Northern Trust 10Q 2021 Q1 Quarterly report

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 March 31, 2021


☐			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 March 31, 2021, 208,140,239 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 MARCH 31, 2021

TABLE OF CONTENTS

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)


	THREE MONTHS ENDED MARCH 31,
CONDENSED INCOME STATEMENTS ($ In Millions)	2021		2020		% CHANGE(1)
Noninterest Income	$	1,243.3	$	1,179.6	5	%
Net Interest Income	340.1		408.1		(17)
Total Revenue	1,583.4		1,587.7		—
Provision for Credit Losses	(30.0)		61.0		N/M
Noninterest Expense	1,117.5		1,065.6		5
Income before Income Taxes	495.9		461.1		8
Provision for Income Taxes	120.8		100.5		20
Net Income	$	375.1	$	360.6	4	%


PER COMMON SHARE
Net Income — Basic	$	1.71	$	1.56	9	%
— Diluted	1.70		1.55		9
Cash Dividends Declared Per Common Share	0.70		0.70		—
Book Value — End of Period (EOP)	50.80		48.04		6
Market Price — EOP	105.11		75.46		39


SELECTED BALANCE SHEET DATA ($ In Millions)	MARCH 31, 2021		DECEMBER 31, 2020		% CHANGE(1)
End of Period:
Total Assets	$	163,924.1	$	170,003.9	(4)	%
Earning Assets	151,036.6		158,531.6		(5)
Deposits	137,457.4		143,878.0		(4)
Stockholders’ Equity	11,457.9		11,688.3		(2)


	THREE MONTHS ENDED MARCH 31,
	2021		2020		% CHANGE(1)
Average Balances:
Total Assets	$	153,255.8	$	124,170.5	23	%
Earning Assets	140,588.6		110,611.3		27
Deposits	126,416.4		95,085.8		33
Stockholders’ Equity	11,537.4		10,787.0		7


CLIENT ASSETS ($ In Billions)	MARCH 31, 2021		DECEMBER 31, 2020		% CHANGE(1)
Assets Under Custody/Administration(2)	$	14,795.1	$	14,532.5	2	%
Assets Under Custody	11,534.2		11,262.8		2
Assets Under Management	1,449.1		1,405.3		3

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.

SELECTED RATIOS AND METRICS


	THREE MONTHS ENDED MARCH 31,
	2021		2020
Financial Ratios:
Return on Average Common Equity	13.7	%	13.4	%
Return on Average Assets	0.99		1.17
Dividend Payout Ratio	41.2		45.2
Net Interest Margin(1)	1.00		1.51


	MARCH 31, 2021				DECEMBER 31, 2020
	STANDARDIZED APPROACH		ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		WELL-CAPITALIZED RATIOS		MINIMUM CAPITAL RATIOS
Capital Ratios:
Northern Trust Corporation
Common Equity Tier 1 Capital	12.0	%	12.8	%	12.8	%	13.4	%	N/A		4.5	%
Tier 1 Capital	13.0		14.0		13.9		14.5		6.0		6.0
Total Capital	14.5		15.2		15.6		15.9		10.0		8.0
Tier 1 Leverage	6.9		6.9		7.6		7.6		N/A		4.0
Supplementary Leverage	N/A		8.1		N/A		8.6		N/A		3.0

The Northern Trust Company
Common Equity Tier 1 Capital	12.1	%	13.2	%	13.0	%	13.8	%	6.5	%	4.5	%
Tier 1 Capital	12.1		13.2		13.0		13.8		8.0		6.0
Total Capital	13.4		14.3		14.5		15.0		10.0		8.0
Tier 1 Leverage	6.4		6.4		7.0		7.0		5.0		4.0
Supplementary Leverage	N/A		7.4		N/A		7.7		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 on page 25.

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 first quarter of 2021. 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, 2020. Investors also should read the section entitled “Forward-Looking Statements.”

FIRST 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: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. 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.

COVID-19 Pandemic and Recent Events

The COVID-19 pandemic continued to present health and economic challenges during the first quarter of 2021. During this time, Northern Trust focused on the health and well-being of its workforce, meeting its clients’ needs and supporting its communities.

Workforce

As governments implement plans to reopen their respective jurisdictions, Northern Trust continues its return-to-office (RTO) planning under the oversight of its COVID Executive Committee composed of senior leadership across various functions. Plans for RTO have been developed on a location-by-location basis based on business unit needs. Northern Trust continues to consider site readiness, transportation options, technology capabilities, and workforce alignment, and plans for the return of a small portion of each office’s population in the initial RTO phase to allow for optimal social distancing. To ensure the health and well-being of Northern Trust’s workforce, clients and visitors, several social distancing elements and other protective measures, distribution of personal protective equipment, and workforce health self-certifications, have been implemented. Since the second half of 2020, several locations returned portions of their workforce to offices.

Client Service

Northern Trust has offered assistance to its clients affected by the COVID-19 pandemic by lending under a government lending program and providing payment deferrals. The Corporation continues to assess developments in government actions meant to support the economy, as further discussed below.

U.S. Small Business Administration’s Paycheck Protection Program

During the second quarter of 2020, Northern Trust became a lender under the Paycheck Protection Program, as amended (PPP), which is administered by the U.S. Small Business Administration (SBA), an agency of the U.S. Department of the Treasury, which works with financial institutions in providing loans to small businesses. The PPP, which is meant to aid small businesses during the COVID-19 pandemic, was created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020.

As of March 31, 2021, Northern Trust had outstanding loans totaling $213.9 million under the PPP and 219 PPP loan forgiveness applications, totaling $34.2 million, went through the forgiveness process and were fully forgiven by the SBA as of such date.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) amended the PPP by extending the authority of the SBA to guarantee loans and the ability of PPP lenders to disburse PPP loans until March 31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extends the PPP application deadline to May 31, 2021 and provides the SBA additional time to process applications through June 30, 2021. For further information on the PPP, please refer to Note 6 — Loans and Leases to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

COVID-19 Pandemic and Recent Events (continued)

Troubled Debt Restructuring (TDR) Relief

Due to the economic environment arising from the COVID-19 pandemic, there have been two forms of relief provided to lenders exempting certain loan modifications which would otherwise be classified as TDRs from such classification. The first of these forms of relief is provided by certain interagency guidance from various banking regulators, including the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau (Interagency Guidance). The other is provided under section 4013 of the CARES Act. Northern Trust has elected to apply each of these forms of relief, when applicable, in providing borrowers with qualifying loan modifications, including payment deferrals, in response to the COVID-19 pandemic. For further information on TDRs, please refer to Note 6 — Loans and Leases to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

Community Support

COVID-19 Relief Support

From the start of the pandemic through March 31, 2021, Northern Trust provided $2.6 million in COVID-19 relief support to numerous organizations serving those most affected by the pandemic. Grantees include Americares, Doctors Without Borders, Feeding America, the Global FoodBanking Network, the Irish Red Cross, Meals on Wheels, NHS Charities Together, the Solidarity Response Fund for the World Health Organization, United Way Worldwide, World Food Program, and other COVID-19 relief funds in Chicago and Illinois to benefit those in need.

Small Business Support

From the start of the pandemic through March 31, 2021, Northern Trust provided $110.5 million in low-cost funding to assist Community Development Financial Institutions (CDFIs), which are instrumental in providing loans to small businesses and non-profit organizations under the PPP. The funding helps meet urgent demand among small businesses and non-profit groups by providing flexible terms and low rates. CDFIs provide loans, investments, financial services and technical assistance to underserved populations and communities. This funding, which is reported in Debt Securities Held to Maturity on the consolidated balance sheets, is separate and distinct from the $213.9 million of outstanding principal of loans made under the PPP.

Additional COVID-19 economic and market-related impacts to the Corporation’s financial condition and results of operations are discussed throughout this Form 10-Q.

Overview of Financial Results

Net Income per diluted common share increased in the current quarter to $1.70 from $1.55 in the first quarter of 2020. Net Income increased $14.5 million, or 4%, to $375.1 million in the current quarter from $360.6 million in the prior-year quarter. Annualized return on average common equity was 13.7% in the current quarter and 13.4% in the prior-year quarter. The annualized return on average assets was 0.99% in the current quarter as compared to 1.17% in the prior-year quarter.

Revenue slightly decreased to $1.58 billion in the current quarter from $1.59 billion in the prior-year quarter.

Trust, Investment and Other Servicing Fees increased $60.1 million, or 6%, from $1.00 billion in the prior-year quarter to $1.06 billion in the current quarter, primarily due to favorable markets, new business, and favorable currency translation, partially offset by money market mutual fund fee waivers.

Other Noninterest Income increased $3.6 million, or 2%, from $176.0 million in the prior-year quarter to $179.6 million in the current quarter, primarily reflecting higher Other Operating Income, partially offset by lower Foreign Exchange Trading Income and Security Commissions and Trading Income.

Net Interest Income decreased $68.0 million, or 17%, to $340.1 million in the current quarter as compared to $408.1 million in the prior-year quarter, primarily due to a lower net interest margin, partially offset by higher average earning assets.

There was a $30.0 million release of credit reserves in the current quarter, as compared to a provision of $61.0 million in the prior-year quarter. The current quarter release of credit reserves was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by continued improvement in projected economic conditions and portfolio credit quality relative to the prior quarter, with decreases primarily in the commercial and institutional, commercial real estate, and private client portfolios.

Noninterest Expense increased $51.9 million, or 5%, from $1.07 billion in the prior-year quarter to $1.12 billion in the current quarter, primarily attributable to higher Compensation, Equipment and Software, and Other Operating Expense.

The Provision for Income Taxes in the current quarter totaled $120.8 million, representing an effective tax rate of 24.4%. The Provision for Income Taxes in the prior-year quarter totaled $100.5 million, representing an effective tax rate of 21.8%. The effective tax rate increased compared to the prior-year quarter primarily due to lower tax benefits related to share-based compensation.

FIRST 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. Low-interest-rate environments have historically had a negative impact on fees earned on certain products.

Beginning in the second quarter of 2020, the Corporation began to waive a portion of certain fees associated with money market mutual funds due to the low-interest-rate environment. Northern Trust voluntarily waived $50.2 million of money market mutual fund fees for the three months ended March 31, 2021 related to the low-interest-rate environment. These fee waivers, which are impacted by the level of yields earned and account balances in certain funds, are expected to continue in the current low-interest-rate environment as the yields in these funds remain insufficient to pay the stated fees associated with such funds. This is expected to adversely impact Trust, Investment and Other Servicing Fees within the C&IS and Wealth Management reporting segments.

The components of Trust, Investment and Other Servicing Fees are provided below.

TABLE 1: TRUST, INVESTMENT AND OTHER SERVICING FEES


	THREE MONTHS ENDED MARCH 31,
($ In Millions)	2021		2020		CHANGE
C&IS Trust, Investment and Other Servicing Fees
Custody and Fund Administration	$	446.0	$	394.9	$	51.1	13	%
Investment Management	115.9		120.8		(4.9)		(4)
Securities Lending	18.2		23.4		(5.2)		(22)
Other	40.4		35.3		5.1		14
Total C&IS Trust, Investment and Other Servicing Fees	$	620.5	$	574.4	$	46.1	8	%
Wealth Management Trust, Investment and Other Servicing Fees
Central	$	164.2	$	159.4	$	4.8	3	%
East	119.0		111.5		7.5		7
West	90.8		87.0		3.8		4
Global Family Office	69.2		71.3		(2.1)		(3)
Total Wealth Management Trust, Investment and Other Servicing Fees	$	443.2	$	429.2	$	14.0	3	%
Total Consolidated Trust, Investment and Other Servicing Fees	$	1,063.7	$	1,003.6	$	60.1	6	%

Corporate & Institutional Services

Custody and Fund Administration fees, the largest component of C&IS 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.

Custody and Fund Administration fees increased from the prior-year quarter, primarily due to new business, favorable currency translation and higher transaction volumes. Investment Management fees decreased from the prior-year quarter, primarily due to money market mutual fund fee waivers, partially offset by new business and favorable markets. Securities Lending fees decreased from the prior-year quarter, primarily due to lower spreads.

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) increased from the prior-year quarter, due to favorable markets, partially offset by higher money market mutual fund fee waivers. Global Family Office fee income decreased from the prior-year quarter, primarily due to higher money market mutual fund fee waivers, partially offset by favorable markets.

FIRST 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 MARCH 31,				AS OF MARCH 31,
	2021	2020	CHANGE		2021	2020	CHANGE
S&P 500	3,864	3,059	26	%	3,973	2,585	54	%
MSCI EAFE (U.S. dollars)	2,200	1,862	18		2,208	1,560	42
MSCI EAFE (local currency)	1,220	1,107	10		1,255	938	34

TABLE 3: FIXED INCOME MARKET INDICES


	AS OF MARCH 31,
	2021	2020	CHANGE
Barclays Capital U.S. Aggregate Bond Index	2,311	2,295	1	%
Barclays Capital Global Aggregate Bond Index	534	510	5

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. The following table presents AUC/A by reporting segment.

TABLE 4: ASSETS UNDER CUSTODY / ADMINISTRATION BY REPORTING SEGMENT


	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2020		CHANGE Q1-21/Q4-20		CHANGE Q1-21/Q1-20
($ In Billions)	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2020		CHANGE Q1-21/Q4-20		CHANGE Q1-21/Q1-20
Corporate & Institutional Services	$	13,876.3	$	13,653.1	$	10,236.5	2	%	36	%
Wealth Management	918.8		879.4		640.1		4		44
Total Assets Under Custody / Administration	$	14,795.1	$	14,532.5	$	10,876.6	2	%	36	%

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


	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2020		CHANGE Q1-21/Q4-20		CHANGE Q1-21/Q1-20
($ In Billions)	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2020		CHANGE Q1-21/Q4-20		CHANGE Q1-21/Q1-20
Corporate & Institutional Services	$	10,618.0	$	10,387.7	$	7,620.8	2	%	39	%
Wealth Management	916.2		875.1		633.9		5		45
Total Assets Under Custody	$	11,534.2	$	11,262.8	$	8,254.7	2	%	40	%

Consolidated assets under custody increased from the prior quarter, primarily reflecting the impact of favorable markets and net inflows, partially offset by unfavorable currency translation. Consolidated assets under custody increased from the prior-year quarter, primarily reflecting the impact of favorable markets, net inflows, and favorable currency translation.

The following table presents the allocation of Northern Trust’s custodied assets by reporting segment.

TABLE 6: ALLOCATION OF ASSETS UNDER CUSTODY


	MARCH 31, 2021						DECEMBER 31, 2020						MARCH 31, 2020
	C&IS		WM		TOTAL		C&IS		WM		TOTAL		C&IS		WM		TOTAL
Equities	47	%	63	%	48	%	46	%	62	%	47	%	40	%	52	%	41	%
Fixed Income Securities	35		14		33		36		15		34		39		20		38
Cash and Other Assets	16		23		17		16		23		17		19		28		19
Securities Lending Collateral	2		—		2		2		—		2		2		—		2

FIRST 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)	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2020		CHANGE Q1-21/Q4-20		CHANGE Q1-21/Q1-20
Equities	$	5,580.7	$	5,293.9	$	3,376.4	5	%	65	%
Fixed Income Securities	3,818.7		3,870.9		3,132.2		(1)		22
Cash and Other Assets	1,933.6		1,911.1		1,579.0		1		22
Securities Lending Collateral	201.2		186.9		167.1		8		20
Total Assets Under Custody	$	11,534.2	$	11,262.8	$	8,254.7	2	%	40	%

The following table presents Northern Trust’s assets under management by reporting segment.

TABLE 8: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT


	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2020		CHANGE Q1-21/Q4-20		CHANGE Q1-21/Q1-20
($ In Billions)	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2020		CHANGE Q1-21/Q4-20		CHANGE Q1-21/Q1-20
Corporate & Institutional Services	$	1,093.7	$	1,057.5	$	842.6	3	%	30	%
Wealth Management	355.4		347.8		276.7		2		28
Total Assets Under Management	$	1,449.1	$	1,405.3	$	1,119.3	3	%	29	%

Consolidated assets under management increased compared to the prior quarter primarily reflecting favorable markets and net inflows. Consolidated assets under management increased compared to the prior-year quarter, primarily reflecting favorable markets, net inflows and favorable 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


	MARCH 31, 2021						DECEMBER 31, 2020						MARCH 31, 2020
	C&IS		WM		TOTAL		C&IS		WM		TOTAL		C&IS		WM		TOTAL
Equities	52	%	55	%	53	%	52	%	52	%	52	%	45	%	46	%	45	%
Fixed Income Securities	11		23		14		11		25		15		14		27		17
Cash and Other Assets	19		22		19		19		23		20		21		27		23
Securities Lending Collateral	18		—		14		18		—		13		20		—		15

The following table presents Northern Trust’s assets under management by investment type.

TABLE 10: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE


($ In Billions)	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2020		CHANGE Q1-21/Q4-20		CHANGE Q1-21/Q1-20
Equities	$	769.6	$	733.7	$	504.5	5	%	53	%
Fixed Income Securities	198.9		204.8		189.8		(3)		5
Cash and Other Assets	279.4		279.9		257.9		—		8
Securities Lending Collateral	201.2		186.9		167.1		8		20
Total Assets Under Management	$	1,449.1	$	1,405.3	$	1,119.3	3	%	29	%

FIRST 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)		MARCH 31, 2021		DECEMBER 31, 2020		SEPTEMBER 30, 2020		JUNE 30, 2020		MARCH 31, 2020
Beginning Balance of AUM		$	1,405.3	$	1,311.7	$	1,257.8	$	1,119.3	$	1,231.3
Inflows by Product
	Equities	84.2		52.0		42.6		46.7		51.7
	Fixed Income	15.3		18.7		16.4		16.4		13.5
	Cash and Other Assets	165.6		188.5		189.9		219.3		204.7
	Securities Lending Collateral	74.1		64.2		57.2		67.7		79.7
Total Inflows		339.2		323.4		306.1		350.1		349.6
Outflows by Product
	Equities	(88.4)		(58.1)		(48.3)		(46.3)		(59.9)
	Fixed Income	(14.8)		(17.5)		(13.9)		(18.5)		(18.6)
	Cash and Other Assets	(163.9)		(203.0)		(195.3)		(180.0)		(168.2)
	Securities Lending Collateral	(59.8)		(50.2)		(50.0)		(69.1)		(75.7)
Total Outflows		(326.9)		(328.8)		(307.5)		(313.9)		(322.4)
Net Inflows (Outflows)		12.3		(5.4)		(1.4)		36.2		27.2
Market Performance, Currency & Other
	Market Performance & Other	37.2		91.0		51.4		99.5		(132.8)
	Currency	(5.7)		8.0		3.9		2.8		(6.4)
Total Market Performance, Currency & Other		31.5		99.0		55.3		102.3		(139.2)
Ending Balance of AUM		$	1,449.1	$	1,405.3	$	1,311.7	$	1,257.8	$	1,119.3

Other Noninterest Income

The components of noninterest income are provided below.

TABLE 12: OTHER NONINTEREST INCOME


	THREE MONTHS ENDED MARCH 31,
($ In Millions)	2021		2020		CHANGE
Foreign Exchange Trading Income	$	78.7	$	88.9	$	(10.2)	(12)	%
Treasury Management Fees	11.2		11.0		0.2		3
Security Commissions and Trading Income	34.8		41.7		(6.9)		(17)
Other Operating Income	54.9		34.4		20.5		60
Investment Security Gains (Losses), net	—		—		—		N/M
Total Other Noninterest Income	$	179.6	$	176.0	$	3.6	2	%

Foreign Exchange Trading Income decreased compared to the prior-year quarter, primarily due to lower client volumes and decreased market volatility.

Security Commissions and Trading Income decreased compared to the prior-year quarter, primarily due to lower revenue from interest rate swaps.

Other Operating Income increased compared to the prior-year quarter, primarily due to higher miscellaneous income and a prior-year quarter market value adjustment for a seed capital investment, partially offset by higher expenses for existing swap agreements related to Visa Inc. Class B common shares. The higher miscellaneous income was primarily associated with a market value increase in the supplemental compensation plans, which also resulted in a related increase in supplemental compensation plan expense reported in other operating expense. Please refer to Note 16 — Other Operating Income to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for further detail.

FIRST 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 on page 25.

FIRST 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)	FIRST QUARTER
	2021						2020
($ 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)	$	0.2	$	37,140.3	—	%	$	23.0	$	19,826.2	0.47	%
Interest-Bearing Due from and Deposits with Banks(2)	2.4		6,464.3		0.15		12.8		5,838.1		0.88
Federal Funds Sold	—		0.3		0.41		—		5.9		1.88
Securities Purchased under Agreements to Resell	1.0		1,551.2		0.27		1.6		661.7		0.96
Securities
U.S. Government	7.2		2,876.9		1.02		21.7		4,639.2		1.88
Obligations of States and Political Subdivisions	15.6		3,199.1		1.96		10.6		1,723.4		2.46
Government Sponsored Agency	83.6		24,845.9		1.36		123.7		23,365.9		2.13
Other(3)	73.9		30,309.5		0.99		92.2		22,234.7		1.67
Total Securities	180.3		61,231.4		1.19		248.2		51,963.2		1.92
Loans and Leases(4)	172.6		34,201.1		2.05		251.7		32,316.2		3.13
Total Interest-Earning Assets	356.5		140,588.6		1.03		537.3		110,611.3		1.95
Cash and Due from Banks and Other Central Bank Deposits(5)	—		2,614.5		—		—		2,723.0		—
Other Noninterest-Earning Assets	—		10,052.7		—		—		10,836.2		—
Total Assets	$	—	$	153,255.8	—	%	$	—	$	124,170.5	—	%
Average Source of Funds
Deposits
Savings, Money Market and Other	$	3.7	$	26,735.9	0.06	%	$	30.5	$	20,251.2	0.61	%
Savings Certificates and Other Time	1.5		923.6		0.67		4.6		959.8		1.91
Non-U.S. Offices — Interest-Bearing	(18.6)		68,305.6		(0.11)		25.8		54,543.3		0.19
Total Interest-Bearing Deposits	(13.4)		95,965.1		(0.06)		60.9		75,754.3		0.32
Federal Funds Purchased	0.1		405.8		0.06		2.0		1,916.5		0.42
Securities Sold under Agreements to Repurchase	—		89.8		0.07		1.0		334.3		1.16
Other Borrowings	3.5		4,681.4		0.30		29.2		7,450.6		1.58
Senior Notes	13.7		3,057.8		1.82		17.9		2,615.1		2.76
Long-Term Debt	5.3		1,178.7		1.83		8.4		1,168.7		2.90
Floating Rate Capital Debt	0.6		277.8		0.81		1.7		277.7		2.41
Total Interest-Related Funds	9.8		105,656.4		0.04		121.1		89,517.2		0.54
Interest Rate Spread	—		—		0.99		—		—		1.41
Demand and Other Noninterest-Bearing Deposits	—		30,451.3		—		—		19,331.5		—
Other Noninterest-Bearing Liabilities	—		5,610.7		—		—		4,534.8		—
Stockholders’ Equity	—		11,537.4		—		—		10,787.0		—
Total Liabilities and Stockholders’ Equity	$	—	$	153,255.8	—	%	$	—	$	124,170.5	—	%
Net Interest Income/Margin (FTE Adjusted)	$	346.7	$	—	1.00	%	$	416.2	$	—	1.51	%
Net Interest Income/Margin (Unadjusted)	$	340.1	$	—	0.98	%	$	408.1	$	—	1.48	%

(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.

