1) | |
| Prior Service Cost (Credit) | (0.2) | | (0.2) | | (0.6) | | (0.7) | |
| Net Periodic Postretirement (Benefit) | $ | (0.2) | | $ | (0.2) | | $ | (0.6) | | $ | (0.6) | |
Northern Trust’s U.S. Qualified Plan provides participants the option to select lump-sum benefit payments upon retirement and termination of service. During the three and nine months ended September 30, 2022, Northern Trust recognized settlement charges related to its U.S. Qualified Plan of $17.0 million and $37.3 million, respectively, as in the second quarter of 2022 it became probable that total lump-sum payments in 2022 would exceed the settlement threshold of the sum of annual service and interest cost. A settlement charge is also expected to be recorded during the fourth quarter of 2022. During the three and nine months ended September 30, 2021, Northern Trust recognized settlement charges of $6.9 million and $24.5 million, respectively. The settlement charge represents the pro rata amount of the net loss in AOCI that is charged to income based on the proportion of the Projected Benefit Obligation settled to the total Projected Benefit Obligation and is resulting from the normal operation of the plan and not as a result of any special event.
Notes to Consolidated Financial Statements (unaudited) (continued)
The application of settlement accounting required an interim remeasurement of the U.S. Qualified Plan as of quarter-end. Northern Trust utilized a discount rate of 5.49% based on the established discount rate methodology, and an expected rate of return of 6.50%. The remeasurement and the recognition of settlement charges decreased the Projected Benefit Obligation of the U.S Qualified Plan by $390.3 million from $1,401.3 million as of December 31, 2021 to $1,011.0 million as of September 30, 2022, and decreased the net funded status (over-funded) of the U.S. Qualified Plan by $172.4 million from $307.6 million as of December 31, 2021 to $135.2 million as of September 30, 2022.
The components of net periodic pension expense are recorded in Employee Benefits expense on the consolidated statements of income.
There were no contributions to the U.S. Qualified Plan during the nine months ended September 30, 2022 and 2021, and $20.7 million and $6.7 million of contributions to the U.S. Non-Qualified Plan during the nine months ended September 30, 2022 and 2021, respectively.
Note 19 – Share-Based Compensation Plans
The Northern Trust Corporation 2017 Long-Term Incentive Plan provides for the grant of non-qualified and incentive stock options; tandem and free-standing stock appreciation rights; stock awards in the form of restricted stock, restricted stock units and other stock awards; and performance awards.
Beginning with the grants made on February 21, 2017 under the Corporation’s prior equity incentive plan, restricted stock unit and performance stock unit grants continue to vest in accordance with the original terms of the award if the applicable employee retires after satisfying applicable age and service requirements.
Total compensation expense for share-based payment arrangements and the associated tax impacts were as follows for the three and nine months ended September 30, 2022 and 2021.
TABLE 71: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| (In Millions) | 2022 | 2021 | 2022 | 2021 |
| Restricted Stock Unit Awards | $ | 13.9 | | $ | 13.9 | | $ | 83.4 | | $ | 67.5 | |
| Performance Stock Units | 0.9 | | 2.8 | | 21.4 | | 18.6 | |
| Total Share-Based Compensation Expense | 14.8 | | 16.7 | | 104.8 | | 86.1 | |
| Tax Benefits Recognized | $ | 3.7 | | $ | 4.2 | | $ | 26.3 | | $ | 21.6 | |
Note 20 – Variable Interest Entities
Variable Interest Entities (VIEs) are defined within GAAP as entities which either (1) lack sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support, (2) have equity investors that lack attributes typical of an equity investor, such as the ability to make significant decisions through voting rights affecting the entity’s operations, or the obligation to absorb expected losses or the right to receive residual returns of the entity, or (3) are structured with voting rights that are disproportionate to the equity investor’s obligation to absorb losses or right to receive returns, and substantially all of the activities are conducted on behalf of the holder of the equity investment at risk with disproportionately few voting rights. Investors that finance a VIE through debt or equity interests are variable interest holders in the entity and the variable interest holder, if any, that has both the power to direct the activities that most significantly impact the entity’s economic performance and, through its variable interest, the obligation to absorb losses or the right to receive returns that could potentially be significant to the entity is deemed to be the VIE’s primary beneficiary and is required to consolidate the VIE.
Tax Credit Structures. Northern Trust invests in qualified affordable housing projects and community development entities (collectively, community development projects) that are designed to generate a return primarily through the realization of tax credits. The community development projects are formed as limited partnerships and limited liability companies in which Northern Trust invests as a limited partner/investor member through equity contributions. The economic performance of the community development projects, some of which are VIEs, is subject to the performance of their underlying investment and their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. Northern Trust has determined that it is not the primary beneficiary of any community development project VIEs as it lacks the power to direct the activities that most significantly impact the economic performance of the underlying investments or to affect their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the general partners and managing members who exercise full and exclusive control of the operations of the community development project VIEs.
Northern Trust’s maximum exposure to loss as a result of its involvement with community development projects is limited to the carrying amounts of its investments, including any undrawn commitments. As of September 30, 2022 and December 31,
Notes to Consolidated Financial Statements (unaudited) (continued)
2021, the carrying amounts of these investments in community development projects that generate tax credits, included in Other Assets on the consolidated balance sheets, totaled $892.6 million and $916.8 million, respectively, of which $854.9 million and $880.0 million are VIEs as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 and December 31, 2021, liabilities related to unfunded commitments on investments in tax credit community development projects, included in Other Liabilities on the consolidated balance sheets, totaled $258.2 million and $289.3 million, respectively, of which $242.7 million and $280.5 million related to undrawn commitments on VIEs as of September 30, 2022 and December 31, 2021, respectively. Northern Trust’s funding requirements are limited to its invested capital and undrawn commitments for future equity contributions. Northern Trust has no exposure to loss from liquidity arrangements and no obligation to purchase assets of the community development projects.
