Northern Trust(NTRS) - 2020 Q4 - Annual Report

PART I Item 1. Business Northern Trust Corporation is a financial holding company providing wealth management, asset servicing, asset management, and banking solutions through two primary segments: Corporate & Institutional Services (C&IS) and Wealth Management Business Overview Northern Trust operates through two main client-focused segments: Corporate & Institutional Services (C&IS) and Wealth Management, with the Asset Management business supporting both Assets by Business Segment (as of December 31, 2020) | Segment | Assets Under Custody/Administration | Assets Under Custody | Assets Under Management | | :--- | :--- | :--- | :--- | | Corporate & Institutional Services (C&IS) | $13.65 trillion | $10.39 trillion | $1.06 trillion | | Wealth Management | $879.4 billion | $875.1 billion | $347.8 billion | - The Asset Management business provides investment solutions including active and passive equity and fixed income, cash management, and alternative assets, with its revenue and expenses fully allocated to the C&IS and Wealth Management segments[18] Supervision and Regulation Northern Trust is subject to extensive regulation as a financial holding company, classified as a Category II institution under the Dodd-Frank Act's tailoring rules - Under the Federal Reserve Board's tailoring rule, Northern Trust is classified as a Category II institution, subjecting it to enhanced prudential standards such as annual capital plans, stress tests, and enhanced risk and liquidity management[30][31] Risk-Based and Leverage Capital Ratios (as of December 31, 2020) | Entity | Common Equity Tier 1 (Standardized) | Tier 1 Capital (Standardized) | Total Capital (Standardized) | Tier 1 Leverage (Standardized) | | :--- | :--- | :--- | :--- | :--- | | Northern Trust Corporation | 12.8% | 13.9% | 15.6% | 7.6% | | The Northern Trust Company | 13.0% | 13.0% | 14.5% | 7.0% | | Minimum Required Ratio | 4.5% | 6.0% | 8.0% | 4.0% | | "Well Capitalized" Minimum | N/A (Corp) / 6.5% (Bank) | 6.0% (Corp) / 8.0% (Bank) | 10.0% | N/A (Corp) / 5.0% (Bank) | - The Corporation's stress capital buffer requirement for the 2020 capital plan cycle was set at 2.5%, effective October 1, 2020, resulting in a minimum Common Equity Tier 1 capital ratio requirement of 7.0%[58] - The company is subject to the U.S. Liquidity Coverage Ratio (LCR) and will be required to comply with the Net Stable Funding Ratio (NSFR) beginning July 1, 2021[59][60] Human Capital Management Northern Trust employed approximately 20,900 full-time equivalent staff globally as of December 31, 2020, with a key human capital strategy focusing on talent, rewards, and DE&I Workforce by Region (as of December 31, 2020) | Region | Percentage of Workforce | | :--- | :--- | | North America | 46% | | Asia Pacific | 35% | | Europe, Middle East, and Africa | 19% | - The company's talent management process includes comprehensive onboarding, continuous learning and development, and annual talent reviews focused on diversity, promotion readiness, and succession planning[96][97][98] Board and Executive Officer Diversity (as of December 31, 2020) | Group | Female | Male | White | Black | Hispanic | Asian | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Board of Directors | 23% | 77% | 61% | 23% | 8% | 8% | | Executive Officers | 33% | 67% | 83% | 17% | —% | —% | Item 1A. Risk Factors Northern Trust faces a variety of significant risks that could adversely affect its business, including pandemic impacts, market volatility, operational failures, and regulatory changes - The COVID-19 pandemic has adversely affected business through lower net interest income, increased provisions for credit losses, and potential operational disruptions from remote work arrangements[112][113] - A majority of revenues are fee-based and tied to the market value of assets, making earnings susceptible to downturns in equity and debt markets[116] - Low interest rate environments negatively impact net interest margin and may require fee waivers on money market mutual funds, directly reducing earnings[119] - Failures of technological systems or security breaches from cyber-attacks are significant risks that could lead to financial losses, regulatory penalties, and reputational damage[132][133][136] - The transition away from LIBOR to alternative reference rates creates uncertainty and could adversely impact the cost of funding, the value of loans and derivatives, and lead to operational disruptions or litigation[153] - The company's ability to pay dividends and repurchase stock is subject to regulatory approval and capital plan rules, which were restricted by the Federal Reserve in 2020 to preserve capital during the pandemic[183][184] Item 2. Properties The executive offices are located in a company-owned building in Chicago, with a global network of mostly leased offices across 22 U.S. states and 22 international locations - The Corporation's main executive offices are located at 50 South La Salle Street in Chicago, a building owned by its subsidiary, The Northern Trust Company[188] - Northern Trust operates through a network of offices in 22 U.S. states and 22 locations across Canada, Europe, the Middle East, and the Asia-Pacific region, with the majority of these facilities being leased[188] Item 3. Legal Proceedings This section incorporates by reference information regarding legal proceedings from Note 26 of the Financial Statements - Information regarding legal proceedings is incorporated by reference from Note 26, "Commitments