FIRST 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 MARCH 31, 2021/2020
	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	$	10.8	$	(33.6)	$	(22.8)
Interest-Bearing Due from and Deposits with Banks	1.2		(11.6)		(10.4)
Federal Funds Sold	—		—		—
Securities Purchased under Agreements to Resell	1.1		(1.7)		(0.6)
Securities
U.S. Government	(6.6)		(7.9)		(14.5)
Obligations of States and Political Subdivisions	7.5		(2.5)		5.0
Government Sponsored Agency	7.3		(47.4)		(40.1)
Other	27.3		(45.6)		(18.3)
Total Securities	35.5		(103.4)		(67.9)
Loans and Leases	64.0		(143.1)		(79.1)
Total Interest Income	$	112.6	$	(293.4)	$	(180.8)

Interest-Bearing Deposits
Savings, Money Market and Other	$	7.4	$	(34.2)	$	(26.8)
Savings Certificates and Other Time	(0.3)		(2.8)		(3.1)
Non-U.S. Offices - Interest-Bearing	5.0		(49.4)		(44.4)
Total Interest-Bearing Deposits	12.1		(86.4)		(74.3)
Federal Funds Purchased	(0.9)		(1.0)		(1.9)
Securities Sold under Agreements to Repurchase	(0.4)		(0.6)		(1.0)
Other Borrowings	(8.1)		(17.6)		(25.7)
Senior Notes	2.6		(6.8)		(4.2)
Long-Term Debt	6.6		(9.7)		(3.1)
Floating Rate Capital Debt	—		(1.1)		(1.1)
Total Interest Expense	$	11.9	$	(123.2)	$	(111.3)
Increase (Decrease) in Net Interest Income (FTE)	$	100.7	$	(170.2)	$	(69.5)

(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 $6.6 million and $8.1 million for the three months ended March 31, 2021 and 2020, 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 on page 25. 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, decreased from the prior-year quarter, primarily due to a lower net interest margin, partially offset by higher average earning assets. Average earning assets increased from the prior-year quarter, primarily due to higher levels of short-term interest-bearing deposits with banks, securities, and loans. Funding of the balance sheet reflected higher levels of client deposits.

The net interest margin on an FTE basis decreased from the prior-year quarter, primarily due to lower interest rates and a balance sheet mix shift. Low levels of market interest rates are expected to continue to impact our net interest income.

Federal Reserve and Other Central Bank Deposits and Other averaged $37.1 billion and increased $17.3 billion, or 87%, from $19.8 billion in the prior-year quarter, resulting from significant deposit inflows. The higher level of client deposits were primarily placed with the Federal Reserve and other central banks and in the securities portfolio. Average Securities were $61.2 billion and increased $9.2 billion, or 18%, from $52.0 billion, in the prior-year quarter and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $911.8 million, $196.6 million and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $57.5 billion in the current quarter and $46.3 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 $3.7 billion in the current quarter

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

and $5.7 billion in the prior-year quarter. Interest-Bearing Due from and Deposits with Banks averaged $6.5 billion in the current quarter and $5.8 billion in the prior-year quarter.

Loans and Leases averaged $34.2 billion and increased $1.9 billion, or 6%, from $32.3 billion in the prior-year quarter, primarily reflecting higher levels of private client, commercial real estate, commercial and institutional, and non-U.S. loans. Private client loans averaged $11.8 billion and increased $821.7 million, or 7%, from $11.0 billion for the prior-year quarter. Commercial real estate loans averaged $3.7 billion and increased $591.7 million, or 19%, from $3.1 billion for the prior-year quarter. Commercial and institutional loans averaged $9.9 billion and increased $348.0 million, or 4%, from $9.5 billion for the prior-year quarter. Non-U.S. loans averaged $2.3 billion and increased $225.0 million or 11%, from $2.1 billion for the prior-year quarter. Residential real estate loans averaged $6.1 billion for both the current quarter and the prior-year quarter.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits increased $20.2 billion, or 27%, to an average of $96.0 billion in the current quarter from $75.8 billion in the prior-year quarter. Other Average Interest-Related Funds decreased $4.1 billion, or 30%, to an average of $9.7 billion in the current quarter from $13.8 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. Average net noninterest-related funds increased $13.8 billion, or 66%, to $34.9 billion in the current quarter from $21.1 billion in the prior-year quarter, primarily resulting from higher levels of Demand and Other Noninterest-Bearing Deposits.

Interest expense for Interest-Bearing Deposits in the current quarter was driven by low and negative interest rates for Non-U.S. Offices Interest-Bearing Deposits and low interest rates on domestic Interest-Bearing Deposits. Average Non-U.S. Offices Interest-Bearing Deposits comprised 71% of total average Interest-Bearing Deposits for the three months ended March 31, 2021.

Provision for Credit Losses

There was a $30.0 million release of credit reserves in the current quarter, as compared to a provision of $61.0 million in the prior-year quarter. The release of credit reserves in the current quarter was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by continued improvement in projected economic conditions and portfolio credit quality relative to the prior quarter, with decreases primarily in the commercial and institutional, commercial real estate, and private client portfolios.

The provision in the prior-year quarter was primarily due to an increase in the reserve evaluated on a collective basis driven by the current and projected economic conditions at the time resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with the largest increase in the commercial and institutional and commercial real estate portfolios. In addition, a $13.7 million increase in the allowance for credit losses, with a corresponding cumulative effect adjustment to decrease retained earnings of $10.1 million, net of income taxes, was recorded on January 1, 2020 upon adoption of Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.”

Net recoveries in the current quarter were $0.9 million, resulting from charge-offs of $0.4 million and recoveries of $1.3 million. The prior-year quarter included $0.7 million of net charge-offs, reflecting $1.8 million of charge-offs and $1.1 million of recoveries. Nonaccrual assets of $125.3 million increased $19.8 million, or 19%, from $105.5 million at the end of the prior-year quarter.

Residential real estate, commercial real estate, commercial and institutional, and private client loans accounted for 48%, 33%, 17%, and 2%, respectively, of total nonaccrual loans and leases at March 31, 2021. Residential real estate, commercial and institutional, and commercial real estate loans accounted for 65%, 32%, and 3%, respectively, of total nonaccrual loans and leases at March 31, 2020. For additional discussion of the allowance for credit losses, refer to the “Asset Quality” section beginning on page 17.

FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense

The components of noninterest expense are provided in the following table.

TABLE 15: NONINTEREST EXPENSE


	THREE MONTHS ENDED MARCH 31,
($ In Millions)	2021		2020		CHANGE
Compensation	$	518.5	$	499.8	$	18.7	4	%
Employee Benefits	103.4		97.9		5.5		6
Outside Services	196.4		192.8		3.6		2
Equipment and Software	176.7		162.2		14.5		9
Occupancy	50.8		51.1		(0.3)		(1)
Other Operating Expense	71.7		61.8		9.9		16
Total Noninterest Expense	$	1,117.5	$	1,065.6	$	51.9	5	%

Compensation expense, the largest component of noninterest expense, increased compared to the prior-year quarter, primarily reflecting higher salary expense and cash-based incentives, partially offset by lower equity incentives.

Employee Benefits expense increased compared to the prior-year quarter primarily reflecting higher retirement plan expenses, medical costs and payroll taxes.

Outside Services expense increased compared to the prior-year quarter, primarily due to higher sub-custodian expenses.

Equipment and Software expense increased compared to the prior-year quarter, primarily reflecting higher software support costs and amortization.

Other Operating Expense increased compared to the prior-year quarter, primarily due to higher supplemental compensation plan expense and other miscellaneous expense, partially offset by lower business promotion and staff-related expense. The higher supplemental compensation plan expense resulted in a related increase in miscellaneous income reported in noninterest income. 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 three months ended March 31, 2021 was $120.8 million, representing an effective tax rate of 24.4%, compared to $100.5 million in the prior-year quarter, representing an effective tax rate of 21.8%.

The effective tax rate increased compared to the prior-year quarter primarily due to lower tax benefits related to share-based compensation.

REPORTING SEGMENTS

Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management.

Reporting segment financial information, presented on an internal management reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level.

Revenues, expenses and average assets are allocated to C&IS and Wealth Management, with the exception of non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments not directly attributable to a specific reporting segment.

Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.

Effective January 1, 2021, Northern Trust implemented enhancements to its FTP methodology, including enhancements impacting the allocation of net interest income between C&IS and Wealth Management. These methodology enhancements affect the results of each of these reporting segments. Due to the lack of historical information, segment results for periods ended prior to January 1, 2021 have not been revised to reflect the methodology enhancements.

REPORTING SEGMENTS (continued)

The following table presents the earnings contributions and average assets of Northern Trust’s reporting segments for the three month periods ended March 31, 2021 and 2020.

TABLE 16: RESULTS OF REPORTING SEGMENTS


($ In Millions)	CORPORATE & INSTITUTIONAL SERVICES						WEALTH MANAGEMENT						OTHER						TOTAL CONSOLIDATED
THREE MONTHS ENDED MARCH 31,	2021			2020			2021			2020			2021			2020			2021			2020
Noninterest Income
Trust, Investment and Other Servicing Fees	$	620.5		$	574.4		$	443.2		$	429.2		$	—		$	—		$	1,063.7		$	1,003.6
Foreign Exchange Trading Income	74.5			85.1			4.2			3.8			—			—			78.7			88.9
Other Noninterest Income	60.3			41.8			44.2			42.4			(3.6)			2.9			100.9			87.1
Total Noninterest Income	755.3			701.3			491.6			475.4			(3.6)			2.9			1,243.3			1,179.6
Net Interest Income(1)	160.7			211.3			186.0			204.9			—			—			346.7			416.2
Revenue(1)	916.0			912.6			677.6			680.3			(3.6)			2.9			1,590.0			1,595.8
Provision for Credit Losses	(5.4)			25.7			(24.6)			35.3			—			—			(30.0)			61.0
Noninterest Expense	713.1			659.3			403.1			394.4			1.3			11.9			1,117.5			1,065.6
Income before Income Taxes(1)	208.3			227.6			299.1			250.6			(4.9)			(9.0)			502.5			469.2
Provision for Income Taxes(1)	50.1			49.9			78.5			60.9			(1.2)			(2.2)			127.4			108.6
Net Income	$	158.2		$	177.7		$	220.6		$	189.7		$	(3.7)		$	(6.8)		$	375.1		$	360.6
Percentage of Consolidated Net Income	42		%	49		%	59		%	53		%	(1)		%	(2)		%	100		%	100		%
Average Assets	$	120,157.7		$	92,715.3		$	33,098.1		$	31,455.2		$	—		$	—		$	153,255.8		$	124,170.5

(1)Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $6.6 million for 2021 and $8.1 million for 2020. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided on page 25.

Corporate & Institutional Services

C&IS Net Income

For the quarter ended March 31, 2021, Net Income decreased $19.5 million, or 11%, from the prior-year quarter, primarily reflecting higher noninterest expense and lower net interest income, partially offset by higher noninterest income and a release of credit reserves.

C&IS Trust, Investment and Other Servicing Fees

For an explanation of C&IS 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.

C&IS Foreign Exchange Trading Income

For the quarter ended March 31, 2021, Foreign Exchange Trading Income decreased $10.6 million, or 12%, from the prior-year quarter, primarily due to lower client volumes and decreased market volatility.

C&IS Other Noninterest Income

For the quarter ended March 31, 2021, Other Noninterest Income increased $18.5 million, or 44%, from the prior-year quarter, primarily due to a market value adjustment for a seed capital investment in the prior year.

C&IS Net Interest Income

For the quarter ended March 31, 2021, Net Interest Income stated on an FTE basis decreased $50.6 million, or 24%, from the prior-year quarter, primarily reflecting a lower net interest margin driven by declining short-term interest rates, partially offset by higher earning asset levels funded by higher deposit balances. Average earning assets increased $27.2 billion to $109.0 billion in the current quarter from $81.7 billion in the prior-year quarter. The earning assets and funding sources in C&IS for the quarter ended March 31, 2021 consisted primarily of intercompany assets and of loans and non-U.S. custody-related interest-bearing deposits, respectively.

REPORTING SEGMENTS (continued)

Corporate & Institutional Services (continued)

C&IS Provision for Credit Losses

For the quarter ended March 31, 2021, there was a $5.4 million release of credit reserves compared with a $25.7 million provision for credit losses from the prior-year quarter.

The release of credit reserves for the quarter ended March 31, 2021, reflected a decrease in the reserve evaluated on a collective basis driven by continued improvement in projected economic conditions and portfolio credit quality, specifically impacting the commercial and institutional portfolio.

C&IS Noninterest Expense

For the quarter ended March 31, 2021, 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 $53.8 million, or 8%, from the prior-year quarter, primarily due to higher expense allocations, Other Operating Expense and Compensation.

Wealth Management

Wealth Management Net Income

For the quarter ended March 31, 2021, Net Income increased $30.9 million, or 16%, from the prior-year quarter primarily due to a release of credit reserves and higher Trust, Investment and Other Servicing Fees, partially offset by lower Net Interest Income, higher Provision for Income Taxes and higher Noninterest Expense.

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.

Wealth Management Net Interest Income

For the quarter ended March 31, 2021, Net Interest Income stated on an FTE basis decreased $18.9 million, or 9%, from the prior-year quarter, primarily reflecting lower interest rates, partially offset by higher net interest allocations and higher deposit and loan balances. Average earning assets increased $2.7 billion to $31.6 billion in the current quarter from $28.9 billion in the prior-year quarter. Earning assets and funding sources for the quarter ended March 31, 2021 were primarily comprised of loans and domestic interest-bearing deposits, respectively.

Wealth Management Provision for Credit Losses

For the quarter ended March 31, 2021, there was a $24.6 million release of credit reserves compared with a $35.3 million provision for credit losses from the prior-year quarter.

The release of credit reserves for the quarter ended March 31, 2021, reflected a decrease in the reserve evaluated on a collective basis driven by continued improvement in projected economic conditions and portfolio credit quality, primarily impacting the commercial real estate, commercial and institutional, and private client portfolios.

Wealth Management Noninterest Expense

For the quarter ended March 31, 2021, 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 $8.7 million or 2% from the prior-year quarter, primarily reflecting higher expense allocations.

Other

Other Noninterest Income

For the quarter ended March 31, 2021, Other Noninterest Income decreased $6.5 million from the prior-year quarter due to higher expenses for existing swap agreements related to Visa Inc. Class B common shares.

Other Noninterest Expense

For the quarter ended March 31, 2021, Other Noninterest Expense decreased $10.6 million or 89.1% from the prior-year quarter, primarily due to higher Compensation expense from the one-time supplemental payment to employees in response to the COVID-19 pandemic recorded in the prior-year quarter.

CONSOLIDATED BALANCE SHEETS

The following tables summarize selected consolidated balance sheet information.

TABLE 17: SELECT CONSOLIDATED BALANCE SHEET INFORMATION


($ In Billions)	MARCH 31, 2021		DECEMBER 31, 2020		CHANGE
Assets
Federal Reserve and Other Central Bank Deposits and Other(1)	$	46.9	$	55.4	$	(8.5)	(15)	%
Interest-Bearing Due from and Deposits with Banks(2)	7.3		6.6		0.7		10
Securities Purchased under Agreements to Resell	1.1		1.6		(0.5)		(31)
Total Securities(3)	61.4		61.1		0.3		—
Loans and Leases	34.3		33.8		0.5		2
Total Earning Assets	151.0		158.5		(7.5)		(5)
Total Assets	163.9		170.0		(6.1)		(4)
Liabilities and Stockholders' Equity
Total Interest-Bearing Deposits	92.0		100.8		(8.8)		(9)
Demand and Other Noninterest-Bearing Deposits	45.5		43.1		2.4		5
Federal Funds Purchased	—		0.3		(0.3)		(100)
Securities Sold under Agreements to Repurchase	0.1		—		0.1		140
Other Borrowings	5.4		4.0		1.4		35
Total Stockholders’ Equity	11.5		11.7		(0.2)		(2)

(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.

TABLE 18: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION


	THREE MONTHS ENDED MARCH 31,
($ In Billions)	2021		2020		CHANGE
Assets
Federal Reserve and Other Central Bank Deposits and Other(1)	$	37.1	$	19.8	$	17.3	87	%
Interest-Bearing Due from and Deposits with Banks(2)	6.5		5.8		0.7		11
Securities Purchased under Agreements to Resell	1.6		0.7		0.9		134
Total Securities(3)	61.2		52.0		9.2		18
Loans and Leases	34.2		32.3		1.9		6
Total Earning Assets	140.6		110.6		30.0		27
Total Assets	153.3		124.2		29.1		23
Liabilities and Stockholders' Equity
Total Interest-Bearing Deposits	96.0		75.8		20.2		27
Demand and Other Noninterest-Bearing Deposits	30.5		19.3		11.2		58
Federal Funds Purchased	0.4		1.9		(1.5)		(79)
Securities Sold under Agreements to Repurchase	0.1		0.3		(0.2)		(73)
Other Borrowings	4.7		7.5		(2.8)		(37)
Total Stockholders’ Equity	11.5		10.8		0.7		7

(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.

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. The current quarter growth in both the period-end and average consolidated balance sheets was primarily driven by higher customer deposit balances.

Stockholders’ Equity. The increase in average Stockholders’ Equity was primarily attributable to retained earnings and Accumulated Other Comprehensive Income since the prior-year period, partially offset by the repurchase of common stock pursuant to the Corporation’s share repurchase program.

CONSOLIDATED BALANCE SHEETS (continued)

During the three months ended March 31, 2021, the Corporation declared cash dividends totaling $151.0 million to common stockholders and cash dividends totaling $16.2 million to preferred stockholders.

On December 18, 2020, the Federal Reserve extended its capital distribution limits into the first quarter of 2021 with certain modifications, which included continuing to limit dividend payments and share repurchases based on recent income. During the first quarter of 2021, the Corporation restarted its share repurchase program in accordance with such limitations. On March 25, 2021, the Federal Reserve announced that the temporary and additional restrictions on bank holding company dividends and share repurchases currently in place may end after June 30, 2021, depending on results from upcoming stress tests.

For the three months ended March 31, 2021, the Corporation repurchased 1,399,673 shares of common stock, including 365,697 shares withheld related to share-based compensation, at a total cost of $135.6 million ($96.91 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 debt securities available for sale and amortized cost of debt securities held to maturity by credit rating.

TABLE 19: FAIR VALUE OF DEBT SECURITIES AVAILABLE FOR SALE BY CREDIT RATING


	AS OF MARCH 31, 2021
($ In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	2,561.0		$	—		$	—		$	—		$	—		$	2,561.0
Obligations of States and Political Subdivisions	992.0			2,287.8			—			—			—			3,279.8
Government Sponsored Agency	24,650.7			—			—			—			—			24,650.7
Non-U.S. Government	517.7			38.4			2.0			—			—			558.1
Corporate Debt	442.1			634.0			1,065.3			64.2			193.1			2,398.7
Covered Bonds	445.6			—			24.6			—			73.9			544.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	2,115.5			694.2			155.9			—			37.8			3,003.4
Other Asset-Backed	4,650.0			—			—			—			133.0			4,783.0
Commercial Mortgage-Backed	1,099.8			—			—			—			—			1,099.8
Total	$	37,474.4		$	3,654.4		$	1,247.8		$	64.2		$	437.8		$	42,878.6
Percent of Total	87		%	9		%	3		%	—		%	1		%	100		%


	AS OF DECEMBER 31, 2020
($ In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	2,799.9		$	—		$	—		$	—		$	—		$	2,799.9
Obligations of States and Political Subdivisions	918.1			2,165.5			—			—			—			3,083.6
Government Sponsored Agency	24,956.7			—			—			—			—			24,956.7
Non-U.S. Government	669.8			38.8			5.4			—			—			714.0
Corporate Debt	426.3			790.0			1,123.5			—			199.8			2,539.6
Covered Bonds	453.3			—			24.9			—			74.9			553.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	1,622.0			566.0			157.8			—			—			2,345.8
Other Asset-Backed	3,947.5			—			—			—			50.0			3,997.5
Commercial Mortgage-Backed	1,031.8			—			—			—			—			1,031.8
Total	$	36,825.4		$	3,560.3		$	1,311.6		$	—		$	324.7		$	42,022.0
Percent of Total	88		%	8		%	3		%	—		%	1		%	100		%

As of March 31, 2021, the 1% of debt securities available for sale not rated by Moody’s Investors Service, Standard and Poor’s or Fitch Ratings consisted of corporate debt, other asset-backed, covered bonds and sub-sovereign, supranational and non-U.S. agency bonds.

As of December 31, 2020, the 1% of debt securities available for sale not rated by Moody’s Investors Service, Standard and Poor’s or Fitch Ratings consisted of corporate debt, covered bonds, and other asset-backed securities.

