Northern Trust (NTRS) 10-Q2021 Q2 Quarterly report

0000073124us-gaap:BankServicingMember2020-04-012020-06-30

Securities registered pursuant to Section 12(b) of the Act:

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 second 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.”

SECOND 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

During the COVID-19 pandemic, Northern Trust has remained focused on the health and well-being of its workforce, meeting its clients’ needs and supporting its communities. The majority of Northern Trust’s workforce continues to work remotely and the Corporation continues to adjust its response to the pandemic as needed. Plans for return-to-office (RTO) are 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. To ensure the health and well-being of Northern Trust’s workforce, clients and visitors, several social distancing practices and other protective measures, distribution of personal protective equipment, and workforce health self-certifications, were implemented. Northern Trust provided its employees a total of two days of paid time off, if needed, to travel to, obtain and recover from COVID-19 vaccinations. Plans are underway in some locations to return portions of the workforce on a hybrid or rotational schedule in the third quarter of 2021. The timing of the RTO will be driven by business, client and operational needs, and will be guided by health and safety guidelines.

During the pandemic, Northern Trust offered assistance to affected clients by lending under a government lending program and providing payment deferrals. 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. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extended the PPP application deadline to May 31, 2021 and provided the SBA additional time to process applications through June 30, 2021.

As of June 30, 2021, Northern Trust had outstanding loans totaling $145.4 million under the PPP and 889 applications went through the PPP loan forgiveness process and resulted in an aggregate $153.1 million of loan principal and interest being forgiven. In addition, there have been two forms of relief provided to lenders exempting certain loan modifications which would otherwise be classified as troubled debt restructuring (TDR) from such classification. Northern Trust 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. Both of these assistance measures have declined since the start of the pandemic. For further information on the PPP and TDRs, please refer to Note 6 — Loans and Leases to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

Overview of Financial Results

Net Income per diluted common share increased in the current quarter to $1.72 from $1.46 in the second quarter of 2020. Net Income increased $54.8 million, or 18%, to $368.1 million in the current quarter from $313.3 million in the prior-year quarter. Annualized return on average common equity was 13.7% in the current quarter and 12.2% in the prior-year quarter. The annualized return on average assets was 0.96% in the current quarter as compared to 0.91% in the prior-year quarter.

Revenue increased $74.2 million to $1.58 billion in the current quarter from $1.51 billion in the prior-year quarter.

Net Interest Income decreased $36.5 million, or 10%, to $335.6 million in the current quarter as compared to $372.1 million in the prior-year quarter, primarily due to a lower net interest margin, partially offset by higher average earning assets.

There was a $27.0 million release of credit reserves in the current quarter, as compared to a provision of $66.0 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 improvements in overall projected economic conditions, as well as improved industry-specific conditions, partially offset by credit deterioration associated with a limited number of commercial real estate loans and overall portfolio growth.

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 $79.2 million and $0.3 million of money market mutual fund fees for the three months ended June 30, 2021 and 2020, respectively. 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.

Client Assets

The following table presents Northern Trust’s assets under custody, a component of AUC/A, by reporting segment.

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

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

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

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

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

The components of noninterest income are provided below.

Other Operating Income decreased compared to the prior-year quarter, primarily due to a prior-year quarter market value adjustment for a seed capital investment and lower miscellaneous income, partially offset by higher banking and credit-related service charges. The lower miscellaneous income was primarily associated with a market value decrease in the supplemental compensation plans, which also resulted in a related decrease 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.

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 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 32.

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.

The net interest margin on an FTE basis decreased from the prior-year quarter, primarily due to lower average interest rates. 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 $37.4 billion and increased $7.1 billion, or 24%, from $30.3 billion in the prior-year quarter, resulting from significant deposit inflows. The higher level of client deposits were primarily placed in the securities portfolio and with the Federal Reserve and other central banks. Average Securities were $60.6 billion and increased $7.7 billion, or 15%, from $52.9 billion, in the prior-year quarter and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $909.9 million, $160.1 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 $47.4 billion in the prior-year quarter. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $3.1 billion in the current quarter

and $5.4 billion in the prior-year quarter. Interest-Bearing Due from and Deposits with Banks averaged $6.7 billion in the current quarter and $5.5 billion in the prior-year quarter.

Loans and Leases averaged $36.3 billion and increased $775.4 million, or 2%, from $35.5 billion in the prior-year quarter, primarily reflecting higher levels of private client, commercial real estate, non-U.S., and residential real estate loans, partially offset by lower levels of commercial and institutional loans. Private client loans averaged $13.5 billion and increased $1.9 billion, or 17%, from $11.6 billion for the prior-year quarter. Commercial real estate loans averaged $3.8 billion and increased $652.6 million, or 21%, from $3.2 billion for the prior-year quarter. Non-U.S. loans averaged $2.6 billion and increased $355.3 million or 16%, from $2.2 billion for the prior-year quarter. Residential real estate loans averaged $6.2 billion and increased $91.1 million, or 1%, from $6.1 billion for the prior-year quarter. Commercial and institutional loans averaged $9.8 billion and decreased $2.3 billion, or 19%, from $12.1 billion for the prior-year quarter.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits increased $8.5 billion, or 10%, to an average of $97.5 billion in the current quarter from $89.0 billion in the prior-year quarter. Other Average Interest-Related Funds decreased $2.1 billion, or 17%, to an average of $10.1 billion in the current quarter from $12.2 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 $10.4 billion, or 43%, to $34.4 billion in the current quarter from $24.0 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 June 30, 2021.