and Contingent Liabilities," in Item 8 of the report[191] Supplemental Item. Information About Our Executive Officers This section provides biographical information for Northern Trust Corporation's executive officers, including Chairman and CEO Michael G. O'Grady and CFO Jason J. Tyler - Michael G. O'Grady serves as Chairman of the Board, Chief Executive Officer, and President[194] - Jason J. Tyler serves as Executive Vice President and Chief Financial Officer[205] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Northern Trust's common stock trades on The NASDAQ Stock Market under "NTRS," with its share repurchase program suspended in 2020 due to Federal Reserve restrictions but restarted in 2021 - The Corporation suspended its share repurchase program on March 16, 2020. No shares were repurchased in Q4 2020 due to Federal Reserve restrictions, but the program restarted in Q1 2021[209] Five-Year Cumulative Total Return Comparison (2015-2020) | Company/Index | 2015 | 2020 | Cumulative Return | | :--- | :--- | :--- | :--- | | Northern Trust | $100 | $146 | 46% | | S&P 500 | $100 | $203 | 103% | | KBW Bank Index | $100 | $153 | 53% | Item 6. Selected Financial Data This section presents a five-year summary of key financial data for Northern Trust Corporation, highlighting changes in net income, assets, and client assets Selected Financial Data (2018-2020) | Metric ($ in Millions, except per share) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenue | $6,100.8 | $6,073.1 | $5,960.2 | | Net Income | $1,209.3 | $1,492.2 | $1,556.4 | | Net Income - Diluted EPS | $5.46 | $6.63 | $6.64 | | Total Assets (EOP) | $170,003.9 | $136,828.4 | $132,212.5 | | Assets Under Custody/Administration (EOP, $B) | $14,532.5 | $12,050.4 | $10,125.3 | | Assets Under Management (EOP, $B) | $1,405.3 | $1,231.3 | $1,069.4 | | Return on Average Common Equity | 11.2% | 14.9% | 16.2% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, Northern Trust's financial performance was significantly impacted by the COVID-19 pandemic, leading to a 19% decline in net income despite growth in fee-based revenue, while maintaining a strong capital position Financial Overview For 2020, Net Income decreased 19% to $1.21 billion, and diluted EPS fell to $5.46 from $6.63 in 2019, with client assets growing due to net inflows and favorable markets 2020 vs. 2019 Financial Highlights | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net Income | $1.21 billion | $1.49 billion | (19%) | | Diluted EPS | $5.46 | $6.63 | (18%) | | Total Revenue | $6.10 billion | $6.07 billion | 0.5% | | Trust, Investment & Other Servicing Fees | $4.00 billion | $3.85 billion | 4% | | Net Interest Income | $1.44 billion | $1.68 billion | (14%) | | Provision for Credit Losses | $125.0 million | ($14.5 million) | N/M | - Client assets under custody/administration (AUC/A) increased by 21% to $14.53 trillion, and assets under management (AUM) grew by 14% to $1.41 trillion, primarily due to net inflows and favorable markets[230] Consolidated Results of Operations Consolidated revenue for 2020 increased slightly to $6.10 billion, driven by growth in noninterest income but offset by a 14% decline in Net Interest Income and a sharp reversal in the Provision for Credit Losses Revenue Components ($ in Millions) | Revenue Component | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Trust, Investment and Other Servicing Fees | $3,995.0 | $3,852.1 | 4% | | Foreign Exchange Trading Income | $290.4 | $250.9 | 16% | | Security Commissions and Trading Income | $133.2 | $103.6 | 29% | | Other Operating Income | $194.0 | $145.5 | 33% | | Net Interest Income | $1,443.2 | $1,677.9 | (14%) | | Total Revenue | $6,100.8 | $6,073.1 | 0.5% | - The company voluntarily waived $29.3 million of money market mutual fund fees in 2020 due to the low-interest-rate environment, which adversely impacted Trust, Investment and Other Servicing Fees[249] - Noninterest expense in 2020 included $55.0 million in severance-related charges, a $43.4 million charge for a corporate action processing error, and $11.9 million for an early lease exit[305] Reporting Segments and Related Information In 2020, the Wealth Management segment generated 60% of consolidated net income, while Corporate & Institutional Services (C&IS) contributed 43%, with both segments experiencing net income declines Net Income by Segment ($ in Millions) | Segment | 2020 Net Income | 2019 Net Income | % Change | % of 2020 Consolidated Net Income | | :--- | :--- | :--- | :--- | :--- | | Corporate & Institutional Services (C&IS) | $520.7 | $713.8 | (27%) | 43% | | Wealth Management | $729.2 | $796.1 | (8%) | 60% | | Treasury and Other | ($40.6) | ($17.7) | N/M | (3%) | - C&IS revenue decreased 2% as an 8% rise in noninterest income was more than offset by a 28% decline in net interest income[330] - Wealth Management revenue grew 3%, but a provision for credit losses of $86.9 million (versus a credit of $16.4 million in 2019) drove the decline in net income[340] Consolidated Balance Sheet Review Total assets increased 24% to $170.0 billion at year-end 2020, primarily driven by a significant rise in customer deposits and Federal Reserve deposits Selected Balance Sheet Data (Year-End, $ in Billions) | Account | Dec 31, 2020 | Dec 31, 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $170.0 | $136.8 | 24% | | Federal Reserve and Other Central Bank Deposits | $55.4 | $33.8 | 64% | | Total Securities | $61.1 | $52.3 | 17% | | Loans and Leases | $33.8 | $31.4 | 7% | | Total Deposits | $143.9 | $109.1 | 32% | | Total Stockholders' Equity | $11.7 | $11.1 | 5% | - The growth in the balance sheet was primarily driven by higher customer deposit balances[360] Asset Quality Asset quality weakened in 2020, with nonaccrual assets increasing 53% and the Allowance for Credit Losses surging due to CECL adoption and deteriorating economic forecasts Nonaccrual Assets ($ in Millions) | Category | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Nonaccrual Loans and Leases | $131.7 | $83.6 | | Other Real Estate Owned | $0.7 | $3.2 | | Total Nonaccrual Assets | $132.4 | $86.8 | Allowance for Credit Losses ($ in Millions) | Component | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Allowance Assigned to Loans and Leases | $190.7 | $104.5 | | Allowance Assigned to Undrawn Commitments | $61.1 | $19.9 | | Total Allowance for Credit Losses | $251.8 | $124.4 | - The increase in the allowance for credit losses was primarily driven by the adoption of ASU 2016-13 (CECL) and the economic impact of the COVID-19 pandemic[386][396] Capital Management Northern Trust maintained a strong capital position in 2020, with all capital ratios exceeding 'well-capitalized' regulatory requirements, and returned $891.8 million to common stockholders Capital Ratios (Standardized Approach, as of Dec 31, 2020) | Ratio | Corporation | Minimum Requirement | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 12.8% | 7.0% (incl. buffer) | | Tier 1 Capital | 13.9% | 8.5% (incl. buffer) | | Total Capital | 15.6% | 10.5% (incl. buffer) | | Tier 1 Leverage | 7.6% | 4.0% | - In 2020, the Corporation returned $891.8 million to common stockholders through $592.0 million in dividends and $299.8 million in share repurchases[415][299] Risk Management Northern Trust employs an integrated, three-lines-of-defense risk management framework covering seven primary risk categories, including liquidity stress testing and managing interest rate risk - The risk management framework is structured around a "three lines of defense" model: business units (1st line), the Risk Management function (2nd line), and Audit Services (3rd line)[458] - The company maintains a strong liquidity position, with cash, central bank deposits, and securities representing 73% of total assets. It satisfied all U.S. Liquidity Coverage Ratio (LCR) requirements during 2020[521][522] Net Interest Income Sensitivity (as of Dec 31, 2020) | Interest Rate Change (Ramp over 12 months) | Estimated Impact on NII ($ in Millions) | | :--- | :--- | | +100 bps | $249 | | +200 bps | $451 | | -100 bps | $114 | - The average Value-at-Risk (VaR) for Global Foreign Currency trading in 2020 was $0.3 million, with a high of $1.8 million[557] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for Northern Trust Corporation, including the unqualified opinion from KPMG LLP and detailed notes on accounting policies and financial data - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[575][576] - A critical audit matter identified by the auditor was the assessment of the allowance for credit losses for commercial loans and leases, due to the significant measurement uncertainty and subjective judgment required under the newly adopted CECL accounting standard (ASC Topic 326)[580][581][582] Consolidated Financial Statements The consolidated financial statements detail Northern Trust's financial position and performance, reporting $170.0 billion in total assets and $1.21 billion in net income for 2020 Key Financial Statement Data (Year Ended Dec 31, 2020) | Metric ($ in Millions) | Amount | | :--- | :--- | | Balance Sheet: | | | Total Assets | $170,003.9 | | Total Loans and Leases | $33,759.7 | | Total Deposits | $143,878.0 | | Total Stockholders' Equity | $11,688.3 | | Income Statement: | | | Total Noninterest Income | $4,657.6 | | Net Interest Income | $1,443.2 | | Net Income | $1,209.3 | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial data, including the adoption of the CECL standard and the composition of various financial portfolios - The company adopted ASU 2016-13 (CECL) on January 1, 2020, recording a $13.7 million increase in the allowance for credit losses and a corresponding $10.1 million decrease to retained earnings, net of tax[672] - As of December 31, 2020, the company had $28.9 billion in undrawn commitments to extend credit and $157.5 billion in custody securities lent with indemnification[938] - The company's non-U.S. operations accounted for $38.4 billion in total assets and $302.6 million in net income for 2020[1014] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with an unqualified attestation report from KPMG LLP - Management concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2020[1031] - Management assessed internal control over financial reporting as effective, and the independent auditor, KPMG LLP, issued an unqualified attestation report on its effectiveness[1033][1037] PART III Items 10-14 Information for Items 10 through 14, covering Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships, and Principal Accountant Fees, is incorporated by reference from the 2021 Proxy Statement - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2021 Proxy Statement[1045][1046][1047][1048][1049] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements and schedules filed as part of the Form 10-K, including key corporate governance documents and compensatory plans - This section lists all financial statements and exhibits filed with the Form 10-K, including key corporate governance documents and compensatory plans[1051][1053]