ASSET QUALITY (continued)

Securities Portfolio (continued)

TABLE 20: AMORTIZED COST OF DEBT SECURITIES HELD TO MATURITY BY CREDIT RATING


	AS OF MARCH 31, 2021
($ In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	100.0		$	—		$	—		$	—		$	—		$	100.0
Obligations of States and Political Subdivisions	—			1.0			—			—			—			1.0
Government Sponsored Agency	53.6			—			—			—			—			53.6
Non-U.S. Government	301.0			205.1			5,760.4			272.8			—			6,539.3
Corporate Debt	75.1			396.0			445.6			—			—			916.7
Covered Bonds	3,046.8			—			—			—			—			3,046.8
Certificates of Deposit	—			—			—			—			644.1			644.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	3,301.2			1,339.8			31.6			—			—			4,672.6
Other Asset-Backed	706.2			—			—			—			—			706.2
Other	—			—			—			—			456.1			456.1
Total	$	7,583.9		$	1,941.9		$	6,237.6		$	272.8		$	1,100.2		$	17,136.4
Percent of Total	44		%	11		%	36		%	2		%	7		%	100		%


	AS OF DECEMBER 31, 2020
(In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	90.0		$	—		$	—		$	—		$	—		$	90.0
Obligations of States and Political Subdivisions	—			1.0			—			1.1			—			2.1
Government Sponsored Agency	3.0			—			—			—			—			3.0
Non-U.S. Government	319.8			1,337.4			6,630.6			48.8			—			8,336.6
Corporate Debt	3.8			279.1			305.1			—			—			588.0
Covered Bonds	3,184.6			—			—			—			—			3,184.6
Certificates of Deposit	—			—			—			—			807.2			807.2
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	2,590.9			1,057.1			—			—			—			3,648.0
Other Asset-Backed	677.0			—			—			—			—			677.0
Other	—			—			—			—			454.6			454.6
Total	$	6,869.1		$	2,674.6		$	6,935.7		$	49.9		$	1,261.8		$	17,791.1
Percent of Total	39		%	15		%	39		%	—		%	7		%	100		%

As of both March 31, 2021 and December 31, 2020, the 7% of debt securities held to maturity not rated by Moody’s Investors Service, Standard and Poor’s 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 gains within the investment securities portfolio totaled $333.6 million at March 31, 2021, compared to net unrealized gains of $872.6 million as of December 31, 2020. Net unrealized gains as of March 31, 2021 were comprised of $694.3 million and $360.7 million of gross unrealized gains and losses, respectively. Net unrealized gains as of December 31, 2020 were comprised of $981.9 million and $109.3 million of gross unrealized gains and losses, respectively.

As of March 31, 2021, the $42.9 billion debt securities available for sale portfolio had unrealized losses of $160.2 million and $52.5 million related to government-sponsored agency and obligations of states and political subdivisions, respectively, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of December 31, 2020, the $42.0 billion debt securities available for sale portfolio had unrealized losses of $26.9 million and $2.8 million related to government-sponsored agency and other asset-backed securities, respectively, which are primarily attributable to changes in market interest rates and credit spreads since their purchase.

As of March 31, 2021, the $17.1 billion debt securities held to maturity portfolio had unrealized losses of $75 million and $23.3 million related to other residential mortgage-backed 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, 2020, the $17.8 billion debt securities held to maturity portfolio had an unrealized loss of $76.5 million related to other residential mortgage-backed securities, which is primarily attributable to changes in overall market interest rates and credit spreads since their purchase.

As of March 31, 2021 and December 31, 2020, 17% and 16%, respectively, of the corporate debt securities available for sale portfolio was backed by guarantees provided by U.S. and non-U.S. government entities.

ASSET QUALITY (continued)

Securities Portfolio (continued)

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).

Northern Trust participates in the repurchase agreement market as a relatively low cost alternative for short-term funding. 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).

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, renegotiations and renewals.

TABLE 21: NONACCRUAL ASSETS


($ In Millions)	MARCH 31, 2021			DECEMBER 31, 2020
Nonaccrual Loans and Leases
Commercial
Commercial and Institutional	$	21.3		$	26.4
Commercial Real Estate	40.1			40.2
Total Commercial	$	61.4		$	66.6
Personal
Residential Real Estate	$	59.5		$	62.2
Private Client	2.9			2.9
Total Personal	$	62.4		$	65.1
Total Nonaccrual Loans and Leases	123.8			131.7
Other Real Estate Owned	1.5			0.7
Total Nonaccrual Assets	$	125.3		$	132.4
90 Day Past Due Loans Still Accruing	$	24.0		$	8.9
Nonaccrual Loans and Leases to Total Loans and Leases	0.36		%	0.39		%
Allowance for Credit Losses Assigned to Loans and Leases to Nonaccrual Loans and Leases	1.3		x	1.4		x

Nonaccrual assets of $125.3 million as of March 31, 2021 decreased primarily due to a net decrease in the residential real estate portfolio due to net payoffs and charge-offs and a payoff of one nonaccrual loan in the commercial and institutional portfolio, partially offset by one new nonaccrual loan 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.

ASSET QUALITY (continued)

Nonaccrual Loans and Leases and Other Real Estate Owned (continued)

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).

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.

As of March 31, 2021, the allowance for credit losses related to loans and leases, undrawn loan commitments and standby letters of credit, debt securities held to maturity, and other financial assets, was $165.4 million, $55.1 million, $8.6 million, and $1.7 million, respectively. As of December 31, 2020, the allowance for credit losses related to loans and leases, undrawn loan commitments and standby letters of credit, debt securities held to maturity, and other financial assets, was $190.7 million, $61.1 million, $7.3 million, and $0.8 million, respectively. For additional information relating to the allowance for credit losses and the changes in the allowance for credit losses during the three months ended March 31, 2021 and 2020 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 22: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES FOR LOANS AND LEASES


	MARCH 31, 2021					DECEMBER 31, 2020
($ 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		—	%	$	10.7		—	%
Evaluated on a Collective Basis
Commercial
Commercial and Institutional	88.3			29		100.6			30
Commercial Real Estate	59.2			11		70.7			10
Lease Financing, net	0.5			—		0.4			—
Non-U.S.	17.8			5		17.7			4
Other	—			1		—			1
Total Commercial	165.8			46		189.4			45
Personal
Residential Real Estate	27.8			18		28.9			18
Private Client	14.7			35		20.6			35
Non-U.S.	1.3			1		2.2			2
Other	—			—		—			—
Total Personal	43.8			54		51.7			55
Total Allowance Evaluated on a Collective Basis	$	209.6		100	%	$	241.1		100	%
Total Allowance for Credit Losses	$	220.5		100	%	$	251.8		100	%
Allowance Assigned to
Loans and Leases	$	165.4				$	190.7
Undrawn Commitments and Standby Letters of Credit	55.1					61.1
Total Allowance for Credit Losses	$	220.5				$	251.8
Allowance Assigned to Loans and Leases to Total Loans and Leases	0.48		%			0.56		%

STATEMENTS OF CASH FLOWS

The following discusses the statement of cash flow activities for the three months ended March 31, 2021 and 2020.

TABLE 23: CASH FLOW ACTIVITY SUMMARY


	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Net cash provided by (used in):
Operating activities	$	68.3	$	(2,685.3)
Investing activities	5,133.7		(21,500.3)
Financing activities	(4,905.6)		25,708.0
Effect of Foreign Currency Exchange Rates on Cash	(101.5)		(148.4)
Change in Cash and Due from Banks	$	194.9	$	1,374.0

Operating Activities

Net cash provided by operating activities of $68.3 million for the three months ended March 31, 2021 was primarily attributable to period earnings, the impact of lower non-cash charges such as amortization and net changes in other operating activities, partially offset by higher net collateral deposited with derivative counterparties.

Net cash used in operating activities of $2.7 billion for the three months ended March 31, 2020 was primarily attributable to higher net collateral deposited with derivative counterparties, partially offset by net changes in other operating activities and period earnings.

Investing Activities

Net cash provided by investing activities of $5.1 billion for the three months ended March 31, 2021 was primarily attributable to decreased levels of Federal Reserve and other central bank deposits, partially offset by net purchases of debt securities available for sale, client security settlement receivables, and interest-bearing deposits with banks.

Net cash used in investing activities of $21.5 billion for the three months ended March 31, 2020 was primarily attributable to increased levels of Federal Reserve and other central bank deposits, higher levels of loans and leases, and client security settlement receivables.

Financing Activities

Net cash used in financing activities of $4.9 billion for the three months ended March 31, 2021 was primarily attributable to the decreased levels of total deposits, partially offset by increased levels of short-term borrowings. The decrease in total deposits was primarily attributable to lower levels of interest-bearing non-U.S. office client deposits and savings, money market and other interest-bearing deposits, partially offset by increased non-U.S. and domestic noninterest-bearing deposits.

Net cash provided by financing activities of $25.7 billion for the three months ended March 31, 2020 was primarily attributable to increased levels of total deposits and federal funds purchased, partially offset by decreased levels of short-term borrowings and securities sold under agreements to repurchase and the redemption by the Corporation of the Series C Non-Cumulative Perpetual Preferred Stock. The increase in total deposits was primarily attributable to higher levels of interest-bearing non-U.S. office client deposits, domestic noninterest-bearing deposits, and savings, money market and other interest-bearing deposits.

CAPITAL RATIOS

The capital ratios of Northern Trust Corporation and its principal subsidiary, The Northern Trust Company, remained strong at March 31, 2021, exceeding the requirements for classification as “well-capitalized” under applicable U.S. regulatory requirements.

As a result of the stress test results published by the Federal Reserve on June 25, 2020, Northern Trust’s stress capital buffer requirement for the 2020 Capital Plan cycle was set at 2.5%. The 2020 stress capital buffer became effective October 1, 2020, and results in an effective common equity tier 1 capital ratio minimum requirement of 7.0% inclusive of this buffer.

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 24: REGULATORY CAPITAL RATIOS


Capital Ratios — Northern Trust Corporation	MARCH 31, 2021				DECEMBER 31, 2020				MARCH 31, 2020
	STANDARDIZED APPROACH		ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		WELL-CAPITALIZED RATIOS	MINIMUM CAPITAL RATIOS
Common Equity Tier 1 Capital	12.0	%	12.8	%	12.8	%	13.4	%	11.7	%	12.9	%	N/A	4.5	%
Tier 1 Capital	13.0		14.0		13.9		14.5		12.8		14.1		6.0	6.0
Total Capital	14.5		15.2		15.6		15.9		14.5		15.7		10.0	8.0
Tier 1 Leverage	6.9		6.9		7.6		7.6		8.1		8.1		N/A	4.0
Supplementary Leverage(1)	N/A		8.1		N/A		8.6		N/A		7.2		N/A	3.0


Capital Ratios — The Northern Trust Company	MARCH 31, 2021				DECEMBER 31, 2020				MARCH 31, 2020
	STANDARDIZED APPROACH		ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		WELL-CAPITALIZED RATIOS		MINIMUM CAPITAL RATIOS
Common Equity Tier 1 Capital	12.1	%	13.2	%	13.0	%	13.8	%	12.0	%	13.5	%	6.5	%	4.5	%
Tier 1 Capital	12.1		13.2		13.0		13.8		12.0		13.5		8.0		6.0
Total Capital	13.4		14.3		14.5		15.0		13.6		14.9		10.0		8.0
Tier 1 Leverage	6.4		6.4		7.0		7.0		7.6		7.6		5.0		4.0
Supplementary Leverage(1)	N/A		7.4		N/A		7.7		N/A		6.8		3.0		3.0

(1) In November 2019, the Federal Reserve and other U.S. federal banking agencies adopted a final rule that established a deduction for central bank deposits from the total leverage exposures of custodial banking organizations, including Northern Trust Corporation and The Northern Trust Company, equal to the lesser of (i) the total amount of funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. The rule became effective on April 1, 2020.

Further, on March 23, 2020, the Federal Reserve issued a temporary rule that required bank holding companies, including Northern Trust Corporation, to deduct their deposits with the Federal Reserve and investments in U.S. Treasury securities from their total leverage exposure. The U.S. Treasury securities deduction is applied in addition to the central bank deposits relief referred to above. This rule became effective on April 1, 2020 and expired on April 1, 2021.

On May 15, 2020, the U.S. federal banking agencies issued a temporary rule that permitted, but did not require, insured depository institutions of bank holding companies to exclude deposits with the Federal Reserve and investments in U.S. Treasury securities from their total leverage exposure. The Northern Trust Company did not elect to take this deduction.

The supplementary leverage ratios at March 31, 2021 and December 31, 2020 for the Northern Trust Corporation and The Northern Trust Company reflect the impact of these final rules.

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

There are no accounting pronouncements and developments issued but not yet effective as of March 31, 2021 that are expected to have a significant impact on Northern Trust’s consolidated balance sheets or results of operations.

MARKET RISK MANAGEMENT

There are two types of market risk, interest rate risk associated with the assets and liabilities on the balance sheet, and trading risk. Interest rate risk associated with the assets and liabilities on the balance sheet 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.

MARKET RISK MANAGEMENT (continued)

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, 2020.

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;

▪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. Each rate movement is assumed to occur gradually over a one-year period.

TABLE 25: NET INTEREST INCOME SENSITIVITY AS OF MARCH 31, 2021


($ In Millions)	INCREASE (DECREASE) ESTIMATED IMPACT ON NEXT TWELVE MONTHS OF NET INTEREST INCOME
Increase in Interest Rates Above Market Implied Forward Rates
100 Basis Points	$	262
200 Basis Points	458
Decrease in Interest Rates Below Market Implied Forward Rates
100 Basis Points	$	74

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:

MARKET RISK MANAGEMENT (continued)

▪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.

TABLE 26: MARKET VALUE OF EQUITY SENSITIVITY AS OF MARCH 31, 2021


($ In Millions)	INCREASE (DECREASE) ESTIMATED IMPACT ON MARKET VALUE OF EQUITY
Increase in Interest Rates Above Market Implied Forward Rates
100 Basis Points	$	23
200 Basis Points	(346)
Decrease in Interest Rates Below Market Implied Forward Rates
100 Basis Points	$	577

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 a variety of high confidence levels, of the potential loss in value that might be incurred if an adverse shift in non-U.S. currency exchange rates were to occur over a small number of days. The model incorporates foreign currency and interest rate volatilities and correlations in price movements among the currencies. VaR is computed for each trading desk and for the global portfolio.

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 March 31, 2021, Northern Trust did not incur an actual GFX trading loss in excess of the daily GFX VaR estimate.

The table below 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 27: 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	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2021		DECEMBER 31, 2020
High	$	0.9	$	1.8	$	0.4	$	1.9	$	0.7	$	1.0
Low	0.1		0.2		0.1		0.1		0.1		0.1
Average	0.4		0.4		0.2		0.2		0.4		0.4
Quarter-End	0.1		0.3		0.1		0.3		0.1		0.2

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 28: RECONCILIATION TO FULLY TAXABLE EQUIVALENT


	THREE MONTHS ENDED MARCH 31,
($ In Millions)	2021			2020
Net Interest Income
Interest Income - GAAP	$	349.9		$	529.2
Add: FTE Adjustment	6.6			8.1
Interest Income (FTE) - Non-GAAP	$	356.5		$	537.3

Net Interest Income - GAAP	$	340.1		$	408.1
Add: FTE Adjustment	6.6			8.1
Net Interest Income (FTE) - Non-GAAP	$	346.7		$	416.2

Net Interest Margin - GAAP	0.98		%	1.48		%
Net Interest Margin (FTE) - Non-GAAP	1.00		%	1.51		%

Total Revenue
Total Revenue - GAAP	$	1,583.4		$	1,587.7
Add: FTE Adjustment	6.6			8.1
Total Revenue (FTE) - Non-GAAP	$	1,590.0		$	1,595.8

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:

•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;

•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;

•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, systems performance or defects, systems interruptions, 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;

•changes in the availability of the London Interbank Offered Rate (LIBOR) or 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;

•geopolitical risks, risks related to global climate change and the risks of extraordinary events such as pandemics, natural disasters, terrorist events and war, and the responses of the United States and other countries to those events;

•the departure of the United Kingdom from the European Union, commonly referred to as “Brexit,” and any negative effects thereof on global economic conditions, global financial markets, and our business and results of operations;

•changes in the nature and activities of Northern Trust’s competition;

•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;

FORWARD-LOOKING STATEMENTS (continued)

•Northern Trust’s ability to continue to generate investment results that satisfy clients and to develop an array of investment products;

•the effectiveness of Northern Trust’s management of its human capital, including its success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;

•Northern Trust’s success in implementing its expense management initiatives;

•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, 2020, 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)	MARCH 31, 2021		DECEMBER 31, 2020
	(Unaudited)
ASSETS
Cash and Due from Banks	$	4,584.4	$	4,389.5
Federal Reserve and Other Central Bank Deposits	46,911.4		55,503.6
Interest-Bearing Deposits with Banks	5,142.8		4,372.6
Federal Funds Sold	0.1		0
Securities Purchased under Agreements to Resell	1,109.3		1,596.5
Debt Securities
Available for Sale (Amortized cost of $42,508.6 and $41,155.7)	42,878.6		42,022.0
Held to Maturity (Fair value of $17,100.0 and $17,797.4)	17,136.4		17,791.1
Trading Account	0.4		0.5
Total Debt Securities	60,015.4		59,813.6
Loans and Leases
Commercial	15,847.9		15,262.0
Personal	18,496.4		18,497.7
Total Loans and Leases (Net of unearned income of $9.4 and $9.8)	34,344.3		33,759.7
Allowance for Credit Losses	(175.7)		(198.8)
Buildings and Equipment	496.7		514.9
Client Security Settlement Receivables	1,970.2		1,160.2
Goodwill	704.0		707.2
Other Assets	8,821.2		8,384.9
Total Assets	$	163,924.1	$	170,003.9
LIABILITIES
Deposits
Demand and Other Noninterest-Bearing	$	18,863.1	$	17,728.5
Savings, Money Market and Other Interest-Bearing	27,322.9		28,631.8
Savings Certificates and Other Time	909.7		937.1
Non U.S. Offices — Noninterest-Bearing	26,615.2		25,382.2
— Interest-Bearing	63,746.5		71,198.4
Total Deposits	137,457.4		143,878.0
Federal Funds Purchased	0.2		260.2
Securities Sold Under Agreements to Repurchase	95.6		39.8
Other Borrowings	5,428.4		4,011.5
Senior Notes	2,991.2		3,122.4
Long-Term Debt	1,165.9		1,189.3
Floating Rate Capital Debt	277.8		277.8
Other Liabilities	5,049.7		5,536.6
Total Liabilities	152,466.2		158,315.6
STOCKHOLDERS' EQUITY
Preferred Stock, No Par Value; Authorized 10,000,000 shares:
Series D, outstanding shares of 5,000	493.5		493.5
Series E, outstanding shares of 16,000	391.4		391.4
Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares;
Outstanding shares of 208,140,239 and 208,289,178	408.6		408.6
Additional Paid-In Capital	914.1		963.6
Retained Earnings	12,415.6		12,207.7
Accumulated Other Comprehensive Income (Loss)	65.9		428.0
Treasury Stock (37,031,285 and 36,882,346 shares, at cost)	(3,231.2)		(3,204.5)
Total Stockholders’ Equity	11,457.9		11,688.3
Total Liabilities and Stockholders’ Equity	$	163,924.1	$	170,003.9

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)			NORTHERN TRUST CORPORATION


	THREE MONTHS ENDED MARCH 31,
(In Millions Except Share Information)	2021		2020
Noninterest Income
Trust, Investment and Other Servicing Fees	$	1,063.7	$	1,003.6
Foreign Exchange Trading Income	78.7		88.9
Treasury Management Fees	11.2		11.0
Security Commissions and Trading Income	34.8		41.7
Other Operating Income	54.9		34.4
Investment Security Gains (Losses), net	0		0
Total Noninterest Income	1,243.3		1,179.6
Net Interest Income
Interest Income	349.9		529.2
Interest Expense	9.8		121.1
Net Interest Income	340.1		408.1
Provision for Credit Losses	(30.0)		61.0
Net Interest Income after Provision for Credit Losses	370.1		347.1
Noninterest Expense
Compensation	518.5		499.8
Employee Benefits	103.4		97.9
Outside Services	196.4		192.8
Equipment and Software	176.7		162.2
Occupancy	50.8		51.1
Other Operating Expense	71.7		61.8
Total Noninterest Expense	1,117.5		1,065.6
Income before Income Taxes	495.9		461.1
Provision for Income Taxes	120.8		100.5
Net Income	$	375.1	$	360.6
Preferred Stock Dividends	16.2		30.5
Net Income Applicable to Common Stock	$	358.9	$	330.1
Per Common Share
Net Income – Basic	$	1.71	$	1.56
– Diluted	1.70		1.55
Average Number of Common Shares Outstanding
– Basic	208,112,824		208,881,131
– Diluted	208,946,448		209,816,822


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)	NORTHERN TRUST CORPORATION
	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Net Income	$	375.1	$	360.6
Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)
Net Unrealized Gains (Losses) on Debt Securities Available for Sale	(369.7)		199.7
Net Unrealized Gains (Losses) on Cash Flow Hedges	(5.2)		7.3
Net Foreign Currency Adjustments	5.0		25.7
Net Pension and Other Postretirement Benefit Adjustments	7.8		7.0
Other Comprehensive Income (Loss)	(362.1)		239.7
Comprehensive Income	$	13.0	$	600.3

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)			NORTHERN TRUST CORPORATION


	THREE MONTHS ENDED MARCH 31, 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

See accompanying notes to the consolidated financial statements.