Tax credits and other tax benefits attributable to community development projects totaled $26.1 million and $22.0 million for the three months ended September 30, 2022 and 2021, respectively, and $74.5 million and $68.1 million for the nine months ended September 30, 2022 and 2021, respectively.
Investment Funds. Northern Trust acts as asset manager for various funds in which clients of Northern Trust are investors. As an asset manager of funds, Northern Trust earns a competitively priced fee that is based on assets managed and varies with each fund’s investment objective. Based on its analysis, Northern Trust has determined that it is not the primary beneficiary of these VIEs under GAAP.
Some of the funds for which Northern Trust acts as asset manager comply or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds and therefore the funds are exempt from the consolidation requirements in ASC 810-10. Northern Trust voluntarily waived $2.6 million of money market fund fees for the three months ended September 30, 2022 related to certain competitive factors and $61.9 million for the nine months ended September 30, 2022 related to the low-interest-rate environment and certain competitive factors. Northern Trust voluntarily waived $76.7 million of money market fund fees for the three months ended September 30, 2021 and $206.7 million for the nine months ended September 30, 2021 related to the low-interest rate environment and certain competitive factors. Northern Trust does not have any contractual obligations to provide financial support to the funds. Any potential future support of the funds will be at the discretion of Northern Trust after an evaluation of the specific facts and circumstances.
Periodically, Northern Trust makes seed capital investments to certain funds. As of September 30, 2022, Northern Trust had $18.1 million of investments valued using net asset value per share and included in Other Assets and had no unfunded commitments related to seed capital investments. As of December 31, 2021, Northern Trust had no seed capital investments and no unfunded commitments related to seed capital investments.
Note 21 – Commitments and Contingent Liabilities
Off-Balance Sheet Financial Instruments, Guarantees and Other Commitments. Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the maximum potential credit exposure should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. Northern Trust does not believe the total contractual amount of these instruments to be representative of its future credit exposure or funding requirements.
The following table provides details of Northern Trust's off-balance sheet financial instruments as of September 30, 2022 and December 31, 2021.
TABLE 72: SUMMARY OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
| | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| ($ In Millions) | ONE YEAR AND LESS | OVER ONE YEAR | TOTAL | ONE YEAR AND LESS | OVER ONE YEAR | TOTAL |
Undrawn Commitments(1) | $ | 12,205.0 | | $ | 17,348.1 | | $ | 29,553.1 | | $ | 9,567.0 | | $ | 17,855.2 | | $ | 27,422.2 | |
Standby Letters of Credit and Financial Guarantees(2)(3) | 11,046.0 | | 386.8 | | 11,432.8 | | 3,485.6 | | 553.9 | | 4,039.5 | |
| Commercial Letters of Credit | 36.2 | | 0.8 | | 37.0 | | 68.5 | | 1.1 | | 69.6 | |
| Custody Securities Lent with Indemnification | 143,747.5 | | — | | 143,747.5 | | 170,445.3 | | — | | 170,445.3 | |
| Total Off-Balance Sheet Financial Instruments | $ | 167,034.7 | | $ | 17,735.7 | | $ | 184,770.4 | | $ | 183,566.4 | | $ | 18,410.2 | | $ | 201,976.6 | |
(1) These amounts exclude $270.3 million and $366.6 million of commitments participated to others at September 30, 2022 and December 31, 2021, respectively.
(2) These amounts include $35.4 million and $30.5 million of standby letters of credit secured by cash deposits or participated to others as of September 30, 2022 and December 31, 2021, respectively.
(3) These amounts include a $9.7 billion and $2.3 billion guarantee to the Fixed Income Clearing Corporation (FICC) under the sponsored member program, without taking into consideration the related collateral, as of September 30, 2022 and December 31, 2021, respectively.
Notes to Consolidated Financial Statements (unaudited) (continued)
Undrawn Commitments generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements.
Standby Letters of Credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges and similar transactions. Northern Trust is obligated to meet the entire financial obligation of these agreements and in certain cases is able to recover the amounts paid through recourse against collateral received or other participants.
Financial Guarantees are issued by Northern Trust to guarantee the performance of a client to a third party under certain arrangements.
Commercial Letters of Credit are instruments issued by Northern Trust on behalf of its clients that authorize a third party (the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement and other similar instruments. Commercial letters of credit are issued primarily to facilitate international trade.
Custody Securities Lent with Indemnification involves Northern Trust lending securities owned by clients to borrowers who are reviewed and approved by the Northern Trust Capital Markets Credit Committee, as part of its securities custody activities and at the direction of its clients. In connection with these activities, Northern Trust has issued indemnifications to certain clients against certain losses that are a direct result of a borrower’s failure to return securities when due, should the value of such securities exceed the value of the collateral required to be posted. Borrowers are required to collateralize fully securities received with cash or marketable securities. As securities are loaned, collateral is maintained at a minimum 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 as of September 30, 2022 and December 31, 2021 subject to indemnification was $143.7 billion and $170.4 billion, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and no liability was recorded as of September 30, 2022 or December 31, 2021, related to these indemnifications.
Unsettled Repurchase and Reverse Repurchase Agreements. Northern Trust enters into repurchase agreements and reverse repurchase agreements which may settle at a future date. In repurchase agreements, Northern Trust receives cash from and provides securities as collateral to a counterparty. In reverse repurchase agreements, Northern Trust advances cash to and receives securities as collateral from a counterparty. These transactions are recorded on the consolidated balance sheets on the settlement date. As of September 30, 2022 and December 31, 2021, there were no unsettled repurchase or reverse repurchase agreements.