There was a $27.0 million release of credit reserves in the current quarter, as compared to a provision of $66.0 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 improvements in overall projected economic conditions, as well as improved industry-specific conditions, partially offset by credit deterioration associated with a limited number of commercial real estate loans and overall portfolio growth.

The provision in the prior-year quarter was primarily due to an increase in the reserve evaluated on a collective basis driven by downgrades in the portfolio and more severe projected economic conditions at the time, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with the largest increases in the commercial and institutional and commercial real estate portfolios.

Net recoveries in the current quarter were $3.2 million, reflecting $3.2 million of recoveries and de minimis charge-offs. The prior-year quarter included $2.6 million of net recoveries, reflecting $3.0 million of recoveries and $0.4 million of charge-offs. Nonaccrual assets of $106.7 million increased $7.3 million, or 7%, from $99.4 million at the end of the prior-year quarter.

The components of Noninterest Expense are provided in the following table.

Income tax expense for the three months ended June 30, 2021 was $118.4 million, representing an effective tax rate of 24.3%, compared to $89.9 million in the prior-year quarter, representing an effective tax rate of 22.3%.

The effective tax rate increased compared to the prior-year quarter primarily due to the deferred tax impact of the UK statutory tax rate increase enacted in the current quarter and a prior-year quarter tax benefit from dispositions of leveraged leases.

Overview of Financial Results

Net Income per diluted common share increased in the current period to $3.42 from $3.02 in the comparable prior-year period. Net income increased $69.3 million, or 10%, to $743.2 million in the current period from $673.9 million in the prior-year period. Annualized return on average common equity was 13.7% in the current period and 12.8% in the prior-year period. The annualized return on average assets was 0.97% in the current period compared to 1.03% in the prior-year period.

Revenue for the six months ended June 30, 2021 increased $69.9 million, or 2%, from $3.09 billion in the prior-year period to $3.16 billion in the current period.

Trust, Investment and Other Servicing Fees increased $174.0 million, or 9%, from $1.97 billion in the prior-year period to $2.14 billion in the current period, primarily driven by favorable markets, new business, and favorable currency translation, partially offset by higher money market mutual fund fee waivers.

Other Noninterest Income increased from $348.5 million in the prior-year period to $348.9 million in the current period, primarily driven by higher Other Operating Income, partially offset by lower Foreign Exchange Trading Income and Security Commissions and Trading Income.

Net Interest Income decreased $104.5 million, or 13%, to $675.7 million in the current period from $780.2 million in the prior-year period, primarily due to lower average interest rates, partially offset by an increase in average earning assets.

There was a $57.0 million release of credit reserves in the current period, as compared to a provision of $127.0 million in the prior-year period.

Noninterest Expense increased $135.8 million, or 6%, from $2.10 billion in the prior-year period to $2.24 billion in the current period, primarily attributable to higher Outside Services, Compensation, Employee Benefits, and Equipment and Software expense, partially offset by lower Other Operating Expense and Occupancy. Employee Benefits expense included a $17.6 million pension settlement charge in the current period.

The Provision for Income Taxes for the six months ended June 30, 2021 totaled $239.2 million, representing an effective tax rate of 24.3%. The Provision for Income Taxes for the six months ended June 30, 2020 totaled $190.4 million, representing an effective tax rate of 22.0%. The effective tax rate increased compared to the prior-year period primarily due to lower tax benefits related to share-based compensation, the deferred tax impact of the UK statutory tax rate increase enacted in the current period, and a prior-year-period tax benefit from dispositions of leveraged leases.

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 $130.0 million and $0.3 million of money market mutual fund fees for the six months ended June 30, 2021 and 2020, respectively. 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 in the table below.

Custody and Fund Administration fees, the largest component of C&IS fees, increased primarily driven by new business, favorable markets and favorable currency translation. Investment Management fees decreased primarily due to higher money market mutual fund fee waivers, partially offset by favorable markets and new business. Securities Lending fees decreased primarily driven by lower spreads, partially offset by higher volumes.

Fee income in the regions (Central, East and West) increased primarily due to favorable markets, partially offset by higher money market mutual fund fee waivers. Global Family Office fee income decreased primarily due to higher money market mutual fund fee waivers, partially offset by favorable markets and new business.

The components of other noninterest income are provided in the following table.

Foreign Exchange Trading Income decreased from the prior-year period, primarily due to lower client volumes, decreased market volatility, and lower foreign exchange swap activity in Treasury.