	THREE MONTHS ENDED MARCH 31, 2020
(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, 2019	$	1,273.4	$	408.6	$	1,013.1	$	11,656.7	$	(194.7)	$	(3,066.1)	$	11,091.0
Cumulative Effect Adjustment related to the adoption of Accounting Standards Update 2016-13	—		—		—		(10.1)		—		—		(10.1)
Net Income	—		—		—		360.6		—		—		360.6
Other Comprehensive Income (Loss) (Net of Tax and Reclassifications)	—		—		—		—		239.7		—		239.7
Dividends Declared:
Common Stock, $0.70 per share	—		—		—		(148.6)		—		—		(148.6)
Preferred Stock	—		—		—		(19.0)		—		—		(19.0)
Redemption of Preferred Stock, Series C	(388.5)		—		—		(11.5)		—		—		(400.0)
Stock Awards and Options Exercised	—		—		(74.8)		—		—		137.7		62.9
Stock Purchased	—		—		—		—		—		(296.8)		(296.8)
Balance at March 31, 2020	$	884.9	$	408.6	$	938.3	$	11,828.1	$	45.0	$	(3,225.2)	$	10,879.7

See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)			NORTHERN TRUST CORPORATION


	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	375.1	$	360.6
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Amortization and Accretion of Securities and Unearned Income, net	26.1		22.4
Provision for Credit Losses	(30.0)		61.0
Depreciation and Amortization	125.4		123.8
Pension Plan Contributions	(6.7)		(10.6)
Change in Receivables	(66.7)		(122.7)
Change in Interest Payable	7.3		(5.7)
Change in Collateral With Derivative Counterparties, net	(824.2)		(3,570.2)
Other Operating Activities, net	462.0		456.1
Net Cash Provided by (Used in) Operating Activities	68.3		(2,685.3)
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Federal Funds Sold	(0.1)		5.0
Change in Securities Purchased under Agreements to Resell	477.9		(367.2)
Change in Interest-Bearing Deposits with Banks	(772.6)		(757.6)
Net Change in Federal Reserve and Other Central Bank Deposits	8,369.3		(11,204.7)
Purchases of Debt Securities – Held to Maturity	(16,047.6)		(7,076.0)
Proceeds from Maturity and Redemption of Debt Securities – Held to Maturity	16,125.8		6,287.3
Purchases of Debt Securities – Available for Sale	(3,631.9)		(2,857.6)
Proceeds from Sale, Maturity and Redemption of Debt Securities – Available for Sale	2,214.9		2,430.7
Change in Loans and Leases	(592.4)		(6,432.9)
Purchases of Buildings and Equipment	(10.7)		(37.6)
Purchases and Development of Computer Software	(94.8)		(94.8)
Change in Client Security Settlement Receivables	(810.4)		(1,241.9)
Other Investing Activities, net	(93.7)		(153.0)
Net Cash Provided by (Used in) Investing Activities	5,133.7		(21,500.3)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits	(5,844.1)		23,956.5
Change in Federal Funds Purchased	(260.0)		3,817.7
Change in Securities Sold under Agreements to Repurchase	55.8		(455.6)
Change in Short-Term Other Borrowings	1,420.3		(778.0)
Redemption of Preferred Stock - Series C	0		(400.0)
Treasury Stock Purchased	(135.6)		(296.8)
Net Proceeds from Stock Options	8.7		8.8
Cash Dividends Paid on Common Stock	(145.9)		(147.1)
Cash Dividends Paid on Preferred Stock	(4.7)		(5.8)
Other Financing Activities, net	(0.1)		8.3
Net Cash (Used in) Provided by Financing Activities	(4,905.6)		25,708.0
Effect of Foreign Currency Exchange Rates on Cash	(101.5)		(148.4)
Change in Cash and Due from Banks	194.9		1,374.0
Cash and Due from Banks at Beginning of Period	4,389.5		4,459.2
Cash and Due from Banks at End of Period	$	4,584.4	$	5,833.2
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid	$	2.2	$	126.7
Income Taxes Paid	30.8		72.6
Transfers from Loans to OREO	3.3		(0.2)

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 March 31, 2021 and 2020, 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. 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, 2020.

Note 2 – Recent Accounting Pronouncements

On January 1, 2021, Northern Trust adopted Accounting Standards Update (ASU) No. 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (ASU 2020-01). ASU 2020-01 addresses two accounting issues: (1) application of the measurement alternative under Topic 321 in correlation with the transition into and out of the equity method under Topic 323 and (2) the measurement of certain forward contracts and purchased options to acquire equity securities. ASU 2020-01 clarifies that an entity applying the measurement alternative under Topic 321 that must transition to the equity method under Topic 323 because of an observable transaction will remeasure its investment immediately before transition, whereas an entity applying the equity method under Topic 323 that must transition to Topic 321 because of an observable transaction will remeasure its investment immediately after transition. ASU 2020-01 also clarifies that certain forward contracts or purchased call options to acquire equity securities generally will be measured using the fair value principles of Topic 321 before settlement or exercise. Upon adoption of ASU 2020-01, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated statements of income.

On January 1, 2021, Northern Trust adopted ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs” (ASU 2020-08). ASU 2020-08 clarifies the Codification related to the standard issued in ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. ASU 2020-08 clarifies that an entity should amortize premiums on purchased callable debt securities to the first call date and related call amount and at that point reassess if there is a remaining premium to amortize to a subsequent call date. Upon adoption of ASU 2020-08, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated statements of income.

On January 7, 2021, Northern Trust retrospectively adopted ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (ASU 2021-01). ASU 2021-01 clarifies the scope of Topic 848 to explicitly include those derivative instruments affected by changes in interest rates used for margining, discounting, or contract price alignment as eligible for certain optional expedients and exceptions in Topic 848. Upon adoption of ASU 2021-01, Northern Trust elected the expedients provided in Topic 848 with no significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.

Note 3 – Fair Value Measurements

Fair Value 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 three months ended March 31, 2021 or the twelve months ended December 31, 2020.

Notes to Consolidated Financial Statements (unaudited) (continued)

Level 1 — Quoted, active market prices for identical assets or liabilities.

Northern Trust’s Level 1 assets are comprised of available for sale investments in U.S. Treasury securities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets.

Northern Trust’s Level 2 assets include available for sale and trading account debt securities, the fair values of which are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and third-party prices. If a security price obtained from a pricing vendor is determined to exceed pre-determined tolerance levels that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated, an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of March 31, 2021, Northern Trust’s available for sale debt securities portfolio included 2,471 Level 2 debt securities with an aggregate market value of $40.3 billion. All 2,471 debt securities were valued by external pricing vendors. As of December 31, 2020, Northern Trust’s available for sale debt securities portfolio included 2,260 Level 2 debt securities with an aggregate market value of $39.2 billion. All 2,260 debt securities were valued by external pricing vendors. Trading account debt securities, which totaled $0.4 million and $0.5 million as of March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020, as well as the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for such liabilities as of such dates.

Notes to Consolidated Financial Statements (unaudited) (continued)

TABLE 29: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS

MARCH 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

$34.6 million

Discounted Cash Flow

Conversion Rate

1.62x

Visa Class A Appreciation

9.63%

Expected Duration

33 months

20 months

(1) Weighted average of expected duration based on scenario probability.

DECEMBER 31, 2020

FINANCIAL INSTRUMENT

FAIR VALUE

VALUATION TECHNIQUE

UNOBSERVABLE INPUTS

INPUT VALUES

WEIGHTED-AVERAGE INPUT VALUES(1)

Swaps Related to Sale of Certain Visa Class B Common Shares

$35.3 million

Discounted Cash Flow

Conversion Rate

1.62x

Visa Class A Appreciation

8.73%

Expected Duration

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 March 31, 2021 and December 31, 2020, segregated by fair value hierarchy level.

TABLE 30: RECURRING BASIS HIERARCHY LEVELING


	MARCH 31, 2021
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		NETTING		ASSETS/LIABILITIES AT FAIR VALUE
Debt Securities
Available for Sale
U.S. Government	$	2,561.0	$	0	$	0	$	—	$	2,561.0
Obligations of States and Political Subdivisions	0		3,279.8		0		—		3,279.8
Government Sponsored Agency	0		24,650.7		0		—		24,650.7
Non-U.S. Government	0		558.1		0		—		558.1
Corporate Debt	0		2,398.7		0		—		2,398.7
Covered Bonds	0		544.1		0		—		544.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	0		3,003.4		0		—		3,003.4
Other Asset-Backed	0		4,783.0		0		—		4,783.0
Commercial Mortgage-Backed	0		1,099.8		0		—		1,099.8
Total Available for Sale	2,561.0		40,317.6		0		—		42,878.6
Trading Account	0		0.4		0		—		0.4
Total Available for Sale and Trading Debt Securities	2,561.0		40,318.0		0		—		42,879.0
Other Assets
Derivative Assets
Foreign Exchange Contracts	0		3,001.0		0		(1,973.5)		1,027.5
Interest Rate Contracts	0		205.6		0		(3.6)		202.0
Total Derivative Assets	0		3,206.6		0		(1,977.1)		1,229.5
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	0		2,543.0		0		(2,023.7)		519.3
Interest Rate Contracts	0		123.7		0		(66.6)		57.1
Other Financial Derivatives(1)	0		0		34.6		0		34.6
Total Derivative Liabilities	$	0	$	2,666.7	$	34.6	$	(2,090.3)	$	611.0

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 March 31, 2021, derivative assets and liabilities shown above also include reductions of $449.1 million and $562.3 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.

Notes to Consolidated Financial Statements (unaudited) (continued)


	DECEMBER 31, 2020
(In Millions)	LEVEL 1		LEVEL 2		LEVEL 3		NETTING		ASSETS/LIABILITIES AT FAIR VALUE
Debt Securities
Available for Sale
U.S. Government	$	2,799.9	$	0	$	0	$	—	$	2,799.9
Obligations of States and Political Subdivisions	0		3,083.6		0		—		3,083.6
Government Sponsored Agency	0		24,956.7		0		—		24,956.7
Non-U.S. Government	0		714.0		0		—		714.0
Corporate Debt	0		2,539.6		0		—		2,539.6
Covered Bonds	0		553.1		0		—		553.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	0		2,345.8		0		—		2,345.8
Other Asset-Backed	0		3,997.5		0		—		3,997.5
Commercial Mortgage-Backed	0		1,031.8		0		—		1,031.8
Total Available for Sale	2,799.9		39,222.1		0		—		42,022.0
Trading Account	0		0.5		0		—		0.5
Total Available for Sale and Trading Debt Securities	2,799.9		39,222.6		0		—		42,022.5
Other Assets
Derivative Assets
Foreign Exchange Contracts	0		4,260.7		0		(3,505.3)		755.4
Interest Rate Contracts	0		297.5		0		(2.5)		295.0
Total Derivative Assets	0		4,558.2		0		(3,507.8)		1,050.4
Other Liabilities
Derivative Liabilities
Foreign Exchange Contracts	0		4,722.5		0		(2,718.6)		2,003.9
Interest Rate Contracts	0		125.0		0		(98.5)		26.5
Other Financial Derivatives(1)	0		0		35.3		0		35.3
Total Derivative Liabilities	$	0	$	4,847.5	$	35.3	$	(2,817.1)	$	2,065.7

Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2020, derivative assets and liabilities shown above also include reductions of $1,867.8 million and $1,177.2 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties.

(1) This line consists of swaps related to the sale of certain Visa Class B common shares.

The following table presents the changes in Level 3 liabilities for the three months ended March 31, 2021 and 2020.

TABLE 31: CHANGES IN LEVEL 3 LIABILITIES


(In Millions)	SWAPS RELATED TO SALE OF CERTAIN VISA CLASS B COMMON SHARES
THREE MONTHS ENDED MARCH 31,	2021		2020
Fair Value at January 1	$	35.3	$	33.4
Total (Gains) Losses:
Included in Earnings(1)	3.6		(2.9)
Purchases, Issues, Sales, and Settlements
Settlements	(4.3)		(4.0)
Fair Value at March 31	$	34.6	$	26.5

(1) (Gains) losses are recorded in Other Operating Income on the consolidated statements of income.

Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to separately disclose these subsequent fair value measurements and to classify them under the fair value hierarchy.

Assets measured at fair value on a nonrecurring basis at March 31, 2021 and December 31, 2020, all of which were categorized as Level 3 under the fair value hierarchy, were comprised of nonaccrual loans whose values were based on real estate and other available collateral, and of 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

Notes to Consolidated Financial Statements (unaudited) (continued)

average based on fair values of 15.8% and 16.8% as of March 31, 2021 and December 31, 2020, respectively. Other loan collateral, which typically consists of accounts receivable, inventory and equipment, is valued using a market approach adjusted for asset-specific characteristics and in limited instances third-party valuations are used. OREO assets are carried at the lower of cost or fair value less estimated costs to sell, with fair value typically based on third-party appraisals.

Collateral-based nonaccrual loans that have been adjusted to fair value totaled $16.7 million and $24.6 million at March 31, 2021 and December 31, 2020, respectively.

The following table presents the fair values of Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of March 31, 2021 and December 31, 2020, as well as the valuation technique, significant unobservable inputs and quantitative information used to develop the significant unobservable inputs for such assets as of such dates.

TABLE 32: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS

MARCH 31, 2021

FINANCIAL INSTRUMENT

FAIR VALUE(1)

VALUATION TECHNIQUE

UNOBSERVABLE INPUTS

INPUT VALUES

WEIGHTED-AVERAGE INPUT VALUES

Loans

$16.7 million

Market Approach

Discount factor applied to real estate collateral-based loans to reflect realizable value

15.0%

20.0%

15.8%

(1) Includes real estate collateral-based loans and other collateral-based loans.

DECEMBER 31, 2020

FINANCIAL INSTRUMENT

FAIR VALUE(1)

VALUATION TECHNIQUE

UNOBSERVABLE INPUTS

INPUT VALUES

WEIGHTED-AVERAGE INPUT VALUES

Loans

$24.6 million

Market Approach

Discount factor applied to real estate collateral-based loans to reflect realizable value

15.0

20.0%

16.8%

(1) Includes real estate collateral-based loans and other collateral-based loans.

Notes to Consolidated Financial Statements (unaudited) (continued)

The following table summarizes the fair values of all financial instruments.

TABLE 33: FAIR VALUE OF FINANCIAL INSTRUMENTS


	MARCH 31, 2021
					FAIR VALUE
(In Millions)	BOOK VALUE		TOTAL FAIR VALUE		LEVEL 1		LEVEL 2		LEVEL 3
ASSETS
Cash and Due from Banks	$	4,584.4	$	4,584.4	$	4,584.4	$	0	$	0
Federal Reserve and Other Central Bank Deposits	46,911.4		46,911.4		0		46,911.4		0
Interest-Bearing Deposits with Banks	5,142.8		5,142.8		0		5,142.8		0
Federal Funds Sold	0.1		0.1		0		0.1		0
Securities Purchased under Agreements to Resell	1,109.3		1,109.3		0		1,109.3		0
Debt Securities
Available for Sale(1)	42,878.6		42,878.6		2,561.0		40,317.6		0
Held to Maturity	17,136.4		17,100.0		100.0		17,000.0		0
Trading Account	0.4		0.4		0		0.4		0
Loans (excluding Leases)
Held for Investment	34,168.1		34,181.7		0		0		34,181.7
Client Security Settlement Receivables	1,970.2		1,970.2		0		1,970.2		0
Other Assets
Federal Reserve and Federal Home Loan Bank Stock	230.0		230.0		0		230.0		0
Community Development Investments	908.1		908.1		0		908.1		0
Employee Benefit and Deferred Compensation	230.3		234.5		133.9		100.6		0
LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	72,801.2	$	72,801.2	$	72,801.2	$	0	$	0
Savings Certificates and Other Time	909.7		911.0		0		911.0		0
Non U.S. Offices Interest-Bearing	63,746.5		63,746.5		0		63,746.5		0
Federal Funds Purchased	0.2		0.2		0		0.2		0
Securities Sold Under Agreements to Repurchase	95.6		95.6		0		95.6		0
Other Borrowings	5,428.4		5,428.6		0		5,428.6		0
Senior Notes	2,991.2		3,083.9		0		3,083.9		0
Long-Term Debt
Subordinated Debt	1,165.9		1,211.5		0		1,211.5		0
Floating Rate Capital Debt	277.8		268.7		0		268.7		0
Other Liabilities
Standby Letters of Credit	18.7		18.7		0		0		18.7
Loan Commitments	76.9		76.9		0		0		76.9
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets	$	370.9	$	370.9	$	0	$	370.9	$	0
Liabilities	29.3		29.3		0		29.3		0
Interest Rate Contracts
Assets	10.0		10.0		0		10.0		0
Liabilities	13.7		13.7		0		13.7		0
Other Financial Derivatives
Liabilities(2)	34.6		34.6		0		0		34.6
Client-Related and Trading
Foreign Exchange Contracts
Assets	2,630.1		2,630.1		0		2,630.1		0
Liabilities	2,513.7		2,513.7		0		2,513.7		0
Interest Rate Contracts
Assets	195.6		195.6		0		195.6		0
Liabilities	110.0		110.0		0		110.0		0

(1) Refer to the table located on page 34 for the disaggregation of available for sale debt securities.

(2) This line consists of swaps related to the sale of certain Visa Class B common shares.

Notes to Consolidated Financial Statements (unaudited) (continued)


	DECEMBER 31, 2020
					FAIR VALUE
(In Millions)	BOOK VALUE		TOTAL FAIR VALUE		LEVEL 1		LEVEL 2		LEVEL 3
ASSETS
Cash and Due from Banks	$	4,389.5	$	4,389.5	$	4,389.5	$	0	$	0
Federal Reserve and Other Central Bank Deposits	55,503.6		55,503.6		0		55,503.6		0
Interest-Bearing Deposits with Banks	4,372.6		4,372.6		0		4,372.6		0
Securities Purchased under Agreements to Resell	1,596.5		1,596.5		0		1,596.5		0
Debt Securities
Available for Sale(1)	42,022.0		42,022.0		2,799.9		39,222.1		0
Held to Maturity	17,791.1		17,797.4		90.0		17,707.4		0
Trading Account	0.5		0.5		0		0.5		0
Loans (excluding Leases)
Held for Investment	33,558.0		34,017.5		0		0		34,017.5
Client Security Settlement Receivables	1,160.2		1,160.2		0		1,160.2		0
Other Assets
Federal Reserve and Federal Home Loan Bank Stock	275.0		275.0		0		275.0		0
Community Development Investments	919.6		919.6		0		919.6		0
Employee Benefit and Deferred Compensation	215.8		228.9		138.6		90.3		0
LIABILITIES
Deposits
Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing	$	71,742.5	$	71,742.5	$	71,742.5	$	0	$	0
Savings Certificates and Other Time	937.1		943.0		0		943.0		0
Non U.S. Offices Interest-Bearing	71,198.4		71,198.4		0		71,198.4		0
Federal Funds Purchased	260.2		260.2		0		260.2		0
Securities Sold Under Agreements to Repurchase	39.8		39.8		0		39.8		0
Other Borrowings	4,011.5		4,012.7		0		4,012.7		0
Senior Notes	3,122.4		3,222.6		0		3,222.6		0
Long-Term Debt
Subordinated Debt	1,189.3		1,250.1		0		1,250.1		0
Floating Rate Capital Debt	277.8		264.6		0		264.6		0
Other Liabilities
Standby Letters of Credit	22.4		22.4		0		0		22.4
Loan Commitments	77.0		77.0		0		0		77.0
Derivative Instruments
Asset/Liability Management
Foreign Exchange Contracts
Assets	$	15.6	$	15.6	$	0	$	15.6	$	0
Liabilities	311.8		311.8		0		311.8		0
Interest Rate Contracts
Assets	8.3		8.3		0		8.3		0
Liabilities	10.2		10.2		0		10.2		0
Other Financial Derivatives
Liabilities(2)	35.3		35.3		0		0		35.3
Client-Related and Trading
Foreign Exchange Contracts
Assets	4,245.1		4,245.1		0		4,245.1		0
Liabilities	4,410.7		4,410.7		0		4,410.7		0
Interest Rate Contracts
Assets	289.2		289.2		0		289.2		0
Liabilities	114.8		114.8		0		114.8		0

(1) Refer to the table located on page 35 for the disaggregation of available for sale debt securities.

(2) This line consists of swaps related to the sale of certain Visa Class B common shares.

Notes to Consolidated Financial Statements (unaudited) (continued)

Note 4 – Securities

Debt Securities Available for Sale. The following tables provide the amortized cost and fair values at March 31, 2021 and December 31, 2020, and remaining maturities of debt securities available for sale at March 31, 2021.

TABLE 34: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF DEBT SECURITIES AVAILABLE FOR SALE


	MARCH 31, 2021
(In Millions)	AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
U.S. Government	$	2,521.1	$	50.6	$	10.7	$	2,561.0
Obligations of States and Political Subdivisions	3,249.8		82.5		52.5		3,279.8
Government Sponsored Agency	24,535.5		275.4		160.2		24,650.7
Non-U.S. Government	564.3		0.1		6.3		558.1
Corporate Debt	2,336.3		65.2		2.8		2,398.7
Covered Bonds	535.8		8.3		0		544.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	2,968.8		54.0		19.4		3,003.4
Other Asset-Backed	4,749.5		38.0		4.5		4,783.0
Commercial Mortgage-Backed	1,047.5		53.6		1.3		1,099.8
Total	$	42,508.6	$	627.7	$	257.7	$	42,878.6


	DECEMBER 31, 2020
(In Millions)	AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
U.S. Government	$	2,728.8	$	71.1	$	0	$	2,799.9
Obligations of States and Political Subdivisions	2,927.8		155.9		0.1		3,083.6
Government Sponsored Agency	24,595.1		388.5		26.9		24,956.7
Non-U.S. Government	713.6		1.1		0.7		714.0
Corporate Debt	2,459.9		79.8		0.1		2,539.6
Covered Bonds	543.1		10.0		0		553.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	2,281.7		64.7		0.6		2,345.8
Other Asset-Backed	3,953.5		46.8		2.8		3,997.5
Commercial Mortgage-Backed	952.2		79.7		0.1		1,031.8
Total	$	41,155.7	$	897.6	$	31.3	$	42,022.0

Notes to Consolidated Financial Statements (unaudited) (continued)

TABLE 35: REMAINING MATURITY OF DEBT SECURITIES AVAILABLE FOR SALE


MARCH 31, 2021	ONE YEAR OR LESS				ONE TO FIVE YEARS				FIVE TO TEN YEARS				OVER TEN YEARS				TOTAL
(In Millions)	AMORTIZED COST		FAIR VALUE		AMORTIZED COST		FAIR VALUE		AMORTIZED COST		FAIR VALUE		AMORTIZED COST		FAIR VALUE		AMORTIZED COST		FAIR VALUE
U.S. Government	$	99.9	$	101.5	$	1,874.1	$	1,911.3	$	547.1	$	548.2	$	0	$	0	$	2,521.1	$	2,561.0
Obligations of States and Political Subdivisions	7.2		7.3		294.8		308.4		2,764.2		2,787.5		183.6		176.6		3,249.8		3,279.8
Government Sponsored Agency	4,859.6		4,913.7		8,260.4		8,330.3		8,833.7		8,816.8		2,581.8		2,589.9		24,535.5		24,650.7
Non-U.S. Government	269.6		269.6		40.5		40.5		254.2		248.0		0		0		564.3		558.1
Corporate Debt	372.6		376.5		1,950.5		2,009.1		9.3		9.2		3.9		3.9		2,336.3		2,398.7
Covered Bonds	106.8		107.1		429.0		437.0		0		0		0		0		535.8		544.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	534.4		537.5		2,001.7		2,043.0		432.7		422.9		0		0		2,968.8		3,003.4
Other Asset-Backed	733.9		742.4		3,201.6		3,228.2		739.2		737.8		74.8		74.6		4,749.5		4,783.0
Commercial Mortgage-Backed	17.8		17.8		510.0		532.5		511.6		541.4		8.1		8.1		1,047.5		1,099.8
Total	$	7,001.8	$	7,073.4	$	18,562.6	$	18,840.3	$	14,092.0	$	14,111.8	$	2,852.2	$	2,853.1	$	42,508.6	$	42,878.6

Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.

Debt Securities Available for Sale with Unrealized Losses. The following table provides information regarding debt securities available for sale 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 March 31, 2021 and December 31, 2020.