Sponsored Member Program. Northern Trust is an approved Government Securities Division (GSD) netting and sponsoring member in the FICC sponsored member program, through which Northern Trust submits eligible repurchase and reverse repurchase transactions in U.S. government securities between Northern Trust and its sponsored member clients for novation and clearing. Northern Trust may sponsor clients to clear their eligible repurchase transactions with the FICC. As a sponsoring member, Northern Trust guarantees to the FICC the prompt and full payment and performance of its sponsored member clients’ respective obligations under the FICC GSD’s rules. To mitigate Northern Trust’s credit exposure under this guarantee, Northern Trust obtains a security interest in its sponsored member clients’ collateral. See Note 23 — Offsetting of Assets and Liabilities for additional information on Northern Trust’s repurchase and reverse repurchase agreements.
Clearing and Settlement Organizations. The Bank is a participating member of various cash, securities and foreign exchange clearing and settlement organizations. It participates in these organizations on behalf of its clients and on its own behalf as a result of its own activities. A wide variety of cash and securities transactions are settled through these organizations, including those involving U.S. Treasuries, obligations of states and political subdivisions, asset-backed securities, commercial paper, dollar placements, and securities issued by the Government National Mortgage Association.
Certain of these industry clearing and settlement exchanges require their members to guarantee their obligations and liabilities and/or to provide liquidity support in the event other members do not honor their obligations as stipulated in each clearing organization’s membership agreement. Exposure related to these agreements varies, primarily as a result of fluctuations in the volume of transactions cleared through the organizations. At September 30, 2022 and December 31, 2021, Northern Trust has not recorded any material liabilities under these arrangements as Northern Trust believes the likelihood that a clearing or settlement exchange (of which Northern Trust is a member) would become insolvent is remote. Controls related to these clearing transactions are closely monitored by management to protect the assets of Northern Trust and its clients.
Legal Proceedings. In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to pending and threatened legal actions, and are subject to regulatory examinations, information-gathering requests, investigations, and proceedings, both formal and informal. In certain legal actions, claims for substantial monetary damages are
Notes to Consolidated Financial Statements (unaudited) (continued)
asserted. In regulatory matters, claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought.
Based on current knowledge, after consultation with legal counsel and after taking into account current accruals, management does not believe that losses, fines or penalties, if any, arising from pending litigation or threatened legal actions or regulatory matters either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although such matters could have a material adverse effect on the Corporation’s operating results for a particular period.
Under GAAP, (i) an event is “probable” if the “future event or events are likely to occur”; (ii) an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely”; and (iii) an event is “remote” if “the chance of the future event or events occurring is slight.”
The outcome of litigation and regulatory matters is inherently difficult to predict and/or the range of loss often cannot be reasonably estimated, particularly for matters that (i) will be decided by a jury, (ii) are in early stages, (iii) involve uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iv) are subject to appeals or motions, (v) involve significant factual issues to be resolved, including with respect to the amount of damages, (vi) do not specify the amount of damages sought or (vii) seek very large damages based on novel and complex damage and liability legal theories. Accordingly, the Corporation cannot reasonably estimate the eventual outcome of these pending matters, the timing of their ultimate resolution or what the eventual loss, fines or penalties, if any, related to each pending matter will be.
In accordance with applicable accounting guidance, the Corporation records accruals for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Corporation does not record accruals. No material accruals have been recorded for pending litigation or threatened legal actions or regulatory matters.
For a limited number of matters for which a loss is reasonably possible in future periods, whether in excess of an accrued liability or where there is no accrued liability, the Corporation is able to estimate a range of possible loss. As of September 30, 2022, the Corporation has estimated the range of reasonably possible loss for these matters to be from zero to approximately $20 million in the aggregate. The Corporation’s estimate with respect to the aggregate range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.
In certain other pending matters, there may be a range of reasonably possible loss (including reasonably possible loss in excess of amounts accrued) that cannot be reasonably estimated for the reasons described above. Such matters are not included in the estimated range of reasonably possible loss discussed above.
In 2015, Northern Trust Fiduciary Services (Guernsey) Limited (NTFS), an indirect subsidiary of the Corporation, was charged by a French investigating magistrate judge with complicity in estate tax fraud in connection with the administration of two trusts for which it serves as trustee. Charges also were brought against a number of other persons and entities related to this matter. In 2017, a French court found no estate tax fraud had occurred and NTFS and all other persons and entities charged were acquitted. The Public Prosecutor’s Office of France appealed the court decision and in June 2018 a French appellate court issued its opinion on the matter, acquitting all persons and entities charged, including NTFS. In January 2021, the Cour de Cassation, the highest court in France, reversed the June 2018 appellate court ruling, requiring a re-trial at the appellate court level. The re-trial proceedings in the appellate court are scheduled to commence in September 2023. As trustee, NTFS provided no tax advice and had no involvement in the preparation or filing of the challenged estate tax filings.
Visa Class B Common Shares. Northern Trust, as a member of Visa U.S.A. Inc. (Visa U.S.A.) and in connection with the 2007 restructuring of Visa U.S.A. and its affiliates and the 2008 initial public offering of Visa Inc. (Visa), received certain Visa Class B common shares. The Visa Class B common shares are subject to certain selling restrictions until the final resolution of certain litigation related to interchange fees involving Visa (the covered litigation), at which time the shares are convertible into Visa Class A common shares based on a conversion rate dependent upon the ultimate cost of resolving the covered litigation. On June 28, 2018, September 27, 2019, December 29, 2021 and June 29, 2022, Visa deposited an additional $600 million, $300 million, $250 million and $600 million, respectively, into an escrow account previously established with respect to the covered litigation. As a result of the additional contributions to the escrow account, the rate at which Visa Class B common shares will convert into Visa Class A common shares was reduced.