Security Commissions and Trading Income decreased from the prior-year period, primarily due to lower revenue from interest rate swaps, partially offset by higher core brokerage revenue.

Other Operating Income increased from the prior-year period, primarily due to higher banking and credit-related service charges, higher miscellaneous income and a prior-year period 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 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.

The following tables present an analysis of average balances and interest rate changes affecting Net Interest Income and an analysis of Net Interest Income changes.

Net Interest Income, stated on an FTE basis, decreased from the prior-year period, primarily due to lower average interest rates, partially offset by an increase in average earning assets. Average earning assets increased 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. Average non-U.S. offices interest-bearing deposits comprised 71% of total average interest-bearing deposits for the six months ended June 30, 2021.

The net interest margin on an FTE basis decreased from the prior-year period, primarily due to lower average interest rates. 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 $37.3 billion and increased $12.2 billion, or 49%, from $25.1 billion in the prior-year period, 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 $60.9 billion and increased $8.5 billion, or 16%, from $52.4 billion in the prior-year period and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $910.9 million, $178.2 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 period and $46.9 billion in the prior-year period. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $3.4 billion in the current period and $5.5 billion in the prior-year period. Interest-Bearing Due from and Deposits with Banks averaged $6.6 billion in the current period and $5.7 billion in the prior-year period.

Loans and leases averaged $35.2 billion and increased $1.3 billion, or 4%, from $33.9 billion in the prior-year period, primarily reflecting higher levels of private client, commercial real estate, non-U.S., and residential real estate loans, partially offset by lower levels of commercial and institutional loans. Private client loans averaged $12.7 billion and increased $1.4 billion, or 12%, from $11.3 billion for the prior-year period. Commercial real estate loans averaged $3.7 billion and increased $622.6 million, or 20%, from $3.1 billion for the prior-year period. Non-U.S. loans averaged $2.5 billion and increased $290.8 million or 13% from $2.2 billion for the prior-year period. Residential real estate loans averaged $6.2 billion and increased $61.5 million, or 1%, from $6.1 billion for the prior-year period. Commercial and institutional loans averaged $9.8 billion and decreased $1.0 billion, or 9%, from $10.8 billion for the prior-year period.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits increased $14.4 billion, or 17%, to an average of $96.8 billion in the current period from $82.4 billion in the prior-year period. Other Average Interest-Related Funds decreased $3.1 billion, or 24%, to an average of $9.9 billion in the current period from $13.0 billion in the prior-year period. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds increased $12.2 billion, or 54%, to $34.7 billion in the current period from $22.5 billion in the prior-year period primarily resulting from higher levels of Demand and Other Noninterest-Bearing Deposits.

There was a $57.0 million release of credit reserves for the six months ended June 30, 2021, as compared to a provision of $127.0 million in the prior-year period. The 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 improvements in overall projected economic conditions and portfolio quality, as well as improved industry-specific conditions, partially offset by credit deterioration associated with a limited number of commercial real estate loans and overall portfolio growth.

The provision in the prior-year period was primarily due to an increase in the reserve evaluated on a collective basis driven by downgrades in the portfolio and current and projected economic conditions at the time, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with the largest increases 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-year period totaled $4.1 million resulting from $0.4 million of charge-offs and $4.5 million of recoveries, compared to net recoveries of $1.9 million in the prior-year period resulting from $2.2 million of charge-offs and $4.1 million of recoveries.

Residential real estate, commercial real estate, and commercial and institutional loans accounted for 47%, 35%, and 18%, respectively, of total nonaccrual loans and leases at June 30, 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 June 30, 2020. For additional discussion of the allowance for credit losses, refer to the “Asset Quality” section beginning on page 23.

The components of Noninterest Expense are provided in the following table.

Compensation expense, the largest component of Noninterest Expense increased compared to the prior-year period, primarily reflecting higher cash-based incentives and salary expense.

Employee Benefits expense increased compared to the prior-year period, primarily due to a $17.6 million pension settlement charge, higher medical costs, and higher payroll taxes.

Outside Services expense increased compared to the prior-year period, primarily reflecting higher technical services costs, third-party advisory fees, and sub-custodian expenses.

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

Occupancy expense decreased compared to the prior-year period, primarily due to rent accelerations arising from workplace real estate strategies in the prior-year period.

Other Operating Expense decreased compared to the prior-year period, primarily due to lower other miscellaneous expenses and business promotion, partially offset by higher supplemental compensation plan 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.

Income tax expense for the six months ended June 30, 2021 was $239.2 million, representing an effective tax rate of 24.3%, compared to $190.4 million for the six months ended June 30, 2020, representing an effective tax rate of 22.0%.

The effective tax rate increased compared to the prior-year period primarily due to lower tax benefits related to share-based compensation, the deferred tax impact of the UK statutory tax rate increase enacted in the current period, and a prior-year-period tax benefit from dispositions of leveraged leases.

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.

The following table presents the earnings contributions and average assets of Northern Trust’s reporting segments for the three- and six- month periods ended June 30, 2021 and 2020.