TABLE 36: DEBT SECURITIES AVAILABLE FOR SALE IN UNREALIZED LOSS POSITION WITH NO CREDIT LOSSES REPORTED


AS OF MARCH 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	$	237.6	$	10.7	$	0	$	0	$	237.6	$	10.7
Obligations of States and Political Subdivisions	1,456.8		52.5		0		0		1,456.8		52.5
Government Sponsored Agency	5,915.6		148.5		2,096.4		11.7		8,012.0		160.2
Non-U.S. Government	274.4		6.3		0		0		274.4		6.3
Corporate Debt	272.6		2.8		0		0		272.6		2.8
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	981.3		19.4		49.9		0		1,031.2		19.4
Other Asset-Backed	1,035.7		4.5		60.0		0		1,095.7		4.5
Commercial Mortgage-Backed	120.8		1.2		7.5		0.1		128.3		1.3
Total	$	10,294.8	$	245.9	$	2,213.8	$	11.8	$	12,508.6	$	257.7


AS OF DECEMBER 31, 2020	LESS THAN 12 MONTHS				12 MONTHS OR LONGER				TOTAL
(In Millions)	FAIR VALUE		UNREALIZED LOSSES		FAIR VALUE		UNREALIZED LOSSES		FAIR VALUE		UNREALIZED LOSSES
Obligations of States and Political Subdivisions	$	52.3	$	0.1	$	0	$	0	$	52.3	$	0.1
Government Sponsored Agency	2,402.3		13.6		2,528.7		13.3		4,931.0		26.9
Non-U.S. Government	90.5		0.7		0		0		90.5		0.7
Corporate Debt	66.6		0.1		0		0		66.6		0.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	162.8		0.5		49.9		0.1		212.7		0.6
Other Asset-Backed	176.8		0.2		792.3		2.6		969.1		2.8
Commercial Mortgage-Backed	44.4		0.1		0		0		44.4		0.1
Total	$	2,995.7	$	15.3	$	3,370.9	$	16.0	$	6,366.6	$	31.3

As of March 31, 2021, 991 debt securities available for sale with a combined fair value of $12.5 billion were in an unrealized loss position, with their unrealized losses totaling $257.7 million. Unrealized losses related to debt securities available for sale of $160.2 million and $52.5 million related to government-sponsored agency and obligations of states and political subdivisions, respectively, are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of March 31, 2021, 17% of the corporate debt securities available for sale portfolio were backed by guarantees provided by U.S. and non-U.S. governmental entities. The remaining unrealized losses on Northern Trust’s debt securities available for sale portfolio as of March 31, 2021 are attributable to changes in overall market interest rates or credit spreads.

Notes to Consolidated Financial Statements (unaudited) (continued)

As of March 31, 2021, Northern Trust did not intend to sell any debt securities available for sale 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.

Debt securities available for sale impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible credit losses. A determination as to whether a security’s decline in market value is related to credit impairment takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is credit-related include, but are not limited to, the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer, which may indicate adverse credit conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that Northern Trust will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if a credit loss has occurred.

There was 0 provision for credit losses for corporate debt securities available for sale for the three months ended March 31, 2021, while there was a $0.2 million provision for the three months ended March 31, 2020. There was 0 allowance for credit losses for corporate debt securities available for sale as of March 31, 2021 and December 31, 2020, respectively. The process for identifying credit losses for corporate debt available for sale 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.

Debt Securities Held to Maturity. The following tables provide the amortized cost and fair values at March 31, 2021 and December 31, 2020, and remaining maturities of debt securities held to maturity at March 31, 2021.

TABLE 37: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF DEBT SECURITIES HELD TO MATURITY


	MARCH 31, 2021
(In Millions)	AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
U.S Government	$	100.0	$	0	$	0	$	100.0
Obligations of States and Political Subdivisions	1.0		0		0		1.0
Government Sponsored Agency	53.6		0.3		0.9		53.0
Non-U.S. Government	6,539.3		6.1		0.2		6,545.2
Corporate Debt	916.7		5.0		1.6		920.1
Covered Bonds	3,046.8		19.9		1.7		3,065.0
Certificates of Deposit	644.1		0		0		644.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	4,672.6		33.1		23.3		4,682.4
Other Asset-Backed	706.2		1.2		0.3		707.1
Other	456.1		1.0		75.0		382.1
Total	$	17,136.4	$	66.6	$	103.0	$	17,100.0


	DECEMBER 31, 2020
(In Millions)	AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES		FAIR VALUE
U.S. Government	$	90.0	$	0	$	0	$	90.0
Obligations of States and Political Subdivisions	2.1		0.1		0		2.2
Government Sponsored Agency	3.0		0.3		0		3.3
Non-U.S. Government	8,336.6		7.3		0.2		8,343.7
Corporate Debt	588.0		6.5		0.1		594.4
Covered Bonds	3,184.6		24.6		0.3		3,208.9
Certificates of Deposit	807.2		0		0		807.2
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	3,648.0		43.5		0.9		3,690.6
Other Asset-Backed	677.0		0.9		0		677.9
Other	454.6		1.1		76.5		379.2
Total	$	17,791.1	$	84.3	$	78.0	$	17,797.4

Notes to Consolidated Financial Statements (unaudited) (continued)

As of March 31, 2021, the $17.1 billion debt securities held to maturity portfolio had an unrealized loss of $75 million related to other residential mortgage-backed securities and an unrealized loss of $23.3 million related to sub-sovereign, supranational and non-U.S. agency bonds, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase.

TABLE 38: REMAINING MATURITY OF DEBT SECURITIES HELD TO MATURITY


MARCH 31, 2021	ONE YEAR OR LESS				ONE TO FIVE YEARS				FIVE TO TEN YEARS				OVER TEN YEARS				TOTAL
(In Millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government	$	100.0	$	100.0	$	0	$	0	$	0	$	0	$	0	$	0	$	100.0	$	100.0
Obligations of States and Political Subdivisions	1.0		1.0		0		0		0		0		0		0		1.0		1.0
Government Sponsored Agency	2.0		2.0		8.0		8.0		9.2		9.2		34.4		33.8		53.6		53.0
Non-U.S. Government	6,049.0		6,049.1		490.3		496.1		0		0		0		0		6,539.3		6,545.2
Corporate Debt	77.9		77.9		774.1		778.0		64.7		64.2		0		0		916.7		920.1
Covered Bonds	1,294.1		1,300.2		1,431.9		1,445.1		320.8		319.7		0		0		3,046.8		3,065.0
Certificates of Deposit	644.1		644.1		0		0		0		0		0		0		644.1		644.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	1,206.4		1,212.0		2,334.3		2,358.2		1,131.9		1,112.2		0		0		4,672.6		4,682.4
Other Asset-Backed	203.9		204.3		392.6		393.3		109.7		109.5		0		0		706.2		707.1
Other	36.5		36.0		252.8		236.6		53.4		47.5		113.4		62.0		456.1		382.1
Total	$	9,614.9	$	9,626.6	$	5,684.0	$	5,715.3	$	1,689.7	$	1,662.3	$	147.8	$	95.8	$	17,136.4	$	17,100.0

Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments.

Debt securities held to maturity consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the three months ended March 31, 2021 and 2020, 0 securities were transferred from available for sale to held to maturity.

Credit Quality Indicators. The following table provides the amortized cost of debt securities held to maturity by credit rating.

TABLE 39: AMORTIZED COST OF DEBT SECURITIES HELD TO MATURITY BY CREDIT RATING


	AS OF MARCH 31, 2021
(In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	100.0		$	0		$	0		$	0		$	0		$	100.0
Obligations of States and Political Subdivisions	0			1.0			0			0			0			1.0
Government Sponsored Agency	53.6			0			0			0			0			53.6
Non-U.S. Government	301.0			205.1			5,760.4			272.8			0			6,539.3
Corporate Debt	75.1			396.0			445.6			0			0			916.7
Covered Bonds	3,046.8			0			0			0			0			3,046.8
Certificates of Deposit	0			0			0			0			644.1			644.1
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	3,301.2			1,339.8			31.6			0			0			4,672.6
Other Asset-Backed	706.2			0			0			0			0			706.2
Other	0			0			0			0			456.1			456.1
Total	$	7,583.9		$	1,941.9		$	6,237.6		$	272.8		$	1,100.2		$	17,136.4
Percent of Total	44		%	11		%	36		%	2		%	7		%	100		%

Notes to Consolidated Financial Statements (unaudited) (continued)


	AS OF DECEMBER 31, 2020
(In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	90.0		$	0		$	0		$	0		$	0		$	90.0
Obligations of States and Political Subdivisions	0			1.0			0			1.1			0			2.1
Government Sponsored Agency	3.0			0			0			0			0			3.0
Non-U.S. Government	319.8			1,337.4			6,630.6			48.8			0			8,336.6
Corporate Debt	3.8			279.1			305.1			0			0			588.0
Covered Bonds	3,184.6			0			0			0			0			3,184.6
Certificates of Deposit	0			0			0			0			807.2			807.2
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	2,590.9			1,057.1			0			0			0			3,648.0
Other Asset-Backed	677.0			0			0			0			0			677.0
Other	0			0			0			0			454.6			454.6
Total	$	6,869.1		$	2,674.6		$	6,935.7		$	49.9		$	1,261.8		$	17,791.1
Percent of Total	39		%	15		%	39		%	0		%	7		%	100		%

Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. Northern Trust maintains a high quality debt securities portfolio, with 91% and 93% of the held to maturity portfolio at March 31, 2021 and December 31, 2020, respectively, comprised of securities rated A or higher. The remaining held to maturity debt securities portfolio was comprised of 2% rated BBB at March 31, 2021 and 7% not rated by Moody’s Investors Service, Standard and Poor’s or Fitch Ratings at March 31, 2021 and December 31, 2020, respectively. Securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security.

Investment Security Gains and Losses. There were 0 sales of debt securities during the three months ended March 31, 2021. Proceeds of $280.0 million from the sale of debt securities during the three months ended March 31, 2020 resulted in gross realized debt securities gains of $0.7 million and gross realized debt securities losses of $0.7 million. There were 0 net investment security (losses) gains for the three months ended March 31, 2021 and 2020.

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 held by the counterparty until the repurchase.

The following table provides information regarding repurchase agreements that are accounted for as secured borrowings as of March 31, 2021 and December 31, 2020.

TABLE 40: REPURCHASE AGREEMENTS ACCOUNTED FOR AS SECURED BORROWINGS


	REMAINING CONTRACTUAL MATURITY OF THE AGREEMENTS
	OVERNIGHT AND CONTINUOUS
($ In Millions)	MARCH 31, 2021		DECEMBER 31, 2020
U.S. Treasury and Agency Securities	$	95.6	$	39.8
Total Borrowings	95.6		39.8
Gross Amount of Recognized Liabilities for Repurchase Agreements in Note 23	95.6		39.8
Amounts related to agreements not included in Note 23	0		0

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 41: LOANS AND LEASES


(In Millions)	MARCH 31, 2021		DECEMBER 31, 2020
Commercial
Commercial and Institutional	$	10,073.1	$	10,058.3
Commercial Real Estate	3,713.9		3,558.4
Non-U.S.	1,771.2		1,345.7
Lease Financing, net	11.3		11.4
Other	278.4		288.2
Total Commercial	15,847.9		15,262.0
Personal
Private Client	12,047.5		11,815.1
Residential Real Estate	6,066.9		6,035.7
Non-U.S.	336.7		597.9
Other	45.3		49.0
Total Personal	18,496.4		18,497.7
Total Loans and Leases	$	34,344.3	$	33,759.7

Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan-to-collateral value 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 March 31, 2021 and December 31, 2020, equity credit lines totaled $285.2 million and $304.4 million, respectively, and equity credit lines for which first liens were held by Northern Trust represented 97% of the total equity credit lines as of both March 31, 2021 and December 31, 2020.

Included within the non-U.S., commercial-other and personal-other classes are short-duration advances primarily related to the processing of custodied client investments, totaling $1.3 billion at March 31, 2021 and $1.1 billion at December 31, 2020, respectively. Demand deposit overdrafts reclassified as loan balances totaled $5.6 million and $26.4 million at March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021 and December 31, 2020, there were 0 loans or leases classified as held for sale.

Paycheck Protection Program. In response to the COVID-19 pandemic, Northern Trust became a lender under the Paycheck Protection Program, as amended (PPP), which was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and is administered by the U.S. Small Business Administration (SBA). Loans issued under the PPP are funded by Northern Trust directly to participating borrowers. The PPP loans are guaranteed by the SBA and borrowers are eligible to apply for PPP loan forgiveness for up to the full principal amount and accrued interest of the PPP loan.

To the extent a borrower uses PPP loan proceeds to cover eligible costs and has met all other SBA loan forgiveness requirements, the SBA will determine loan forgiveness under the CARES Act and will pay to Northern Trust the eligible PPP loan forgiven amount, which will be credited to the borrower’s loan to repay or pay down the PPP loan. The SBA forgiveness portal opened on August 10, 2020 and Northern Trust’s vendor portal opened on September 11, 2020 to begin processing the PPP loan forgiveness applications. When Northern Trust submits forgiveness applications to the SBA, the SBA will have at least 90 days to respond as to the approval or denial of such application. 219 PPP loan forgiveness applications totaling $34.2 million that went through the forgiveness process as of March 31, 2021, were fully forgiven by the SBA as of such date.

Notes to Consolidated Financial Statements (unaudited) (continued)

As of March 31, 2021, Northern Trust had 1,137 outstanding loans totaling $213.9 million under the PPP in its commercial and institutional portfolio with an average loan balance of $0.2 million. For its origination efforts, Northern Trust received approximately $2.6 million in SBA fees, net of service charges as of March 31, 2021.

Northern Trust accounts for loans originated under the PPP as loan receivables in accordance with Accounting Standards Codification (ASC) 310 and recognizes such loans at the principal amount less the net amount of loan origination fees. PPP loans are reported in Total Loans and Leases on the consolidated balance sheets.

The SBA provides a 100% guarantee on PPP loans covering principal and interest. Northern Trust considers the risk mitigating effects of these guarantees, and accounts for them as a credit enhancement embedded in the contract. As a result, no allowance for credit losses is measured for Northern Trust’s exposure under the PPP.

Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels.

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 March 31, 2021 and December 31, 2020 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 42: CREDIT QUALITY INDICATOR AT AMORTIZED COST BASIS BY ORIGINATION YEAR


March 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	$	334.2	$	653.5	$	332.8	$	179.2	$	103.4	$	786.0	$	3,597.0	$	1.2	$	5,987.3
4 to 5 Category	196.1		697.7		524.6		339.9		343.7		288.1		1,351.5		33.6		3,775.2
6 to 9 Category	29.9		33.4		77.9		36.7		39.5		24.9		68.3		0		310.6
Total Commercial and Institutional	560.2		1,384.6		935.3		555.8		486.6		1,099.0		5,016.8		34.8		10,073.1
Commercial Real Estate
Risk Rating:
1 to 3 Category	124.7		341.5		153.4		59.8		24.3		113.5		82.6		2.8		902.6
4 to 5 Category	121.4		752.7		752.0		282.2		115.8		542.7		98.8		9.4		2,675.0
6 to 9 Category	12.1		18.2		55.2		15.5		23.9		11.4		0		0		136.3
Total Commercial Real Estate	258.2		1,112.4		960.6		357.5		164.0		667.6		181.4		12.2		3,713.9
Non-U.S.
Risk Rating:
1 to 3 Category	724.7		112.9		17.0		0		11.1		0		270.0		0		1,135.7
4 to 5 Category	282.1		28.0		0.7		2.1		0		85.2		129.5		1.8		529.4
6 to 9 Category	0.2		0		23.1		0		0		0		82.8		0		106.1
Total Non-U.S.	1,007.0		140.9		40.8		2.1		11.1		85.2		482.3		1.8		1,771.2
Lease Financing, net
Risk Rating:

4 to 5 Category	0		0		0		0		0		11.3		0		0		11.3

Total Lease Financing, net	0		0		0		0		0		11.3		0		0		11.3
Other
Risk Rating:
1 to 3 Category	135.8		0		0		0		0		0		0		0		135.8
4 to 5 Category	142.6		0		0		0		0		0		0		0		142.6

Total Other	278.4		0		0		0		0		0		0		0		278.4
Total Commercial	2,103.8		2,637.9		1,936.7		915.4		661.7		1,863.1		5,680.5		48.8		15,847.9
Personal
Private Client
Risk Rating:
1 to 3 Category	50.9		567.3		122.5		43.7		54.5		141.5		5,283.6		59.1		6,323.1
4 to 5 Category	229.2		535.5		595.7		115.1		64.2		100.0		3,805.1		210.6		5,655.4
6 to 9 Category	0.1		5.8		0.5		21.7		0		0		39.6		1.3		69.0
Total Private Client	280.2		1,108.6		718.7		180.5		118.7		241.5		9,128.3		271.0		12,047.5
Residential Real Estate
Risk Rating:
1 to 3 Category	375.1		1,440.3		247.7		25.3		99.1		771.4		143.7		0		3,102.6
4 to 5 Category	150.7		877.9		359.8		111.0		127.5		957.6		245.4		5.6		2,835.5
6 to 9 Category	0.3		14.1		8.1		0.6		0.5		82.6		22.6		0		128.8
Total Residential Real Estate	526.1		2,332.3		615.6		136.9		227.1		1,811.6		411.7		5.6		6,066.9
Non-U.S.
Risk Rating:
1 to 3 Category	0		9.2		32.3		0		0		1.1		65.9		0		108.5
4 to 5 Category	0		10.2		8.2		10.7		0.4		8.8		176.0		13.6		227.9
6 to 9 Category	0		0		0		0		0		0.3		0		0		0.3
Total Non-U.S.	0		19.4		40.5		10.7		0.4		10.2		241.9		13.6		336.7
Other
Risk Rating:
1 to 3 Category	26.8		0		0		0		0		0		0		0		26.8
4 to 5 Category	18.5		0		0		0		0		0		0		0		18.5

Total Other	45.3		0		0		0		0		0		0		0		45.3
Total Personal	851.6		3,460.3		1,374.8		328.1		346.2		2,063.3		9,781.9		290.2		18,496.4
Total Loans and Leases	$	2,955.4	$	6,098.2	$	3,311.5	$	1,243.5	$	1,007.9	$	3,926.4	$	15,462.4	$	339.0	$	34,344.3

Notes to Consolidated Financial Statements (unaudited) (continued)


December 31, 2020	TERM LOANS AND LEASES												REVOLVING LOANS		REVOLVING LOANS CONVERTED TO TERM LOANS
(In Millions)	2020		2019		2018		2017		2016		PRIOR						TOTAL
Commercial
Commercial and Institutional
Risk Rating:
1 to 3 Category	$	663.8	$	546.0	$	204.6	$	96.0	$	396.0	$	448.8	$	3,742.4	$	5.5	$	6,103.1
4 to 5 Category	793.4		505.1		354.1		405.4		134.6		167.3		1,238.7		32.3		3,630.9
6 to 9 Category	34.3		119.8		37.3		42.8		23.0		6.0		61.1		0		324.3
Total Commercial and Institutional	1,491.5		1,170.9		596.0		544.2		553.6		622.1		5,042.2		37.8		10,058.3
Commercial Real Estate
Risk Rating:
1 to 3 Category	406.3		109.2		27.6		36.5		11.8		99.4		124.3		8.7		823.8
4 to 5 Category	703.1		811.8		332.7		107.4		184.5		382.8		60.4		11.4		2,594.1
6 to 9 Category	15.3		55.2		32.0		25.8		0		12.2		0		0		140.5
Total Commercial Real Estate	1,124.7		976.2		392.3		169.7		196.3		494.4		184.7		20.1		3,558.4
Non-U.S.
Risk Rating:
1 to 3 Category	555.2		16.8		0		11.1		0		0		78.5		0		661.6
4 to 5 Category	313.1		0.7		2.0		0		0		157.9		39.2		1.8		514.7
6 to 9 Category	0		23.1		0		0		0		0		146.3		0		169.4
Total Non-U.S.	868.3		40.6		2.0		11.1		0		157.9		264.0		1.8		1,345.7
Lease Financing, net
Risk Rating:
4 to 5 Category	0		0		0		0		0		11.4		0		0		11.4
Total Lease Financing, net	0		0		0		0		0		11.4		0		0		11.4
Other
Risk Rating:
1 to 3 Category	81.7		0		0		0		0		0		0		0		81.7
4 to 5 Category	206.5		0		0		0		0		0		0		0		206.5
Total Other	288.2		0		0		0		0		0		0		0		288.2
Total Commercial	3,772.7		2,187.7		990.3		725.0		749.9		1,285.8		5,490.9		59.7		15,262.0
Personal
Private Client
Risk Rating:
1 to 3 Category	668.6		273.7		51.7		60.4		10.2		136.1		5,392.8		47.9		6,641.4
4 to 5 Category	492.1		479.9		117.3		60.4		77.5		77.5		3,564.7		207.3		5,076.7
6 to 9 Category	6.0		0.5		22.1		3.2		0		0		63.7		1.5		97.0
Total Private Client	1,166.7		754.1		191.1		124.0		87.7		213.6		9,021.2		256.7		11,815.1
Residential Real Estate
Risk Rating:
1 to 3 Category	1,554.3		317.4		42.9		109.9		205.1		627.8		152.8		1.7		3,011.9
4 to 5 Category	854.6		359.5		115.8		163.2		209.7		896.5		273.1		7.4		2,879.8
6 to 9 Category	15.3		8.3		0.7		0.5		1.9		94.8		22.5		0		144.0
Total Residential Real Estate	2,424.2		685.2		159.4		273.6		416.7		1,619.1		448.4		9.1		6,035.7
Non-U.S.
Risk Rating:
1 to 3 Category	23.3		14.9		0		0		0		1.8		275.6		0		315.6
4 to 5 Category	12.7		26.0		11.8		0.5		0.5		7.9		217.5		5.1		282.0
6 to 9 Category	0		0		0		0		0		0.3		0		0		0.3
Total Non-U.S.	36.0		40.9		11.8		0.5		0.5		10.0		493.1		5.1		597.9
Other
Risk Rating:
1 to 3 Category	34.6		0		0		0		0		0		0		0		34.6
4 to 5 Category	14.4		0		0		0		0		0		0		0		14.4
Total Other	49.0		0		0		0		0		0		0		0		49.0
Total Personal	3,675.9		1,480.2		362.3		398.1		504.9		1,842.7		9,962.7		270.9		18,497.7
Total Loans and Leases	$	7,448.6	$	3,667.9	$	1,352.6	$	1,123.1	$	1,254.8	$	3,128.5	$	15,453.6	$	330.6	$	33,759.7

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

Notes to Consolidated Financial Statements (unaudited) (continued)

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 March 31, 2021 and December 31, 2020.