In September 2018, Visa reached a proposed class settlement agreement covering damage claims but not injunctive relief claims regarding the covered litigation. In December 2019, the district court granted final approval for the proposed class settlement agreement. Certain merchants have opted out of the class settlement and are pursuing claims separately, while other merchants have appealed the approval order granted by the district court. The ultimate resolution of the covered litigation, the
Notes to Consolidated Financial Statements (unaudited) (continued)
timing for removal of the selling restrictions on the Visa Class B common shares and the rate at which such shares will ultimately convert into Visa Class A common shares are uncertain.
In June 2016 and 2015, Northern Trust recorded a $123.1 million and $99.9 million net gain on the sale of 1.1 million and 1.0 million of its Visa Class B common shares, respectively. These sales do not affect Northern Trust’s risk related to the impact of the covered litigation on the rate at which such shares will ultimately convert into Visa Class A common shares. Northern Trust continued to hold approximately 4.1 million Visa Class B common shares, which are recorded at their original cost basis of zero, as of September 30, 2022 and December 31, 2021.
Note 22 – Derivative Financial Instruments
Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients, as part of its trading activity for its own account and as part of its risk management activities. These instruments may include foreign exchange contracts, interest rate contracts, total return swap contracts, and swaps related to the sale of certain Visa Class B common shares.
Foreign exchange contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients. Foreign exchange contracts are also used for trading and risk management purposes. For risk management purposes, Northern Trust uses foreign exchange contracts to reduce its exposure to changes in foreign exchange rates relating to certain forecasted non-functional-currency-denominated revenue and expenditure transactions, foreign-currency-denominated assets and liabilities, including debt securities, and net investments in non-U.S. affiliates.
Interest rate contracts include swap and option contracts. Interest rate swap contracts involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Northern Trust enters into interest rate swap contracts with its clients and also may utilize such contracts to reduce or eliminate the exposure to changes in the cash flows or fair value of hedged assets or liabilities due to changes in interest rates. Interest rate option contracts may include caps, floors, collars and swaptions, and provide for the transfer or reduction of interest rate risk, typically in exchange for a fee. Northern Trust enters into option contracts primarily as a seller of interest rate protection to clients. Northern Trust receives a fee at the outset of the agreement for the assumption of the risk of an unfavorable change in interest rates. This assumed interest rate risk is then mitigated by entering into an offsetting position with an outside counterparty. Northern Trust may also purchase or enter into option contracts for risk management purposes including to reduce the exposure to changes in the cash flows of hedged assets due to changes in interest rates.
Notes to Consolidated Financial Statements (unaudited) (continued)
The following table shows the notional and fair values of all derivative financial instruments as of September 30, 2022 and December 31, 2021.
TABLE 73: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS
| | | | | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| NOTIONAL VALUE | FAIR VALUE | NOTIONAL VALUE | FAIR VALUE |
| (In Millions) | ASSET(1) | LIABILITY(2) | ASSET(1) | LIABILITY(2) |
| Derivatives Designated as Hedging under GAAP | | | | | | |
| Interest Rate Contracts | | | | | | |
| Fair Value Hedges | $ | 4,628.2 | | $ | 67.1 | | $ | 49.5 | | $ | 4,430.5 | | $ | 7.6 | | $ | 8.7 | |
| | | | | | |
| Foreign Exchange Contracts | | | | | | |
| Cash Flow Hedges | 224.5 | | 17.4 | | 13.7 | | 3,697.9 | | 61.8 | | 12.6 | |
| Net Investment Hedges | 3,392.4 | | 514.0 | | 9.8 | | 4,161.8 | | 183.3 | | 12.3 | |
| Total Derivatives Designated as Hedging under GAAP | $ | 8,245.1 | | $ | 598.5 | | $ | 73.0 | | $ | 12,290.2 | | $ | 252.7 | | $ | 33.6 | |
| Derivatives Not Designated as Hedging under GAAP | | | | | | |
| Non-Designated Risk Management Derivatives | | | | | | |
Foreign Exchange Contracts | $ | 51.4 | | $ | 0.9 | | $ | 0.3 | | $ | 109.9 | | $ | 0.2 | | $ | 0.6 | |
Other Financial Derivatives(3) | 619.1 | | 1.9 | | 27.6 | | 738.5 | | — | | 37.5 | |
| Total Non-Designated Risk Management Derivatives | $ | 670.5 | | $ | 2.8 | | $ | 27.9 | | $ | 848.4 | | $ | 0.2 | | $ | 38.1 | |
| Client-Related and Trading Derivatives | | | | | | |
Foreign Exchange Contracts | $ | 291,383.1 | | $ | 5,618.4 | | $ | 5,637.8 | | $ | 315,532.3 | | $ | 1,962.1 | | $ | 1,973.3 | |
Interest Rate Contracts | 11,771.2 | | 140.4 | | 419.8 | | 11,570.1 | | 132.4 | | 90.2 | |
| Total Client-Related and Trading Derivatives | $ | 303,154.3 | | $ | 5,758.8 | | $ | 6,057.6 | | $ | 327,102.4 | | $ | 2,094.5 | | $ | 2,063.5 | |
| Total Derivatives Not Designated as Hedging under GAAP | $ | 303,824.8 | | $ | 5,761.6 | | $ | 6,085.5 | | $ | 327,950.8 | | $ | 2,094.7 | | $ | 2,101.6 | |
| Total Gross Derivatives | $ | 312,069.9 | | $ | 6,360.1 | | $ | 6,158.5 | | $ | 340,241.0 | | $ | 2,347.4 | | $ | 2,135.2 | |
Less: Netting(4) | | 2,482.8 | | 5,268.1 | | | 1,533.8 | | 1,283.5 | |
| Total Derivative Financial Instruments | | $ | 3,877.3 | | $ | 890.4 | | | $ | 813.6 | | $ | 851.7 | |
(1) Derivative assets are reported in Other Assets on the consolidated balance sheets.