TABLE 43: 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
March 31, 2021
Commercial
Commercial and Institutional	$	10,024.5	$	25.1	$	2.2	$	0	$	10,051.8	$	21.3	$	10,073.1	$	9.9
Commercial Real Estate	3,660.5		8.7		0		4.6		3,673.8		40.1		3,713.9		32.2
Non-U.S.	1,771.2		0		0		0		1,771.2		0		1,771.2		0
Lease Financing, net	11.3		0		0		0		11.3		0		11.3		0
Other	278.4		0		0		0		278.4		0		278.4		0
Total Commercial	15,745.9		33.8		2.2		4.6		15,786.5		61.4		15,847.9		42.1
Personal
Private Client	11,912.3		103.4		11.1		17.8		12,044.6		2.9		12,047.5		2.9
Residential Real Estate	5,976.1		28.0		1.7		1.6		6,007.4		59.5		6,066.9		51.1
Non-U.S.	336.5		0.2		0		0		336.7		0		336.7		0
Other	45.3		0		0		0		45.3		0		45.3		0
Total Personal	18,270.2		131.6		12.8		19.4		18,434.0		62.4		18,496.4		54.0
Total Loans and Leases	$	34,016.1	$	165.4	$	15.0	$	24.0	$	34,220.5	$	123.8	$	34,344.3	$	96.1
	Other Real Estate Owned										$	1.5
	Total Nonaccrual Assets										$	125.3

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, 2020
Commercial
Commercial and Institutional	$	9,877.0	$	153.7	$	1.2	$	0	$	10,031.9	$	26.4	$	10,058.3	$	9.1
Commercial Real Estate	3,516.2		2.0		0		0		3,518.2		40.2		3,558.4		32.3
Non-U.S.	1,345.7		0		0		0		1,345.7		0		1,345.7		0
Lease Financing, net	11.4		0		0		0		11.4		0		11.4		0
Other	288.2		0		0		0		288.2		0		288.2		0
Total Commercial	15,038.5		155.7		1.2		0		15,195.4		66.6		15,262.0		41.4
Personal
Private Client	11,765.4		29.1		9.9		7.8		11,812.2		2.9		11,815.1		2.9
Residential Real Estate	5,946.0		23.5		2.9		1.1		5,973.5		62.2		6,035.7		53.8
Non-U.S	596.7		1.2		0		0		597.9		0		597.9		0
Other	49.0		0		0		0		49.0		0		49.0		0
Total Personal	18,357.1		53.8		12.8		8.9		18,432.6		65.1		18,497.7		56.7
Total Loans and Leases	$	33,395.6	$	209.5	$	14.0	$	8.9	$	33,628.0	$	131.7	$	33,759.7	$	98.1
	Other Real Estate Owned										$	0.7
	Total Nonaccrual Assets										$	132.4

Interest income that would have been recorded for nonaccrual loans and leases in accordance with their original terms was $0.9 million and $1.3 million for the three months ended March 31, 2021 and March 31, 2020, 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 March 31, 2021 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

Notes to Consolidated Financial Statements (unaudited) (continued)

reported if the loan was modified at a market rate and has performed according to the modified terms for at least six payment periods. A loan that has been modified at a below market rate will return to accrual status if it satisfies the six-payment-period performance requirement.

The expected credit loss is measured based upon the present value of expected future cash flows, discounted at the effective interest rate based on the original contractual rate. If a loan’s contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, the loan’s effective interest rate is calculated based on the factor as it changes over the life of the loan. Northern Trust elected not to project changes in the factor for purposes of estimating expected future cash flows. Further, Northern Trust elected not to adjust the effective interest rate for prepayments. If the loan is collateral dependent, the expected loss is measured based on the fair value of the collateral at the reporting date.

If the loan valuation is less than the recorded value of the loan, either an allowance is established, or a charge-off is recorded, for the difference. Smaller balance (individually less than $1 million) homogeneous loans are collectively evaluated. Northern Trust’s accounting policies for material nonaccrual loans is consistent across all classes of loans and leases.

All loans and leases with TDR modifications are evaluated for additional expected credit losses. The nature and extent of further deterioration in credit quality, including a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses.

Included within nonaccrual loans were $78.8 million and $38.9 million of nonaccrual TDRs, and $23.3 million and $29.3 million of accrual TDRs as of March 31, 2021 and December 31, 2020, respectively.

There were $8.9 million and $10.4 million of aggregate undrawn loan commitments and standby letters of credit at March 31, 2021 and December 31, 2020, 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 month periods ended March 31, 2021 and 2020, and the recorded investments and unpaid principal balances as of March 31, 2021 and 2020.

TABLE 44: TROUBLED DEBT RESTRUCTURINGS


	THREE MONTHS ENDED MARCH 31, 2021
($ In Millions)	NUMBER OF LOANS AND LEASES	RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE
Commercial
Commercial and Institutional	6	$	19.6	$	19.6
Commercial Real Estate	1	21.4		23.3
Total Commercial	7	41.0		42.9
Personal
Residential Real Estate	2	0.2		0.3
Total Personal	2	0.2		0.3
Total Loans and Leases	9	$	41.2	$	43.2

Note: Period-end balances reflect all paydowns and charge-offs during the period.


	THREE MONTHS ENDED MARCH 31, 2020
($ In Millions)	NUMBER OF LOANS AND LEASES	RECORDED INVESTMENT		UNPAID PRINCIPAL BALANCE
Commercial
Commercial and Institutional	2	$	24.3	$	24.5
Total Commercial	2	24.3		24.5
Personal
Residential Real Estate	6	1.0		1.2
Total Personal	6	1.0		1.2
Total Loans and Leases	8	$	25.3	$	25.7

Note: Period-end balances reflect all paydowns 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 March 31, 2021, the TDR modification of loans within commercial and institutional, residential real estate and commercial real estate was deferred principal.

Notes to Consolidated Financial Statements (unaudited) (continued)

During the three months ended March 31, 2020, the TDR modifications of loans within residential real estate were extensions of term, other modifications, interest rate concessions, and deferred principal. During the three months ended March 31, 2020, the TDR modifications within commercial and institutional were other modifications.

There was 1 residential real estate loan TDR modification during the twelve months ended December 31, 2020, which subsequently had a payment default during the three months ended March 31, 2021. The total recorded investment for this loan was approximately $5.5 million and the unpaid principal balance for these loans was approximately $5.5 million.

There were 0 residential real estate loan TDR modifications during the twelve months ended December 31, 2019, which subsequently had a payment default during the three months ended March 31, 2020.

Northern Trust may obtain physical possession of real estate via foreclosure on an in-substance repossession. As of March 31, 2021, Northern Trust held foreclosed real estate properties with a carrying value of $1.5 million as a result of obtaining physical possession. In addition, as of March 31, 2021, Northern Trust had loans with a carrying value of $6.5 million for which formal foreclosure proceedings were in process.

TDR Relief — COVID-19. Due to the economic environment arising from the COVID-19 pandemic, there have been two forms of relief provided for classifying loans as TDRs: the Interagency Guidance (as defined below) and the CARES Act.

Various banking regulators, including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, issued guidance in the April 7, 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (revised) on loan modification treatment (Interagency Guidance) pursuant to which financial institutions can apply ASC 310-40 Receivables – Troubled Debt Restructurings by Creditors. In accordance with the Interagency Guidance, a loan modification is not considered a TDR if the modification is related to COVID-19; the borrower had been current (not more than 29 days past due) when the modification program was implemented; and the modification includes payment deferrals for not more than 6 months.

Under section 4013 of the CARES Act, relief provided to lenders exempting certain loan modifications which would otherwise be classified as TDRs from such classification applies for loans that were not more than 30 days past due as of December 31, 2019. The TDR relief under the CARES Act applies to COVID-19-related modifications that were made from March 1, 2020 until the earlier of (a) January 1, 2022 or (b) 60 days from the date the COVID-19 national emergency officially ends.

Financial institutions may account for eligible loan modifications under the Interagency Guidance and/or the CARES Act. Northern Trust elected to apply both the CARES Act and the Interagency Guidance, as applicable, in providing borrowers with loan modification relief in response to the COVID-19 pandemic. All other types of modifications which do not meet the CARES Act or Interagency Guidance requirements continue to be governed by existing regulations and accounting policies.

The following tables provide, by segment and class, the number of total COVID-19-related loan modifications including the loan volume and deferred principal and interest balances as of March 31, 2021, for which Northern Trust applied an exemption from TDR classification that are in active deferral (loans currently in the deferral period) or completed deferral (loans that returned to their regular payment schedule).

TABLE 45: COVID-19 LOAN MODIFICATIONS NOT CONSIDERED TDRS IN ACTIVE DEFERRAL STATUS


	MARCH 31, 2021
($ In Millions)	NUMBER OF COVID-19 RELATED MODIFICATIONS	LOAN VOLUME		DEFERRED PRINCIPAL AMOUNT		DEFERRED INTEREST AMOUNT
Personal
Residential Real Estate	25	$	9.5	$	0.2	$	0.2
Total Personal	25	$	9.5	$	0.2	$	0.2
Total Loans	25	$	9.5	$	0.2	$	0.2

Notes to Consolidated Financial Statements (unaudited) (continued)

TABLE 46: COVID-19 LOAN MODIFICATIONS NOT CONSIDERED TDRS THAT HAVE COMPLETED DEFERRAL


	MARCH 31, 2021
($ In Millions)	NUMBER OF COVID-19 RELATED MODIFICATIONS	LOAN VOLUME		DEFERRED PRINCIPAL AMOUNT		DEFERRED INTEREST AMOUNT
Commercial
Commercial and Institutional	90	$	238.4	$	0	$	2.0
Commercial Real Estate	91	457.2		0		3.2
Total Commercial	181	$	695.6	$	0	$	5.2

Personal
Private Client	32	$	169.8	$	0	$	1.2
Residential Real Estate	382	164.8		1.4		2.0
Total Personal	414	$	334.6	$	1.4	$	3.2
Total Loans	595	$	1,030.2	$	1.4	$	8.4

Northern Trust continues to accrue and recognize interest income during the loan deferral period, and hence has not moved these loans to nonaccrual or reported them as past due. Further, these loan balances continue to be assessed on a collective basis for purposes of measuring an allowance for expected credit losses.

During the three months ended March 31, 2021, 38 loans with an aggregate principal amount of $42.9 million that had been granted payment deferrals were paid off.

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.

The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic Research group, and each of Northern Trust’s business units. The Credit Loss Reserve Committee determines the probability weights applied to each forecast approved by Northern Trust’s Macroeconomic Scenario Development Committee, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s qualitative adjustment framework.

The following table provides information regarding changes in the total allowance for credit losses during the three months ended March 31, 2021 and 2020.

TABLE 47: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES


	THREE MONTHS ENDED MARCH 31, 2021
(In Millions)	LOANS AND LEASES		UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT		DEBT SECURITIES HELD TO MATURITY		OTHER FINANCIAL ASSETS		TOTAL
Balance at Beginning of Period	$	190.7	$	61.1	$	7.3	$	0.8	$	259.9
Charge-Offs	(0.4)		0		0		0		(0.4)
Recoveries	1.3		0		0		0		1.3
Net Recoveries (Charge-Offs)	0.9		0		0		0		0.9
Provision for Credit Losses	(26.2)		(6.0)		1.3		0.9		(30.0)
Balance at End of Period	$	165.4	$	55.1	$	8.6	$	1.7	$	230.8

Notes to Consolidated Financial Statements (unaudited) (continued)


	THREE MONTHS ENDED MARCH 31, 2020
(In Millions)	LOANS AND LEASES		UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT		DEBT SECURITIES HELD TO MATURITY		OTHER FINANCIAL ASSETS		TOTAL
Balance at End of Prior Period	$	104.5	$	19.9	$	0	$	0	$	124.4
Cumulative Effect Adjustment	(2.2)		8.9		6.6		0.4		13.7
Balance at Beginning of Period	$	102.3	$	28.8	$	6.6	$	0.4	$	138.1
Charge-Offs	(1.8)		0		0		0		(1.8)
Recoveries	1.1		0		0		0		1.1
Net Recoveries (Charge-Offs)	(0.7)		0		0		0		(0.7)
Provision for Credit Losses(1)	45.6		11.6		2.9		0.7		60.8
Balance at End of Period	$	147.2	$	40.4	$	9.5	$	1.1	$	198.2

(1) The table excludes $0.2 million of credit losses recognized for corporate debt securities available for sale as of March 31, 2020. See further detail in Note 4 - Securities.

The portion of the allowance assigned to loans and leases, debt securities held to maturity, 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 debt securities available for sale, 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, Federal Funds Sold, and Other Assets, please refer to the Allowance for Other Financial Assets section within this footnote.

The Provision for Credit Losses on the consolidated statements of income represents the change in the Allowance for Credit Losses on the consolidated balance sheets and is the charge to current period earnings. It represents the amount needed to maintain the Allowance for Credit Losses on the consolidated balance sheets at an appropriate level to absorb lifetime expected credit losses related to financial assets in scope. Actual losses may vary from current estimates and the amount of the Provision for Credit Losses may be either greater than or less than actual net charge-offs.

There was a $30.0 million release of credit reserves in the current quarter, as compared to a $61.0 million provision in the prior-year quarter. There were net recoveries of $0.9 million during the three months ended March 31, 2021, as compared to net charge-offs of $0.7 million for the three months ended March 31, 2020. The release of credit reserves in the current quarter was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by continued improvement in projected economic conditions and portfolio credit quality relative to the prior quarter, with decreases primarily in the commercial and institutional, commercial real estate, and private client portfolios.

Forecasting and Reversion. Estimating expected lifetime credit losses requires the consideration of the effect of future economic conditions. Northern Trust employs multiple scenarios over a reasonable and supportable period (currently two years) to project future conditions. Management determines the probability weights assigned to each scenario at each quarter-end. Key variables determined to be relevant for projecting credit losses on the portfolios in scope include macroeconomic factors, such as corporate profits, unemployment, and real estate price indices, as well as financial market factors such as equity prices, volatility, and credit spreads. For periods beyond the reasonable and supportable period, Northern Trust reverts to its own historical loss experiences on a straight-line basis over four quarters. For the current quarter, the primary forecast, consistent with Northern Trust’s economic outlook publications, assumes continued economic recovery from the challenges of COVID-19, with strong growth and a falling unemployment rate over the forecast horizon. An alternative scenario is also considered, which contemplates a resurgence of the virus, causing a double-dip recession.

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.

Notes to Consolidated Financial Statements (unaudited) (continued)

Allowance for the Loan and Lease Portfolio. The following table provides information regarding changes in the total allowance for credit losses, including undrawn loan commitments and standby letters of credit, by segment during the three months ended March 31, 2021 and 2020.

TABLE 48: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO LOANS AND LEASES


	THREE MONTHS ENDED MARCH 31, 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		(0.4)		(0.4)		0		0		0
Recoveries	0		1.3		1.3		0		0		0
Net Recoveries (Charge-Offs)	0		0.9		0.9		0		0		0
Provision for Credit Losses	(17.5)		(8.7)		(26.2)		(5.9)		(0.1)		(6.0)
Balance at End of Period	$	124.7	$	40.7	$	165.4	$	51.7	$	3.4	$	55.1


	THREE MONTHS ENDED MARCH 31, 2020
	LOANS AND LEASES						UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
(In Millions)	COMMERCIAL		PERSONAL		TOTAL		COMMERCIAL		PERSONAL		TOTAL
Balance at End of Prior Period	$	58.1	$	46.4	$	104.5	$	15.8	$	4.1	$	19.9
Cumulative Effect Adjustment	(5.9)		3.7		(2.2)		11.9		(3.0)		8.9
Balance at Beginning of Period	$	52.2	$	50.1	$	102.3	$	27.7	$	1.1	$	28.8
Charge-Offs	(0.1)		(1.7)		(1.8)		0		0		0
Recoveries	0.7		0.4		1.1		0		0		0
Net Recoveries (Charge-Offs)	0.6		(1.3)		(0.7)		0		0		0
Provision for Credit Losses	41.9		3.7		45.6		11.1		0.5		11.6
Balance at End of Period	$	94.7	$	52.5	$	147.2	$	38.8	$	1.6	$	40.4

The decrease to the allowance for both loans and leases and the allowance for undrawn loan commitments and standby letters of credit for the three months ended March 31, 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by continued improvement in projected economic conditions and portfolio credit quality relative to the prior quarter, with decreases primarily in the commercial and institutional, commercial real estate, and private client portfolios.

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 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 considered impaired that is based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay. For impaired loans 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 March 31, 2021 and December 31, 2020.

TABLE 49: RECORDED INVESTMENTS IN LOANS AND LEASES


	MARCH 31, 2021						DECEMBER 31, 2020
(In Millions)	COMMERCIAL		PERSONAL		TOTAL		COMMERCIAL		PERSONAL		TOTAL
Loans and Leases
Evaluated on an Individual Basis	$	61.4	$	62.4	$	123.8	$	66.6	$	65.1	$	131.7
Evaluated on a Collective Basis	15,786.5		18,434.0		34,220.5		15,195.4		18,432.6		33,628.0
Total Loans and Leases	15,847.9		18,496.4		34,344.3		15,262.0		18,497.7		33,759.7
Allowance for Credit Losses on Credit Exposures
Evaluated on an Individual Basis	10.6		0.3		10.9		8.8		0.3		9.1
Evaluated on a Collective Basis	114.1		40.4		154.5		133.4		48.2		181.6
Allowance Assigned to Loans and Leases	124.7		40.7		165.4		142.2		48.5		190.7
Allowance for Undrawn Loan Commitments and Standby Letters of Credit
Evaluated on an Individual Basis	0		0		0		1.6		0		1.6
Evaluated on a Collective Basis	51.7		3.4		55.1		56.0		3.5		59.5
Allowance Assigned to Undrawn Loan Commitments and Standby Letters of Credit	51.7		3.4		55.1		57.6		3.5		61.1
Total Allowance Assigned to Loans and Leases and Undrawn Loan Commitments and Standby Letters of Credit	$	176.4	$	44.1	$	220.5	$	199.8	$	52.0	$	251.8

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 Debt Securities Held to Maturity Securities Portfolio. The following table provides information regarding changes in the total allowance for credit losses for debt securities held to maturity during the three months ended March 31, 2021 and March 31, 2020.

TABLE 50: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO DEBT SECURITIES HELD TO MATURITY


	THREE MONTHS ENDED MARCH 31, 2021
(In Millions)	CORPORATE DEBT		NON-U.S. GOVERNMENT		SUB-SOVEREIGN, SUPERNATIONAL, AND NON-U.S. AGENCY BONDS		CERTIFICATE OF DEPOSITS		COVERED BONDS		OTHER		TOTAL
Balance at Beginning of Period	$	0.8	$	0.2	$	1.2	$	0	$	0.1	$	5.0	$	7.3
Provision for Credit Losses	0.3		0.7		0.6		0		0		(0.3)		1.3
Balance at End of Period	$	1.1	$	0.9	$	1.8	$	0	$	0.1	$	4.7	$	8.6


	THREE MONTHS ENDED MARCH 31, 2020
(In Millions)	CORPORATE DEBT		NON-U.S. GOVERNMENT		SUB-SOVEREIGN, SUPERNATIONAL, AND NON-U.S. AGENCY BONDS		CERTIFICATE OF DEPOSITS		COVERED BONDS		OTHER		TOTAL
Balance at End of Prior Period	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Cumulative Effect Adjustment	0.8		0.3		0.9		0		0		4.6		6.6
Balance at Beginning of Period	0.8		0.3		0.9		0		0		4.6		6.6
Provision for Credit Losses	1.9		0.1		0.4		0.2		0.1		0.2		2.9
Balance at End of Period	$	2.7	$	0.4	$	1.3	$	0.2	$	0.1	$	4.8	$	9.5

Debt securities held to maturity 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.

Notes to Consolidated Financial Statements (unaudited) (continued)

Debt securities held to maturity classified as other asset-backed represent pools of underlying receivables from which the cash flows are used to pay the bonds that vary in seniority. Utilizing a qualitative estimation approach, the allowance for other asset-backed securities is assessed by evaluating underlying pool performance based on delinquency rates and available credit support.

Debt securities held to maturity classified as other relates to investments purchased by Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income communities within Northern Trust’s market area. The allowance for CRA investments is assessed using a qualitative estimation approach primarily based on internal historical performance experience and default history of the underlying CRA portfolios to determine a quantitative component of the allowance.

The allowance estimation methodology for all other debt securities held to maturity 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 Cash and Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, Federal Funds Sold, and Other Assets. The Other Assets category includes other miscellaneous credit exposures reported in Other Assets on the consolidated balance sheets. The allowance estimation methodology for Other Financial Assets primarily utilizes a similar approach as used for the Debt Securities Held to Maturity portfolio. It consists of a combination of externally and internally developed loss data, adjusted for the appropriate contractual term. Northern Trust’s portfolio is composed mostly of institutions within the “1 to 3” internal borrower rating category and is expected to exhibit minimal to modest likelihood of loss. The allowance for credit losses related to Other Financial Assets was $1.7 million and $0.8 million as of March 31, 2021 and December 31, 2020, respectively.

Accrued Interest. Accrued interest balances are reported within Other Assets on the consolidated balance sheets. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables related to its loan and securities 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 51: ACCRUED INTEREST


(In Millions)	MARCH 31, 2021		DECEMBER 31, 2020
Loans and Leases	$	59.4	$	55.3
Debt Securities
Held to Maturity	$	19.8	$	26.5
Available for Sale	136.1		153.6
Other Financial Assets	$	1.6	$	1.4

The amount of accrued interest reversed through interest income for loans and leases was immaterial and there was no accrued interest reversed through interest income related to any other financial assets for the three months ended March 31, 2021 and 2020.

Notes to Consolidated Financial Statements (unaudited) (continued)

Note 8 – Pledged and Restricted Assets

Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements and borrowings, as well as for other purposes, including support for securities settlement, primarily related to client activities, and for derivative contracts.

The following table presents Northern Trust's pledged assets.

TABLE 52: TYPE OF PLEDGED ASSETS


(In Billions)	MARCH 31, 2021		DECEMBER 31, 2020
Securities
Obligations of States and Political Subdivisions	$	3.0	$	2.9
Government Sponsored Agency and Other Securities	30.6		32.5
Loans	12.3		12.1
Total Pledged Assets	$	45.9	$	47.5

Collateral required for these purposes totaled $1.6 billion and $5.7 billion at March 31, 2021 and December 31, 2020, respectively.

The following table presents the available for sale debt securities pledged as collateral that are included in pledged assets.

TABLE 53: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES INCLUDED IN PLEDGED ASSETS


	SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE				DERIVATIVE CONTRACTS
(In Millions)	MARCH 31, 2021		DECEMBER 31, 2020		MARCH 31, 2021		DECEMBER 31, 2020
Debt Securities
Available for Sale	$	93.0	$	33.0	$	29.3	$	27.1

The secured parties to these transactions have the right to repledge or sell the securities as it relates to $93.4 million and $33.5 million of the pledged collateral as of March 31, 2021 and December 31, 2020, respectively.

Northern Trust accepts financial assets as collateral that it may, in some instances, be permitted to repledge or sell. The collateral is generally obtained under certain reverse repurchase agreements and derivative contracts. The following table presents the fair value of securities accepted as collateral. There was 0 repledged or sold collateral at March 31, 2021 or December 31, 2020.

TABLE 54: ACCEPTED COLLATERAL


(In Millions)	MARCH 31, 2021		DECEMBER 31, 2020
Collateral that may be repledged or sold
Reverse repurchase agreements	$	309.3	$	1,179.8
Derivative contracts	8.4		0.9

Collateral that may not be repledged or sold
Reverse repurchase agreements	800.0		500.0

As a result of the economic environment arising from the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement to zero percent on March 26, 2020. Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $1.7 billion for the three months ended March 31, 2020.

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 three months ended March 31, 2021, including the effect of foreign exchange rates on non-U.S. dollar denominated balances, were as follows.

TABLE 55: GOODWILL


(In Millions)	CORPORATE & INSTITUTIONAL SERVICES		WEALTH MANAGEMENT		TOTAL
Balance at December 31, 2020	$	636.0	$	71.2	$	707.2
Foreign Exchange Rates	(3.2)		0		(3.2)
Balance at March 31, 2021	$	632.8	$	71.2	$	704.0

Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization as of March 31, 2021 and December 31, 2020 were as follows.

TABLE 56: OTHER INTANGIBLE ASSETS


(In Millions)	MARCH 31, 2021		DECEMBER 31, 2020
Gross Carrying Amount	$	210.0	$	221.3
Less: Accumulated Amortization	106.2		108.7
Net Book Value	$	103.8	$	112.6

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 $4.3 million for the three months ended March 31, 2021, and $4.1 million for the three months ended March 31, 2020. Amortization for the remainder of 2021 and for the years 2022, 2023, 2024, and 2025 is estimated to be $10.5 million, $10.1 million, $9.8 million, $9.7 million, and $9.1 million, respectively.

Capitalized Software. The gross carrying amount and accumulated amortization of capitalized software as of March 31, 2021 and December 31, 2020 were as follows.

TABLE 57: CAPITALIZED SOFTWARE


(In Millions)	MARCH 31, 2021		DECEMBER 31, 2020
Gross Carrying Amount	$	4,404.8	$	4,337.4
Less: Accumulated Amortization	2,810.5		2,744.5
Net Book Value	$	1,594.3	$	1,592.9

Capitalized software, which is included in Other Assets on the consolidated balance sheets, consists primarily of purchased software, software licenses, and allowable internal costs, including compensation relating to software developed for internal use. Fees paid for the use of software licenses that are not hosted by Northern Trust are expensed as incurred. Amortization expense, which is included in Equipment and Software on the consolidated statements of income, totaled $94.0 million and $91.6 million, respectively, for the three months ended March 31, 2021 and March 31, 2020.

Note 10 – Reporting Segments

Northern Trust is organized around its 2 client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to C&IS and Wealth Management.

Notes to Consolidated Financial Statements (unaudited) (continued)

The following table presents the earnings contributions and average assets of Northern Trust’s reporting segments for the three month periods ended March 31, 2021 and 2020.

TABLE 58: RESULTS OF REPORTING SEGMENTS


($ In Millions)	CORPORATE & INSTITUTIONAL SERVICES						WEALTH MANAGEMENT						OTHER						TOTAL CONSOLIDATED
THREE MONTHS ENDED MARCH 31,	2021			2020			2021			2020			2021			2020			2021			2020
Noninterest Income
Trust, Investment and Other Servicing Fees	$	620.5		$	574.4		$	443.2		$	429.2		$	0		$	0		$	1,063.7		$	1,003.6
Foreign Exchange Trading Income	74.5			85.1			4.2			3.8			0			0			78.7			88.9
Other Noninterest Income	60.3			41.8			44.2			42.4			(3.6)			2.9			100.9			87.1
Total Noninterest Income	755.3			701.3			491.6			475.4			(3.6)			2.9			1,243.3			1,179.6
Net Interest Income(1)	160.7			211.3			186.0			204.9			0			0			346.7			416.2
Revenue(1)	916.0			912.6			677.6			680.3			(3.6)			2.9			1,590.0			1,595.8
Provision for Credit Losses	(5.4)			25.7			(24.6)			35.3			0			0			(30.0)			61.0
Noninterest Expense	713.1			659.3			403.1			394.4			1.3			11.9			1,117.5			1,065.6
Income before Income Taxes(1)	208.3			227.6			299.1			250.6			(4.9)			(9.0)			502.5			469.2
Provision for Income Taxes(1)	50.1			49.9			78.5			60.9			(1.2)			(2.2)			127.4			108.6
Net Income	$	158.2		$	177.7		$	220.6		$	189.7		$	(3.7)		$	(6.8)		$	375.1		$	360.6
Percentage of Consolidated Net Income	42		%	49		%	59		%	53		%	(1)		%	(2)		%	100		%	100		%
Average Assets	$	120,157.7		$	92,715.3		$	33,098.1		$	31,455.2		$	0		$	0		$	153,255.8		$	124,170.5

(1) Non-GAAP financial measures stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $6.6 million for 2021 and $8.1 million for 2020.

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 March 31, 2021, 5,000 shares of Series D Non-Cumulative Perpetual Preferred Stock (the “Series D Preferred Stock”) and 16,000 shares of Series E Non-Cumulative Perpetual Preferred Stock (“Series E Preferred Stock”) were outstanding.

Series D Preferred Stock. As of March 31, 2021, the Corporation had issued and outstanding 500,000 depositary shares, each representing a 1/100th ownership interest in a share of Series D Preferred Stock, issued in August 2016. Equity related to Series D Preferred Stock as of March 31, 2021 and December 31, 2020 was $493.5 million. Shares of the Series D Preferred Stock have 0 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 January 20, 2021, the Corporation declared a cash dividend of $2,300 per share of Series D Preferred Stock payable on April 1, 2021, to stockholders of record as of March 15, 2021.

Series E Preferred Stock. As of March 31, 2021, the Corporation had issued and outstanding 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Preferred Stock, issued in November 2019. Equity related to Series E Preferred Stock as of March 31, 2021 and December 31, 2020 was $391.4 million. Shares of the Series E Preferred Stock have 0 par value and a liquidation preference of $25,000 (equivalent to $25 per depositary share).

Notes to Consolidated Financial Statements (unaudited) (continued)

Dividends on the Series E Preferred Stock, which are not mandatory, will accrue and be payable on the liquidation preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January, April, July and October of each year, commencing on April 1, 2020, at a rate per annum equal to 4.70%. On January 20, 2021, the Corporation declared cash dividends of $293.75 per share of Series E Preferred Stock payable on April 1, 2021, to stockholders of record as of March 15, 2021.

Common Stock. In July 2018, the Board of Directors approved a stock repurchase authorization 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.

On December 18, 2020, the Federal Reserve extended its capital distribution limits into the first quarter of 2021 with certain modifications, which included continuing to limit dividend payments and share repurchases based on recent income. During the first quarter of 2021, the Corporation restarted its share repurchase program in accordance with such limitations. During the current quarter, the Corporation repurchased 1,399,673 shares of common stock, including 365,697 shares withheld related to share-based compensation, at a total cost of $135.6 million ($96.91 average price per share). On March 25, 2021, the Federal Reserve announced that the temporary and additional restrictions on bank holding company dividends and share repurchases currently in place may end after June 30, 2021, depending on results from upcoming stress tests.

Note 12 – Accumulated Other Comprehensive Income (Loss)

The following tables summarize the components of Accumulated Other Comprehensive Income (Loss) (AOCI) at March 31, 2021 and 2020, and changes during the three months then ended.

TABLE 59: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)


	THREE MONTHS ENDED MARCH 31, 2021
(In Millions)	NET UNREALIZED GAINS (LOSSES) ON DEBT SECURITIES AVAILABLE FOR SALE(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	(369.7)		(5.2)		5.0		7.8		(362.1)
Balance at March 31, 2021	$	272.1	$	(8.4)	$	149.7	$	(347.5)	$	65.9

(1) Includes net unrealized gains on debt securities transferred from available for sale to held to maturity during the period ended March 31, 2021.


	THREE MONTHS ENDED MARCH 31, 2020
(In Millions)	NET UNREALIZED GAINS (LOSSES) ON DEBT SECURITIES AVAILABLE FOR SALE(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, 2019	$	114.0	$	(3.7)	$	117.8	$	(422.8)	$	(194.7)
Net Change	199.7		7.3		25.7		7.0		239.7
Balance at March 31, 2020	$	313.7	$	3.6	$	143.5	$	(415.8)	$	45.0

(1) Includes net unrealized gains on debt securities transferred from available for sale to held to maturity during the period ended March 31, 2020.

Notes to Consolidated Financial Statements (unaudited) (continued)

TABLE 60: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)


	THREE MONTHS ENDED MARCH 31,
	2021						2020
(In Millions)	BEFORE TAX		TAX EFFECT		AFTER TAX		BEFORE TAX		TAX EFFECT		AFTER TAX
Unrealized Gains (Losses) on Debt Securities Available for Sale
Unrealized Gains (Losses) on Debt Securities Available for Sale	$	(496.5)	$	126.8	$	(369.7)	$	266.8	$	(67.1)	$	199.7
Reclassification Adjustment for (Gains) Losses Included in Net Income(1)	0		0		0		0		0		0
Net Change	$	(496.5)	$	126.8	$	(369.7)	$	266.8	$	(67.1)	$	199.7
Unrealized Gains (Losses) on Cash Flow Hedges
Foreign Exchange Contracts	$	(2.5)	$	0.7	$	(1.8)	$	13.3	$	(3.3)	$	10.0
Interest Rate Contracts	0		0		0		0.4		(0.1)		0.3
Reclassification Adjustment for (Gains) Losses Included in Net Income(2)	(4.5)		1.1		(3.4)		(4.0)		1.0		(3.0)
Net Change	$	(7.0)	$	1.8	$	(5.2)	$	9.7	$	(2.4)	$	7.3
Foreign Currency Adjustments
Foreign Currency Translation Adjustments	$	(57.3)	$	0.5	$	(56.8)	$	(89.8)	$	9.6	$	(80.2)
Long-Term Intra-Entity Foreign Currency Transaction Gains (Losses)	(0.2)		0.1		(0.1)		(0.6)		0.1		(0.5)
Net Investment Hedge Gains (Losses)	82.7		(20.8)		61.9		142.7		(36.3)		106.4
Net Change	$	25.2	$	(20.2)	$	5.0	$	52.3	$	(26.6)	$	25.7
Pension and Other Postretirement Benefit Adjustments
Net Actuarial Gains	$	(1.3)	$	0.3	$	(1.0)	$	(1.3)	$	0.1	$	(1.2)
Reclassification Adjustment for (Gains) Losses Included in Net Income(3)
Amortization of Net Actuarial Loss	11.9		(2.9)		9.0		10.9		(2.6)		8.3
Amortization of Prior Service Cost	(0.3)		0.1		(0.2)		(0.1)		0		(0.1)
Net Change	$	10.3	$	(2.5)	$	7.8	$	9.5	$	(2.5)	$	7.0
Total Net Change	$	(468.0)	$	105.9	$	(362.1)	$	338.3	$	(98.6)	$	239.7

(1) The before-tax reclassification adjustment out of AOCI related to the realized gains (losses) on debt securities available for sale is recorded in Investment Security Gains (Losses), net on the consolidated statements of income.

(2) See Note 22 — Derivative Financial Instruments for the location of the reclassification adjustment related to cash flow hedges.

(3) The before-tax reclassification adjustment out of AOCI related to pension and other postretirement benefit adjustments is recorded in Employee Benefits expense on the consolidated statements of income.

Note 13 – Net Income Per Common Share

The computations of net income per common share are presented in the following table.

TABLE 61: NET INCOME PER COMMON SHARE


	THREE MONTHS ENDED MARCH 31,
($ In Millions Except Per Common Share Information)	2021		2020
Basic Net Income Per Common Share
Average Number of Common Shares Outstanding	208,112,824		208,881,131
Net Income	$	375.1	$	360.6
Less: Dividends on Preferred Stock	16.2		30.5
Net Income Applicable to Common Stock	358.9		330.1
Less: Earnings Allocated to Participating Securities	3.7		3.9
Earnings Allocated to Common Shares Outstanding	355.2		326.2
Basic Net Income Per Common Share	$	1.71	$	1.56
Diluted Net Income Per Common Share
Average Number of Common Shares Outstanding	208,112,824		208,881,131
Plus: Dilutive Effect of Share-based Compensation	833,624		935,691
Average Common and Potential Common Shares	208,946,448		209,816,822
Earnings Allocated to Common and Potential Common Shares	$	355.2	$	326.2
Diluted Net Income Per Common Share	1.70		1.55

Note: For the three months ended March 31, 2021 and 2020, there were 0 common stock equivalents excluded in the computation of diluted net income per share.

Notes to Consolidated Financial Statements (unaudited) (continued)

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 C&IS clients. Investment Management and Advisory income contains revenue received from providing asset management and related services to Wealth Management and C&IS clients and to Northern Trust sponsored funds. Securities Lending income represents revenues generated from securities lending arrangements that Northern Trust enters into as agent, mainly with C&IS clients. Other income largely consists of revenues received from providing employee benefit, investment risk and analytic and other services to C&IS and Wealth Management clients.

Other Noninterest Income. Treasury management income represents revenues received from providing cash and liquidity management services to C&IS and Wealth Management clients. The portion of Security Commissions and Trading Income that relates to revenue from contracts with clients is primarily comprised of commissions earned from providing securities brokerage services to Wealth Management and C&IS clients. The portion of Other Operating Income that relates to revenue from contracts with clients is mainly comprised of service fees for banking-related services provided to Wealth Management and C&IS clients.

Performance Obligations. Clients are typically charged monthly or quarterly in arrears based on the fee arrangement agreed to with each client; payment terms will vary depending on the client and services offered.

Substantially all revenues generated from contracts with clients for asset servicing, asset management, securities lending, treasury management and banking-related services are recognized on an accrual basis, over the period in which services are provided. The nature of Northern Trust’s performance obligations is to provide a series of distinct services in which the customer simultaneously receives and consumes the benefits of the promised services as they are performed. Fee arrangements are mainly comprised of variable amounts based on market value of client assets managed and serviced, transaction volumes, number of accounts, and securities lending volume and spreads. Revenue is recognized using the output method in an amount that reflects the consideration to which Northern Trust expects to be entitled in exchange for providing each month or quarter of service. For contracts with multiple performance obligations, revenue is allocated to each performance obligation based on the price agreed to with the client, representing its relative standalone selling price.

Security brokerage revenue is primarily represented by securities commissions received in exchange of providing trade execution related services. Control is transferred at a point in time, on the trade date of the transaction, and fees are typically variable based on transaction volumes and security types.

Northern Trust’s contracts with its clients are typically open-ended arrangements and are therefore considered to have an original duration of less than one year. Northern Trust has elected the practical expedient to not disclose the value of remaining performance obligations for contracts with an original expected duration of one year or less.

The following table presents revenues disaggregated by major revenue source.

TABLE 62: REVENUE DISAGGREGATION


	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Noninterest Income
Trust, Investment and Other Servicing Fees
Custody and Fund Administration	$	469.7	$	417.6
Investment Management and Advisory	516.4		510.5
Securities Lending	18.3		23.5
Other	59.3		52.0
Total Trust, Investment and Other Servicing Fees	$	1,063.7	$	1,003.6
Other Noninterest Income
Foreign Exchange Trading Income	$	78.7	$	88.9
Treasury Management Fees	11.2		11.0
Security Commissions and Trading Income	34.8		41.7
Other Operating Income	54.9		34.4
Total Other Noninterest Income	$	179.6	$	176.0
Total Noninterest Income	$	1,243.3	$	1,179.6

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 March 31, 2021, revenue from contracts with clients

Notes to Consolidated Financial Statements (unaudited) (continued)

also includes $28.7 million of the $34.8 million total Security Commissions and Trading Income and $12.8 million of the $54.9 million total Other Operating Income. For the three months ended March 31, 2020, revenue from contracts with clients also includes $29.0 million of the $41.7 million total Security Commissions and Trading Income and $10.8 million of the $34.4 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 March 31, 2021 and December 31, 2020.

TABLE 63: CLIENT RECEIVABLES


(In Millions)	MARCH 31, 2021		DECEMBER 31, 2020
Trust Fees Receivable, net(1)	$	890.2	$	819.3
Other	116.2		116.5
Total Client Receivables	$	1,006.4	$	935.8

(1) Trust Fees Receivable is net of a $6.7 million and $7.2 million fee receivable allowance as of March 31, 2021 and December 31, 2020, respectively.

Note 15 – Net Interest Income

The components of Net Interest Income were as follows:

TABLE 64: NET INTEREST INCOME


	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Interest Income
Loans and Leases	$	172.0	$	250.2
Securities — Taxable	173.9		241.1
— Non-Taxable(1)	0.4		0.5
Interest-Bearing Due from and Deposits with Banks(2)	2.4		12.8
Federal Reserve and Other Central Bank Deposits and Other	1.2		24.6
Total Interest Income	$	349.9	$	529.2
Interest Expense
Deposits	$	(13.4)	$	60.9
Federal Funds Purchased	0.1		2.0
Securities Sold Under Agreements to Repurchase	0		1.0
Other Borrowings	3.5		29.2
Senior Notes	13.7		17.9
Long-Term Debt	5.3		8.4
Floating Rate Capital Debt	0.6		1.7
Total Interest Expense	$	9.8	$	121.1
Net Interest Income	$	340.1	$	408.1

(1) Non-Taxable Securities represent securities that are exempt from U.S. federal income taxes.

(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.

Notes to Consolidated Financial Statements (unaudited) (continued)

Note 16 – Other Operating Income

The components of Other Operating Income were as follows:

TABLE 65: OTHER OPERATING INCOME


	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Loan Service Fees	$	15.4	$	11.9
Banking Service Fees	12.7		11.4
Other Income	26.8		11.1
Total Other Operating Income	$	54.9	$	34.4

Note 17 – Other Operating Expense

The components of Other Operating Expense were as follows:

TABLE 66: OTHER OPERATING EXPENSE


	THREE MONTHS ENDED MARCH 31,
($ In Millions)	2021		2020
Business Promotion	$	7.9	$	18.8
Staff Related	6.8		(3.5)
FDIC Insurance Premiums	3.6		2.5
Other Intangibles Amortization	4.3		4.1
Other Expenses	49.1		39.9
Total Other Operating Expense	$	71.7	$	61.8

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 months ended March 31, 2021 and 2020.

TABLE 67: NET PERIODIC PENSION EXPENSE (BENEFIT)


U.S. QUALIFIED PLAN	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Service Cost	$	13.2	$	11.8
Interest Cost	9.8		10.8
Expected Return on Plan Assets	(20.1)		(19.2)
Amortization
Net Actuarial Loss	9.4		8.8
Prior Service Cost	(0.1)		(0.1)
Net Periodic Pension Expense	$	12.2	$	12.1


NON-U.S. PENSION PLANS	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Service Cost	$	0.5	$	0.5
Interest Cost	0.6		0.7
Expected Return on Plan Assets	(0.6)		(0.7)
Settlement Expense	0.2		0.2
Amortization
Net Actuarial Loss	0.3		0.3
Prior Service Cost	0		0
Net Periodic Pension Expense	$	1.0	$	1.0


U.S. NON-QUALIFIED PLAN	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Service Cost	$	1.3	$	1.1
Interest Cost	0.9		1.2
Amortization
Net Actuarial Loss	2.1		1.8
Prior Service Cost	0		0
Net Periodic Pension Expense	$	4.3	$	4.1


POSTRETIREMENT HEALTH CARE PLAN	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Service Cost	$	0	$	0
Interest Cost	0.1		0.2
Amortization
Net Actuarial (Gain)	(0.1)		(0.2)
Prior Service Cost	(0.2)		0
Net Periodic Postretirement Expense	$	(0.2)	$	0

Northern Trust changed the plan design of its post-retirement health care plan as of January 1, 2021, which resulted in the recognition of negative prior-service cost at the time these changes were communicated to participants in August 2020. Concurrently, a further shift in population from active to inactive participants required an adjustment to the amortization period from the average remaining service period of active participants to the average life expectancy of the inactive participants. Negative prior service costs are being amortized on a straight-line basis over 13.9 years.

The components of net periodic pension expense are recorded in Employee Benefits expense on the consolidated statements of income.

There were 0 contributions to the U.S. Qualified Plan during the three months ended March 31, 2021 and 2020, respectively.

Notes to Consolidated Financial Statements (unaudited) (continued)

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.

The Corporation granted 729,013 stock unit awards with a total grant-date fair value of $70.4 million during the three months ended March 31, 2021, compared to 763,554 stock unit awards with a total grant-date fair value of $76.2 million during the three months ended March 31, 2020. Compensation expense for the three months ended March 31, 2021 included $21.8 million attributable to restricted stock units granted to retirement-eligible employees that were expensed in their entirety on the date of grant, compared to $23.2 million in the prior-year quarter.

There were 0 non-qualified stock option grants in the three months ended March 31, 2021 and 2020.

The Corporation granted 200,066 performance stock units with a total grant-date fair value of $19.5 million during the three months ended March 31, 2021, compared to 205,847 performance stock units with a total grant-date fair value of $20.8 million during the three months ended March 31, 2020. Compensation expense for the three months ended March 31, 2021 included $9.9 million attributable to performance stock units granted to retirement-eligible employees that were expensed in their entirety on the date of grant, compared to $10.8 million in the prior-year quarter.

Restricted stock unit award compensation expense for the three months ended March 31, 2021 and 2020 included $4.2 million and $4.3 million, respectively, attributable to restricted stock units vested in full and expensed in their entirety upon date of grant.