(2) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets.
(3) This line includes swaps related to sales of certain Visa Class B common shares and total return swap contracts.
(4) See further detail in Note 23 — Offsetting of Assets and Liabilities.
Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheets. They are used merely to express the volume of this activity. Northern Trust’s credit-related risk of loss is limited to the positive fair value of the derivative instrument, net of any collateral received, which is significantly less than the notional amount.
All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance sheets at fair value within Other Assets or Other Liabilities. Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty.
Hedging Derivative Instruments Designated under GAAP. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, and equity price. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value, cash flow or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and changes in fair value are recognized currently in Other Operating Income within the consolidated statements of income (see below section “Derivative Instruments Not Designated as Hedging under GAAP”).
In order to qualify for hedge accounting, a formal assessment is performed on a calendar-quarter basis to verify that derivatives used in designated hedging transactions continue to be highly effective in offsetting the changes in fair value or cash flows of the hedged item. If a derivative ceases to be highly effective, matures, is sold or is terminated, or if a hedged forecasted transaction is no longer probable of occurring, hedge accounting is terminated and the derivative is treated as if it were a trading instrument.
Fair Value Hedges. Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. Northern Trust enters into interest rate swaps to hedge changes in fair value of AFS debt securities and long-term subordinated debt and senior notes. Northern Trust applied the “shortcut” method of accounting, available under GAAP, which assumes there is perfect effectiveness in a hedge, for all of its fair value hedges during the three- and nine- month periods ended September 30, 2022 and 2021. Changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recognized currently in earnings within the same income statement line item.
Notes to Consolidated Financial Statements (unaudited) (continued)
Cash Flow Hedges. Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. Northern Trust enters into foreign exchange contracts to hedge changes in cash flows due to movements in foreign exchange rates of forecasted foreign- currency-denominated transactions and foreign-currency-denominated debt securities. Northern Trust also enters into interest rate contracts to hedge changes in cash flows due to movements in interest rates of AFS debt securities. The change in fair value of cash flow hedging derivative instruments are recorded in AOCI and reclassified to earnings when the hedged forecasted transaction impacts earnings within the same income statement line item.
There were no material gains or losses reclassified into earnings during the three- and nine- month periods ended September 30, 2022 and 2021, as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated that net gains of $3.7 million will be reclassified into net income within the next twelve months relating to cash flow hedges of foreign-currency-denominated transactions. As of September 30, 2022, 11 months was the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign-currency-denominated transactions was being hedged.
The following tables provide fair value and cash flow hedge derivative gains and losses recognized in income during the three- and nine- month periods ended September 30, 2022 and 2021.
TABLE 74: LOCATION AND AMOUNT OF FAIR VALUE AND CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECORDED IN INCOME
| | | | | | | | | | | | | | | | | | | | |
| (In Millions) | INTEREST INCOME | INTEREST EXPENSE | OTHER OPERATING INCOME |
| THREE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| Total amounts on the consolidated statements of income | $ | 799.3 | | $ | 351.3 | | $ | 286.3 | | $ | 4.9 | | $ | 57.3 | | $ | 62.3 | |
| Gains (Losses) on fair value hedges recognized on | | | | | | |
| Interest Rate Contracts | | | | | | |
| Recognized on derivatives | 32.3 | | 9.3 | | (119.9) | | (1.4) | | — | | — | |
| Recognized on hedged items | (32.3) | | (9.3) | | 119.9 | | 1.4 | | — | | — | |
| Amounts related to interest settlements on derivatives | (4.0) | | (10.6) | | (6.9) | | 0.9 | | — | | — | |
| Total gains (losses) recognized on fair value hedges | $ | (4.0) | | $ | (10.6) | | $ | (6.9) | | $ | 0.9 | | $ | — | | $ | — | |
| Gains (Losses) on cash flow hedges recognized on | | | | | | |
| Foreign Exchange Contracts | | | | | | |
| Net gains (losses) reclassified from AOCI to net income | $ | — | | $ | 0.3 | | $ | — | | $ | — | | $ | (0.6) | | $ | (1.0) | |
| | | | | | |
| | | | | | |
| Total gains (losses) reclassified from AOCI to net income on cash flow hedges | $ | — | | $ | 0.3 | | $ | — | | $ | — | | $ | (0.6) | | $ | (1.0) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| (In Millions) | INTEREST INCOME | INTEREST EXPENSE | OTHER OPERATING INCOME |
| NINE MONTHS ENDED SEPTEMBER 30, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
| Total amounts on the consolidated statements of income | $ | 1,707.6 | | $ | 1,044.3 | | $ | 354.9 | | $ | 22.2 | | $ | 144.0 | | $ | 171.6 | |
| Gains (Losses) on fair value hedges recognized on | | | | | | |
| Interest Rate Contracts | | | | | | |
| Recognized on derivatives | 90.0 | | 27.2 | | (373.6) | | (112.4) | | — | | — | |
| Recognized on hedged items | (90.0) | | (27.2) | | 373.6 | | 112.4 | | — | | — | |
| Amounts related to interest settlements on derivatives | (13.3) | | (14.2) | | 18.0 | | 32.4 | | — | | — | |
| Total gains (losses) recognized on fair value hedges | $ | (13.3) | | $ | (14.2) | | $ | 18.0 | | $ | 32.4 | | $ | — | | $ | — | |
| Gains (Losses) on cash flow hedges recognized on | | | | | | |
| Foreign Exchange Contracts | | | | | | |
| Net gains (losses) reclassified from AOCI to net income | $ | 0.6 | | $ | 8.5 | | $ | — | | $ | — | | $ | (4.4) | | $ | (4.5) | |
| | | | | | |
| | | | | | |
| Total gains (losses) reclassified from AOCI to net income on cash flow hedges | $ | 0.6 | | $ | 8.5 | | $ | — | | $ | — | | $ | (4.4) | | $ | (4.5) | |
Notes to Consolidated Financial Statements (unaudited) (continued)
The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged items as of September 30, 2022 and December 31, 2021.
TABLE 75: HEDGED ITEMS IN FAIR VALUE HEDGES
| | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 | DECEMBER 31, 2021 |
| (In Millions) | CARRYING VALUE OF THE HEDGED ITEMS | CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(1) | CARRYING VALUE OF THE HEDGED ITEMS | CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(2) |
Available for Sale Debt Securities(3) | $ | 1,819.3 | | $ | 69.3 | | $ | 1,677.4 | | $ | 11.1 | |
| Senior Notes and Long-Term Subordinated Debt | 2,746.0 | | (313.7) | | 2,745.6 | | 59.5 | |
| Total | $ | 4,565.3 | | $ | (244.4) | | $ | 4,423.0 | | $ | 70.6 | |
(1) The cumulative hedge accounting basis adjustment includes $8.7 million related to discontinued hedging relationships of AFS debt securities as of September 30, 2022. There are no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of September 30, 2022.
(2) The cumulative hedge accounting basis adjustment includes $9.6 million related to discontinued hedging relationships of AFS debt securities as of December 31, 2021. There were no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31, 2021.
(3) Carrying value represents amortized cost.
Net Investment Hedges. Certain foreign exchange contracts are designated as net investment hedges to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. Net investment hedge gains of $248.4 million and $86.7 million were recognized in AOCI related to foreign exchange contracts for the three months ended September 30, 2022 and 2021, respectively. Net investment hedge gains of $512.1 million and $157.3 million were recognized in AOCI related to foreign exchange contracts for the nine months ended September 30, 2022 and 2021, respectively.
Derivative Instruments Not Designated as Hedging under GAAP. Northern Trust’s derivative instruments that are not designated as hedging under GAAP include derivatives for purposes of client-related and trading activities, as well as other risk management purposes. These activities consist principally of providing foreign exchange services to clients in connection with Northern Trust’s global custody business. However, in the normal course of business, Northern Trust also engages in trading of currencies for its own account.
Non-designated risk management derivatives include foreign exchange contracts entered into to manage the foreign currency risk of non-U.S.-dollar-denominated assets and liabilities, the net investment in certain non-U.S. affiliates, commercial loans and forecasted foreign-currency-denominated transactions. Swaps related to sales of certain Visa Class B common shares were entered into pursuant to which Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into Visa Class A common shares. Total return swaps are entered into to manage the equity price risk associated with certain investments.
Changes in the fair value of derivative instruments not designated as hedges under GAAP are recognized currently in income. The following table provides the location and amount of gains and losses recorded in the consolidated statements of income for the three and nine months ended September 30, 2022 and 2021 for derivative instruments not designated as hedges under GAAP.
TABLE 76: LOCATION AND AMOUNT OF GAINS AND LOSSES RECORDED IN INCOME FOR DERIVATIVES NOT DESIGNATED AS HEDGING UNDER GAAP
| | | | | | | | | | | | | | | | | |
| (In Millions) | DERIVATIVE GAINS (LOSSES) LOCATION RECOGNIZED IN INCOME | AMOUNT OF DERIVATIVE GAINS (LOSSES) RECOGNIZED IN INCOME |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| 2022 | 2021 | 2022 | 2021 |
| Non-designated risk management derivatives | | | | |
| Foreign Exchange Contracts | Other Operating Income | $ | (0.6) | | $ | (0.3) | | $ | (2.0) | | $ | 2.7 | |
Other Financial Derivatives(1) | Other Operating Income | 0.7 | | (3.6) | | (9.4) | | (15.7) | |
| Gains (Losses) from non-designated risk management derivatives | $ | 0.1 | | $ | (3.9) | | $ | (11.4) | | $ | (13.0) | |
| Client-related and trading derivatives | | | | |
| Foreign Exchange Contracts | Foreign Exchange Trading Income | $ | 64.7 | | $ | 66.4 | | $ | 223.2 | | $ | 215.7 | |
| Interest Rate Contracts | Security Commissions and Trading Income | 2.9 | | 7.6 | | 7.1 | | 13.4 | |
| Gains from client-related and trading derivatives | $ | 67.6 | | $ | 74.0 | | $ | 230.3 | | $ | 229.1 | |
| Total gains from derivatives not designated as hedging under GAAP | $ | 67.7 | | $ | 70.1 | | $ | 218.9 | | $ | 216.1 | |
(1) This line includes swaps related to the sale of certain Visa Class B common shares and total return swap contracts.
Notes to Consolidated Financial Statements (unaudited) (continued)
Note 23 – Offsetting of Assets and Liabilities
Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty.
The following table provides information regarding the offsetting of derivative assets and securities purchased under agreements to resell within the consolidated balance sheets as of September 30, 2022 and December 31, 2021.