Total compensation expense for share-based payment arrangements and the associated tax impacts were as follows for the three months ended March 31, 2021 and 2020.

TABLE 68: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS


	THREE MONTHS ENDED MARCH 31,
(In Millions)	2021		2020
Restricted Stock Unit Awards	$	38.4	$	40.7
Stock Options	0		0.2
Performance Stock Units	12.1		12.9
Total Share-Based Compensation Expense	50.5		53.8
Tax Benefits Recognized	$	12.7	$	13.4

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

Notes to Consolidated Financial Statements (unaudited) (continued)

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 March 31, 2021 and December 31, 2020, the carrying amounts of these investments in community development projects that generate tax credits, included in Other Assets on the consolidated balance sheets, totaled $908.1 million and $919.6 million, respectively, of which $863.6 million and $874.0 million are VIEs as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, liabilities related to unfunded commitments on investments in tax credit community development projects, included in Other Liabilities on the consolidated balance sheets, totaled $313.7 million and $351.6 million, respectively, of which $298.3 million and $335.9 million related to undrawn commitments on VIEs as of March 31, 2021 and December 31, 2020, respectively. Northern Trust’s funding requirements are limited to its invested capital and undrawn commitments for future equity contributions. Northern Trust has 0 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 $23.0 million and $16.3 million for the three months ended March 31, 2021 and 2020, 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 $50.2 million of money market mutual fund fees for the three months ended March 31, 2021 related to the low-interest-rate environment and certain competitive factors. Northern Trust did 0t waive any money market mutual fund fees for the three months ended March 31, 2020. Northern Trust does 0t 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 March 31, 2021, and December 31, 2020, 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 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.

The following table provides details of Northern Trust's off-balance sheet financial instruments as of March 31, 2021 and December 31, 2020.

TABLE 69: SUMMARY OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS


	MARCH 31, 2021						DECEMBER 31, 2020
($ In Millions)	ONE YEAR AND LESS		OVER ONE YEAR		TOTAL		ONE YEAR AND LESS		OVER ONE YEAR		TOTAL
Undrawn Commitments to Extend Credit(1)	$	11,519.7	$	18,016.0	$	29,535.7	$	11,260.5	$	17,678.0	$	28,938.5
Standby Letters of Credit and Financial Guarantees(2)	1,474.8		321.0		1,795.8		1,228.1		763.5		1,991.6
Commercial Letters of Credit	66.2		0		66.2		54.6		0		54.6
Custody Securities Lent with Indemnification	176,378.0		0		176,378.0		157,478.0		0		157,478.0
Total Off-Balance Sheet Financial Instruments	$	189,438.7	$	18,337.0	$	207,775.7	$	170,021.2	$	18,441.5	$	188,462.7

(1) These amounts exclude $404.2 million and $384.7 million of commitments participated to others at March 31, 2021 and December 31, 2020, respectively.

(2) These amounts include $23.8 million and $24.2 million of standby letters of credit secured by cash deposits or participated to others as of March 31, 2021 and December 31, 2020, respectively.

Undrawn Commitments to Extend Credit generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements.

Notes to Consolidated Financial Statements (unaudited) (continued)

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 March 31, 2021 and December 31, 2020 subject to indemnification was $176.4 billion and $157.5 billion, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and 0 liability was recorded as of March 31, 2021 or December 31, 2020, related to these indemnifications.

Legal Proceedings. In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to pending and threatened legal actions, and are subject to regulatory examinations, information-gathering requests, investigations, and proceedings, both formal and informal. In certain legal actions, claims for substantial monetary damages are asserted. In regulatory matters, claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought.

Based on current knowledge, after consultation with legal counsel and after taking into account current accruals, management does not believe that losses, fines or penalties, if any, arising from pending litigation or threatened legal actions or regulatory matters either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although such matters could have a material adverse effect on the Corporation’s operating results for a particular period.

Under GAAP, (i) an event is “probable” if the “future event or events are likely to occur”; (ii) an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely”; and (iii) an event is “remote” if “the chance of the future event or events occurring is slight.”

The outcome of litigation and regulatory matters is inherently difficult to predict and/or the range of loss often cannot be reasonably estimated, particularly for matters that (i) will be decided by a jury, (ii) are in early stages, (iii) involve uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iv) are subject to appeals or motions, (v) involve significant factual issues to be resolved, including with respect to the amount of damages, (vi) do not specify the amount of damages sought or (vii) seek very large damages based on novel and complex damage and liability legal theories. Accordingly, the Corporation cannot reasonably estimate the eventual outcome of these pending matters, the timing of their ultimate resolution or what the eventual loss, fines or penalties, if any, related to each pending matter will be.

In accordance with applicable accounting guidance, the Corporation records accruals for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Corporation does not record accruals. NaN 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 March 31, 2021, the Corporation has estimated the range of reasonably possible loss for these matters to be from 0 to approximately $25 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.

Notes to Consolidated Financial Statements (unaudited) (continued)

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 2 trusts for which it serves as trustee. Charges also were brought against a number of other persons and entities related to this matter. In 2017, a French court found no estate tax fraud had occurred and NTFS and all other persons and entities charged were acquitted. The Public Prosecutor’s Office of France appealed the court decision and in June 2018 a French appellate court issued its opinion on the matter, acquitting all persons and entities charged, including NTFS. In January 2021, the Cour de Cassation, the highest court in France, reversed the June 2018 appellate court ruling, requiring a re-trial at the appellate court level. The re-trial proceedings in the appellate court have not yet been scheduled. As trustee, NTFS provided no tax advice and had no involvement in the preparation or filing of the challenged estate tax filings.

Visa Class B Common Shares. Northern Trust, as a member of Visa U.S.A. Inc. (Visa U.S.A.) and in connection with the 2007 restructuring of Visa U.S.A. and its affiliates and the 2008 initial public offering of Visa Inc. (Visa), received certain Visa Class B common shares. The Visa Class B common shares are subject to certain selling restrictions until the final resolution of certain litigation related to interchange fees involving Visa (the covered litigation), at which time the shares are convertible into Visa Class A common shares based on a conversion rate dependent upon the ultimate cost of resolving the covered litigation. On June 28, 2018, and September 27, 2019, Visa deposited an additional $600 million and $300 million, respectively, into an escrow account previously established with respect to the covered litigation. As a result of the additional contributions to the escrow account, the rate at which Visa Class B common shares will convert into Visa Class A common shares was reduced.

In September 2018, Visa reached a proposed class settlement agreement covering damage claims but not injunctive relief claims regarding the covered litigation. In December 2019, the district court granted final approval for the proposed class settlement agreement. Certain merchants have opted out of the class settlement and are pursuing claims separately, while other merchants have appealed the approval order granted by the district court. The ultimate resolution of the covered litigation, the timing for removal of the selling restrictions on the Visa Class B common shares and the rate at which such shares will ultimately convert into Visa Class A common shares are uncertain.

In June 2016 and 2015, Northern Trust recorded a $123.1 million and $99.9 million net gain on the sale of 1.1 million and 1.0 million of its Visa Class B common shares, respectively. These sales do not affect Northern Trust’s risk related to the impact of the covered litigation on the rate at which such shares will ultimately convert into Visa Class A common shares. Northern Trust continued to hold approximately 4.1 million Visa Class B common shares, which are recorded at their original cost basis of 0, as of March 31, 2021 and December 31, 2020.

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 March 31, 2021 and December 31, 2020.

TABLE 70: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS


	MARCH 31, 2021						DECEMBER 31, 2020
	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	$	4,513.7	$	10.0	$	13.7	$	4,717.6	$	8.2	$	10.2
Cash Flow Hedges	0		0		0		50.0		0.1		0
Foreign Exchange Contracts
Cash Flow Hedges	6,464.9		296.7		20.4		6,554.4		15.4		104.0
Net Investment Hedges	3,482.1		73.5		8.8		3,480.3		0.1		207.7
Total Derivatives Designated as Hedging under GAAP	$	14,460.7	$	380.2	$	42.9	$	14,802.3	$	23.8	$	321.9
Derivatives Not Designated as Hedging under GAAP
Non-Designated Risk Management Derivatives
Foreign Exchange Contracts	$	131.0	$	0.7	$	0.1	$	67.7	$	0.1	$	0.1
Other Financial Derivatives(3)	721.5		—		34.6		745.4		0		35.3
Total Non-Designated Risk Management Derivatives	$	852.5	$	0.7	$	34.7	$	813.1	$	0.1	$	35.4
Client-Related and Trading Derivatives
Foreign Exchange Contracts	$	309,731.3	$	2,630.1	$	2,513.7	$	320,563.4	$	4,245.1	$	4,410.7
Interest Rate Contracts	10,702.2		195.6		110.0		10,573.3		289.2		114.8
Total Client-Related and Trading Derivatives	$	320,433.5	$	2,825.7	$	2,623.7	$	331,136.7	$	4,534.3	$	4,525.5
Total Derivatives Not Designated as Hedging under GAAP	$	321,286.0	$	2,826.4	$	2,658.4	$	331,949.8	$	4,534.4	$	4,560.9
Total Gross Derivatives	$	335,746.7	$	3,206.6	$	2,701.3	$	346,752.1	$	4,558.2	$	4,882.8
Less: Netting(4)			1,977.1		2,090.3				3,507.8		2,817.1
Total Derivative Financial Instruments			$	1,229.5	$	611.0			$	1,050.4	$	2,065.7

(1) Derivative assets are reported in Other Assets on the consolidated balance sheets.

(2) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets.

(3) This line includes swaps related to sales of certain Visa Class B common shares.

(4) See further detail in Note 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 available for sale 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

Notes to Consolidated Financial Statements (unaudited) (continued)

fair value hedges during the three-month periods ended March 31, 2021 and 2020. 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.

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 available for sale 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 0 material gains or losses reclassified into earnings during the three-month periods ended March 31, 2021 and 2020, as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated that net losses of $8.0 million and gains of $287.9 million will be reclassified into net income within the next twelve months relating to cash flow hedges of foreign-currency-denominated transactions and cash flow hedges of foreign-currency-denominated debt securities, respectively. As of March 31, 2021, 23 months was the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign-currency-denominated transactions was being hedged.

The following tables provide fair value and cash flow hedge derivative gains and losses recognized in income during the three-month periods ended March 31, 2021 and 2020.

TABLE 71: 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 MARCH 31,	2021		2020		2021		2020		2021		2020
Total amounts on the consolidated statements of income	$	349.9	$	529.2	$	9.8	$	121.1	$	54.9	$	34.4
Gains (Losses) on fair value hedges recognized on
Interest Rate Contracts
Recognized on derivatives	18.4		(76.0)		(142.9)		150.4		0		0
Recognized on hedged items	(18.4)		76.0		142.9		(150.4)		0		0
Amounts related to interest settlements on derivatives	(1.6)		(0.5)		7.0		(2.9)		0		0
Total gains (losses) recognized on fair value hedges	$	(1.6)	$	(0.5)	$	7.0	$	(2.9)	$	0	$	0
Gains (Losses) on cash flow hedges recognized on
Foreign Exchange Contracts
Net gains (losses) reclassified from AOCI to net income	$	5.5	$	4.1	$	0	$	0	$	(1.0)	$	(0.1)


Total gains (losses) reclassified from AOCI to net income on cash flow hedges	$	5.5	$	4.1	$	0	$	0	$	(1.0)	$	(0.1)

The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged items as of March 31, 2021 and December 31, 2020.

TABLE 72: HEDGED ITEMS IN FAIR VALUE HEDGES


	MARCH 31, 2021				DECEMBER 31, 2020
(In Millions)	CARRYING VALUE OF THE HEDGED ITEMS		CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(1)		CARRYING VALUE OF THE HEDGED ITEMS		CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(2)
Available for Sale Debt Securities(3)	$	1,807.4	$	35.3	$	2,075.1	$	48.8
Senior Notes and Long-Term Subordinated Debt	2,745.2		66.5		2,745.1		221.5
Total	$	4,552.6	$	101.8	$	4,820.2	$	270.3

(1) The cumulative hedge accounting basis adjustment includes $10.2 million related to discontinued hedging relationships of available for sale debt securities as of March 31, 2021. There are 0 amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of March 31, 2021.

(2) The cumulative hedge accounting basis adjustment includes $10.4 million related to discontinued hedging relationships of available for sale debt securities as of December 31, 2020. There were 0 amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31, 2020.

(3) Carrying value represents amortized cost.

Net Investment Hedges. Certain foreign exchange contracts are designated as net investment hedges to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. Net

Notes to Consolidated Financial Statements (unaudited) (continued)

investment hedge gains of $82.7 million and $142.7 million were recognized in AOCI related to foreign exchange contracts for the three months ended March 31, 2021 and 2020, 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 months ended March 31, 2021 and 2020 for derivative instruments not designated as hedges under GAAP.

TABLE 73: 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 MARCH 31,
		2021		2020
Non-designated risk management derivatives
Foreign Exchange Contracts	Other Operating Income	$	0.1	$	0.1
Other Financial Derivatives(1)	Other Operating Income	(3.6)		2.9
Gains (Losses) from non-designated risk management derivatives		$	(3.5)	$	3.0
Client-related and trading derivatives
Foreign Exchange Contracts	Foreign Exchange Trading Income	$	78.7	$	88.9
Interest Rate Contracts	Security Commissions and Trading Income	3.0		11.0
Gains (Losses) from client-related and trading derivatives		$	81.7	$	99.9
Total gains (losses) from derivatives not designated as hedging under GAAP		$	78.2	$	102.9

(1) This line includes swaps related to the sale of certain Visa Class B common shares.

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 March 31, 2021 and December 31, 2020.

TABLE 74: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL


	MARCH 31, 2021
(In Millions)	GROSS RECOGNIZED ASSETS		GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(2)		NET AMOUNTS PRESENTED IN THE BALANCE SHEET		GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET		NET AMOUNT(3)
Derivative Assets(1)
Foreign Exchange Contracts Over the Counter (OTC)	$	2,303.8	$	1,973.5	$	330.3	$	8.4	$	321.9
Interest Rate Swaps OTC	204.0		3.6		200.4		—		200.4
Interest Rate Swaps Exchange Cleared	1.6		0		1.6		—		1.6
Total Derivatives Subject to a Master Netting Arrangement	2,509.4		1,977.1		532.3		8.4		523.9
Total Derivatives Not Subject to a Master Netting Arrangement	697.2		—		697.2		0		697.2
Total Derivatives	3,206.6		1,977.1		1,229.5		8.4		1,221.1
Securities Purchased under Agreements to Resell	$	1,109.3	$	—	$	1,109.3	$	1,109.3	$	—


	DECEMBER 31, 2020
(In Millions)	GROSS RECOGNIZED ASSETS		GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(2)		NET AMOUNTS PRESENTED IN THE BALANCE SHEET		GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET		NET AMOUNT(3)
Derivative Assets(1)
Foreign Exchange Contracts OTC	$	3,799.7	$	3,505.3	$	294.4	$	0.9	$	293.5
Interest Rate Swaps OTC	295.9		2.5		293.4		—		293.4
Interest Rate Swaps Exchange Cleared	1.6		0		1.6		—		1.6
Total Derivatives Subject to a Master Netting Arrangement	4,097.2		3,507.8		589.4		0.9		588.5
Total Derivatives Not Subject to a Master Netting Arrangement	461.0		—		461.0		0		461.0
Total Derivatives	4,558.2		3,507.8		1,050.4		0.9		1,049.5
Securities Purchased under Agreements to Resell	$	1,596.5	$	—	$	1,596.5	$	1,596.5	$	—

(1)Derivative assets are reported in Other Assets on the consolidated balance sheets. Other Assets (excluding derivative assets) totaled $7.6 billion and $7.3 billion as of March 31, 2021 and December 31, 2020, respectively.

(2)Including cash collateral received from counterparties.

(3)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 March 31, 2021 and December 31, 2020.

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 March 31, 2021 and December 31, 2020.

TABLE 75: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE


	MARCH 31, 2021
(In Millions)	GROSS RECOGNIZED LIABILITIES		GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(2)		NET AMOUNTS PRESENTED IN THE BALANCE SHEET		GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET		NET AMOUNT(3)
Derivative Liabilities(1)
Foreign Exchange Contracts OTC	$	2,093.4	$	2,023.7	$	69.7	$	0.9	$	68.8
Interest Rate Swaps OTC	123.7		66.6		57.1		—		57.1

Other Financial Derivatives	34.6		0		34.6		—		34.6
Total Derivatives Subject to a Master Netting Arrangement	2,251.7		2,090.3		161.4		0.9		160.5
Total Derivatives Not Subject to a Master Netting Arrangement	449.6		—		449.6		0		449.6
Total Derivatives	2,701.3		2,090.3		611.0		0.9		610.1
Securities Sold under Agreements to Repurchase	$	95.6	$	—	$	95.6	$	95.6	$	—

Notes to Consolidated Financial Statements (unaudited) (continued)


	DECEMBER 31, 2020
(In Millions)	GROSS RECOGNIZED LIABILITIES		GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(2)		NET AMOUNTS PRESENTED IN THE BALANCE SHEET		GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET		NET AMOUNT(3)
Derivative Liabilities(1)
Foreign Exchange Contracts OTC	$	3,577.7	$	2,718.6	$	859.1	$	0.5	$	858.6
Interest Rate Swaps OTC	125.0		98.5		26.5		—		26.5
Interest Rate Swaps Exchange Cleared	0		0		0		—		0
Other Financial Derivatives	35.3		0		35.3		—		35.3
Total Derivatives Subject to a Master Netting Arrangement	3,738.0		2,817.1		920.9		0.5		920.4
Total Derivatives Not Subject to a Master Netting Arrangement	1,144.8		—		1,144.8		—		1,144.8
Total Derivatives	4,882.8		2,817.1		2,065.7		0.5		2,065.2
Securities Sold under Agreements to Repurchase	$	39.8	$	—	$	39.8	$	39.8	$	—

(1)Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets. Other Liabilities (excluding derivative liabilities) totaled $4.4 billion and $3.5 billion as of March 31, 2021 and December 31, 2020, respectively.

(2)Including cash collateral deposited with counterparties.

(3)Northern Trust did not place any cash collateral with counterparties that was not offset in the consolidated balance sheets that could have been used to offset the net amounts presented in the consolidated balance sheets as of March 31, 2021 and December 31, 2020.

All of Northern Trust’s securities sold under agreements to repurchase (repurchase agreements) and securities purchased under agreements to resell (reverse repurchase agreements) involve the transfer of financial assets in exchange for cash subject to a right and obligation to repurchase those assets for an agreed upon amount. In the event of a repurchase failure, the cash or financial assets are available for offset. All of Northern Trust’s repurchase agreements and reverse repurchase agreements are subject to a master netting arrangement, which sets forth the rights and obligations for repurchase and offset. Under the master netting arrangement, Northern Trust is entitled to 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. However, Northern Trust’s repurchase agreements and reverse repurchase agreements do not meet the requirements to net under GAAP.

Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally enforceable master netting arrangements or similar agreements exist. Derivative assets and liabilities can be further offset by cash collateral received from, and deposited with, the transacting counterparty. The basis for this view is that, upon termination of transactions subject to a master netting arrangement or similar agreement, the individual derivative receivables do not represent resources to which general creditors have rights and individual derivative payables do not represent claims that are equivalent to the claims of general creditors.

Credit risk associated with derivative instruments relates to the failure of the counterparty and the failure of Northern Trust to pay based on the contractual terms of the agreement, and is generally limited to the unrealized fair value gains and losses on these instruments, net of any collateral received or deposited. The amount of credit risk will increase or decrease during the lives of the instruments as interest rates, foreign exchange rates, or equity prices fluctuate. Northern Trust’s risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Credit Support Annexes and other similar agreements are currently in place with a number of Northern Trust’s counterparties which mitigate the aforementioned credit risk associated with derivative activity conducted with those counterparties by requiring that significant net unrealized fair value gains be supported by collateral placed with Northern Trust.

Additional cash collateral received from and deposited with derivative counterparties totaling $189.0 million and $206.1 million, respectively, as of March 31, 2021, and $111.0 million and $49.0 million, respectively, as of December 31, 2020, 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 $401.6 million and $1,648.2 million at March 31, 2021 and December 31, 2020, respectively. Cash collateral amounts deposited with derivative counterparties on those dates included $391.1 million and $1,044.0 million, respectively, posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required at March 31, 2021 and December 31, 2020, of $10.5 million and $604.2 million, respectively. Accelerated settlement of these liabilities would not have a material effect on the consolidated financial position or liquidity of Northern Trust.

Item 4. Controls and Procedures

As of March 31, 2021, 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 March 31, 2021, 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 March 31, 2021.

TABLE 76: REPURCHASES OF COMMON STOCK


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
January 1 - 31, 2021	162,409	$	92.36	162,409	6,325,238
February 1 - 28, 2021	621,235	96.58		621,235	5,704,003
March 1 - 31, 2021	250,332	99.87		250,332	5,453,671
Total (First Quarter)	1,033,976	$	96.71	1,033,976	5,453,671

On July 17, 2018, 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 resume repurchases thereunder when circumstances warrant and applicable regulation permits. On December 18, 2020, the Federal Reserve extended its capital distribution limits into the first quarter of 2021 with certain modifications, which included continuing to limit dividend payments and share repurchases based on recent income. During the first quarter of 2021, the Corporation restarted its share repurchase program in accordance with such limitations. On March 25, 2021, the Federal Reserve announced that the temporary and additional restrictions on bank holding company dividends and share repurchases currently in place may end after June 30, 2021, depending on results from upcoming stress tests. Please refer to Note 11 — Stockholders’ Equity to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

Item 6. Exhibits


Exhibit Number			Description

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.

10.1			Form of 2021 Performance Stock Unit Award Terms and Condi tions

10.2			Form of 2021 Stock Unit Award Terms and Condi tions

10.3			Northern Trust Corporation Non-Employee Director Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.17 to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020).

10.4			Northern Partners Incentive Plan, as amended and restated on February 16, 2021 (incorporated herein by reference to Exhibit 10.18 to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020).

31.1			Rule 13a-14(a)/15d-14(a) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2			Rule 13a-14(a)/15d-14(a) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32			Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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 March 31, 2021, 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.

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.


		NORTHERN TRUST CORPORATION
		(Registrant)

Date:	April 27, 2021	By:	/s/ Jason J. Tyler
			Jason J. Tyler Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

Date:	April 27, 2021	By:	/s/ Lauren Allnutt
			Lauren Allnutt Executive Vice President and Controller (Principal Accounting Officer)

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Northern Trust (NTRS) 10-Q2021 Q1 Quarterly report

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