TABLE 77: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
| | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| (In Millions) | GROSS RECOGNIZED ASSETS | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) | NET AMOUNT(5) |
Derivative Assets(1) | | | | | |
| Foreign Exchange Contracts Over the Counter (OTC) | $ | 4,765.6 | | $ | 2,351.5 | | $ | 2,414.1 | | $ | 12.1 | | $ | 2,402.0 | |
| Interest Rate Swaps OTC | 194.0 | | 129.4 | | 64.6 | | — | | 64.6 | |
| Interest Rate Swaps Exchange Cleared | 13.5 | | — | | 13.5 | | — | | 13.5 | |
| Other Financial Derivative | 1.9 | | 1.9 | | — | | — | | — | |
| Total Derivatives Subject to a Master Netting Arrangement | 4,975.0 | | 2,482.8 | | 2,492.2 | | 12.1 | | 2,480.1 | |
| Total Derivatives Not Subject to a Master Netting Arrangement | 1,385.1 | | — | | 1,385.1 | | — | | 1,385.1 | |
| Total Derivatives | 6,360.1 | | 2,482.8 | | 3,877.3 | | 12.1 | | 3,865.2 | |
Securities Purchased under Agreements to Resell(2) | $ | 8,133.3 | | $ | 6,967.1 | | $ | 1,166.2 | | $ | 1,166.2 | | $ | — | |
| | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 |
| (In Millions) | GROSS RECOGNIZED ASSETS | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) | NET AMOUNT(5) |
Derivative Assets(1) | | | | | |
| Foreign Exchange Contracts OTC | $ | 1,762.7 | | $ | 1,530.7 | | $ | 232.0 | | $ | 2.8 | | $ | 229.2 | |
| Interest Rate Swaps OTC | 140.0 | | 3.1 | | 136.9 | | — | | 136.9 | |
| Total Derivatives Subject to a Master Netting Arrangement | 1,902.7 | | 1,533.8 | | 368.9 | | 2.8 | | 366.1 | |
| Total Derivatives Not Subject to a Master Netting Arrangement | 444.7 | | — | | 444.7 | | — | | 444.7 | |
| Total Derivatives | 2,347.4 | | 1,533.8 | | 813.6 | | 2.8 | | 810.8 | |
Securities Purchased under Agreements to Resell(2) | $ | 2,078.9 | | $ | 1,392.5 | | $ | 686.4 | | $ | 686.4 | | $ | — | |
(1)Derivative assets are reported in Other Assets on the consolidated balance sheets. Other Assets (excluding derivative assets) totaled $8.8 billion and $7.8 billion as of September 30, 2022 and December 31, 2021, respectively.
(2)Offsetting of Securities Purchased under Agreements to Resell primarily relates to our involvement in FICC.
(3)Including cash collateral received from counterparties.
(4)Including financial assets accepted as collateral which are received from counterparties.
(5)Northern Trust did not possess any cash collateral that was not offset in the consolidated balance sheets that could have been used to offset the net amounts presented in the consolidated balance sheets as of September 30, 2022 and December 31, 2021.
Notes to Consolidated Financial Statements (unaudited) (continued)
The following table provides information regarding the offsetting of derivative liabilities and securities sold under agreements to repurchase within the consolidated balance sheets as of September 30, 2022 and December 31, 2021.
TABLE 78: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
| | | | | | | | | | | | | | | | | |
| SEPTEMBER 30, 2022 |
| (In Millions) | GROSS RECOGNIZED LIABILITIES | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) | NET AMOUNT(5) |
Derivative Liabilities(1) | | | | | |
| Foreign Exchange Contracts OTC | $ | 5,497.5 | | $ | 5,249.2 | | $ | 248.3 | | $ | — | | $ | 248.3 | |
| Interest Rate Swaps OTC | 453.7 | | 18.9 | | 434.8 | | — | | 434.8 | |
| Interest Rate Swaps Exchange Cleared | 15.6 | | — | | 15.6 | | — | | 15.6 | |
| Other Financial Derivatives | 27.6 | | — | | 27.6 | | — | | 27.6 | |
| Total Derivatives Subject to a Master Netting Arrangement | 5,994.4 | | 5,268.1 | | 726.3 | | — | | 726.3 | |
| Total Derivatives Not Subject to a Master Netting Arrangement | 164.1 | | — | | 164.1 | | — | | 164.1 | |
| Total Derivatives | 6,158.5 | | 5,268.1 | | 890.4 | | — | | 890.4 | |
Securities Sold under Agreements to Repurchase(2) | $ | 7,528.5 | | $ | 6,967.1 | | $ | 561.4 | | $ | 561.4 | | $ | — | |
| | | | | | | | | | | | | | | | | |
| DECEMBER 31, 2021 |
| (In Millions) | GROSS RECOGNIZED LIABILITIES | GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) | NET AMOUNTS PRESENTED IN THE BALANCE SHEET | GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) | NET AMOUNT(5) |
Derivative Liabilities(1) | | | | | |
| Foreign Exchange Contracts OTC | $ | 1,430.1 | | $ | 1,234.5 | | $ | 195.6 | | $ | — | | $ | 195.6 | |
| Interest Rate Swaps OTC | 98.7 | | 48.1 | | 50.6 | | — | | 50.6 | |
| Interest Rate Swaps Exchange Cleared | 0.2 | | — | | 0.2 | | — | | 0.2 | |
| Other Financial Derivatives | 37.5 | | 0.9 | | 36.6 | | — | | 36.6 | |
| Total Derivatives Subject to a Master Netting Arrangement | 1,566.5 | | 1,283.5 | | 283.0 | | — | | 283.0 | |
| Total Derivatives Not Subject to a Master Netting Arrangement | 568.7 | | — | | 568.7 | | — | | 568.7 | |
| Total Derivatives | 2,135.2 | | 1,283.5 | | 851.7 | | — | | 851.7 | |
Securities Sold under Agreements to Repurchase(2) | $ | 1,924.4 | | $ | 1,392.5 | | $ | 531.9 | | $ | 531.9 | | $ | — | |
(1)Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets. Other Liabilities (excluding derivative liabilities) totaled $3.5 billion and $3.3 billion as of September 30, 2022 and December 31, 2021, respectively.
(2)Offsetting of Securities Sold under Agreements to Repurchase primarily relates to our involvement in FICC.
(3)Including cash collateral deposited with counterparties.
(4)Including financial assets accepted as collateral which are deposited with counterparties.
(5)Northern Trust did not place any cash collateral with counterparties that was not offset in the consolidated balance sheets that could have been used to offset the net amounts presented in the consolidated balance sheets as of September 30, 2022 and December 31, 2021.
All of Northern Trust’s securities sold under agreements to repurchase (repurchase agreements) and securities purchased under agreements to resell (reverse repurchase agreements) involve the transfer of financial assets in exchange for cash subject to a right and obligation to repurchase those assets for an agreed upon amount. In the event of a repurchase failure, the cash or financial assets are available for offset. All of Northern Trust’s repurchase agreements and reverse repurchase agreements are subject to a master netting arrangement, which sets forth the rights and obligations for repurchase and offset. Under the master netting arrangement, Northern Trust is entitled to offset receivables from and collateral placed with a single counterparty against obligations owed to that counterparty. In addition, collateral held by Northern Trust can be offset against receivables from that counterparty. Northern Trust’s repurchase agreements and reverse repurchase agreements, other than those in which the counterparty is FICC, do not meet the requirements to net under GAAP.
Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally enforceable master netting arrangements or similar agreements exist. Derivative assets and liabilities can be further offset by cash collateral received from, and deposited with, the transacting counterparty. The basis for this view is that, upon termination of transactions subject to a master netting arrangement or similar agreement, the individual derivative receivables do not represent resources to which general creditors have rights and individual derivative payables do not represent claims that are equivalent to the claims of general creditors.
Credit risk associated with derivative instruments relates to the failure of the counterparty and the failure of Northern Trust to pay based on the contractual terms of the agreement, and is generally limited to the unrealized fair value gains and losses on these instruments, net of any collateral received or deposited. The amount of credit risk will increase or decrease during the
Notes to Consolidated Financial Statements (unaudited) (continued)
lives of the instruments as interest rates, foreign exchange rates, or equity prices fluctuate. Northern Trust’s risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Credit Support Annexes and other similar agreements are currently in place with a number of Northern Trust’s counterparties which mitigate the aforementioned credit risk associated with derivative activity conducted with those counterparties by requiring that significant net unrealized fair value gains be supported by collateral placed with Northern Trust.
Additional cash collateral received from and deposited with derivative counterparties totaling $98.0 million and $342.1 million, respectively, as of September 30, 2022, and $93.5 million and $43.4 million, respectively, as of December 31, 2021, was not offset against derivative assets and liabilities in the consolidated balance sheets as the amounts exceeded the net derivative positions with those counterparties.
Certain master netting arrangements Northern Trust enters into with derivative counterparties contain credit-risk-related contingent features in which the counterparty has the option to declare Northern Trust in default and accelerate cash settlement of net derivative liabilities with the counterparty in the event Northern Trust’s credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position was $1.59 billion and $111.5 million at September 30, 2022 and December 31, 2021, respectively. Cash collateral amounts deposited with derivative counterparties on those dates included $1.47 billion and $84.2 million, respectively, posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required at September 30, 2022 and December 31, 2021, of $115.4 million and $27.3 million, respectively. Accelerated settlement of these liabilities would not have a material effect on the consolidated financial position or liquidity of Northern Trust.
Item 4. Controls and Procedures
As of September 30, 2022, the Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), that are designed to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Based on such evaluation, such officers have concluded that, as of September 30, 2022, the Corporation’s disclosure controls and procedures are effective.
There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act during the last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The information presented under the caption “Legal Proceedings” in Note 21 — Commitments and Contingent Liabilities included under Part I, Item 1 of this Form 10-Q is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table shows certain information relating to the Corporation’s purchases of common stock for the three months ended September 30, 2022.
TABLE 79: REPURCHASES OF COMMON STOCK
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| PERIOD | TOTAL NUMBER OF SHARES PURCHASED | AVERAGE PRICE PAID PER SHARE | TOTAL NUMBER OF SHARES PURCHASED AS PART OF A PUBLICLY ANNOUNCED PLAN | MAXIMUM NUMBER OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLAN |
| July 1 - 31, 2022 | — | | $ | — | | — | | 25,000,000 | |
| August 1 - 31, 2022 | — | | — | | — | | 25,000,000 | |
| September 1 - 30, 2022 | — | | — | | — | | 25,000,000 | |
| Total (Third Quarter) | — | | $ | — | | — | | 25,000,000 | |
On October 19, 2021, the Corporation announced a share repurchase program under which the Corporation’s Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. The repurchase authorization approved by the Board of Directors has no expiration date, thus the Corporation retains the ability to repurchase when circumstances warrant and applicable regulation permits. Please refer to Note 11 — Stockholders’ Equity to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).
Item 6. Exhibits
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Exhibit
Number | Description |
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| 4.1 | Certain instruments defining the rights of the holders of long-term debt of the Corporation and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Corporation hereby agrees to furnish a copy of any of these agreements to the SEC upon request. |
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| 101 | Includes the following financial and related information from Northern Trust’s Quarterly Report on Form 10-Q as of and for the quarter ended September 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Income, (3) the Consolidated Statements of Comprehensive Income, (4) the Consolidated Statements of Changes in Stockholders’ Equity, (5) the Consolidated Statements of Cash Flows, and (6) Notes to Consolidated Financial Statements. |
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| 104 | The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | NORTHERN TRUST CORPORATION |
| | (Registrant) |
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| Date: | October 25, 2022 | By: | /s/ Jason J. Tyler |
| | | Jason J. Tyler
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |
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| Date: | October 25, 2022 | By: | /s/ Lauren Allnutt |
| | | Lauren Allnutt
Executive Vice President and Controller
(Principal Accounting Officer) |
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