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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 year ended December 31, 2020. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled “Forward-Looking Statements.”

BUSINESS OVERVIEW

The Corporation is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business.

The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (the Bank). The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a global presence with offices in 22 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. Except where the context requires otherwise, the terms “Northern Trust,” “we,” “us,” “our,” “its,” or similar terms refers to the Corporation and its subsidiaries on a consolidated basis.

COVID-19 PANDEMIC AND RECENT EVENTS

The COVID-19 pandemic presented health and economic challenges on an unprecedented scale during the year ended December 31, 2020. During this time, Northern Trust focused on the health and well-being of its workforce, meeting its clients’ needs and supporting its communities. Although planning is underway to return to the office when conditions permit, the vast majority of staff is expected to continue to work remotely for some time to come.

Workforce

As governments implement plans to reopen their respective jurisdictions, Northern Trust has begun its return-to-office (RTO) planning under the oversight of its COVID Executive Committee composed of senior leadership across various functions. Plans for RTO were developed on a location-by-location basis based on business unit needs. Northern Trust considers site readiness, transportation options, technology capabilities, and workforce alignment, and has 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 were implemented, such as temperature screenings, where allowable by law, distribution of personal protective equipment, and workforce health self-certifications. Several offices returned portions of their workforce in the second half of 2020.

Client Service

Northern Trust 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 December 31, 2020, Northern Trust had 1,087 outstanding loans totaling $207.1 million under the PPP. 41 loans totaling $6.7 million underwent the loan forgiveness process, with 36 loans totaling $6.7 million being fully forgiven as of December 31, 2020.

The original timeframe for PPP lending expired on June 30, 2020, when Congress acted to extend PPP lending for a 5-week period to allow small businesses additional time to apply for the remaining PPP funds allocated by Congress in connection with the CARES Act. Northern Trust continued to lend under the PPP through the new August 8, 2020 deadline. 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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

March 31. 2021. For further information on the PPP, please refer to Note 6, “Loans and Leases,” provided in Item 8, “Financial Statements and Supplementary Data.”

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 Federal Reserve Board, the FDIC, 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,” provided in Item 8, “Financial Statements and Supplementary Data.”

Community Support

COVID-19 Relief Support

Through December 31, 2020, Northern Trust provided $2.5 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

Through December 31, 2020, 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 $207.1 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 Annual Report on Form 10-K.

FINANCIAL OVERVIEW

Net Income decreased $282.9 million, or 19%, to $1.21 billion in 2020 from $1.49 billion in 2019. Earnings per diluted common share was $5.46 in 2020 compared to $6.63 in 2019. Return on average common equity decreased to 11.2% in 2020 from 14.9% in 2019.

Revenue increased $27.7 million to $6.10 billion in 2020 from $6.07 billion in the prior year, primarily driven by increases in Trust, Investment and Other Servicing Fees of 4%, Other Operating Income of 33%, Foreign Exchange Trading Income of 16%, and Security Commissions and Trading Income of 29%, partially offset by a decrease in Net Interest Income of 14%.

Client assets under custody/administration (AUC/A) increased 21% from $12.05 trillion as of December 31, 2019 to $14.53 trillion as of December 31, 2020, primarily reflecting net inflows, favorable markets, and favorable currency translation. Client assets under custody, a component of AUC/A, increased 22% from $9.23 trillion as of December 31, 2019 to $11.26 trillion as of December 31, 2020. Client assets under custody included $7.42 trillion of global custody assets as of December 31, 2020, which increased 26% from $5.89 trillion as of December 31, 2019. Client assets under management increased 14% to $1.41 trillion as of December 31, 2020 from $1.23 trillion at December 31, 2019 due to favorable markets and net inflows.

Trust, Investment and Other Servicing Fees, which represent the largest component of total revenue, increased 4% to $4.00 billion in 2020, from $3.85 billion in 2019, primarily due to new business and favorable markets, partially offset by money market mutual fund fee waivers.

Foreign Exchange Trading Income of $290.4 million in 2020 increased 16% from $250.9 million in 2019, primarily driven by higher client volumes and increased market volatility, partially offset by lower foreign exchange swap activity in Treasury.

Security Commissions and Trading Income of $133.2 million in 2020 increased 29% from $103.6 million in 2019, primarily driven by higher core brokerage revenue and revenue from interest rate swaps.

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Other Operating Income of $194.0 million in 2020 increased 33% from $145.5 million in 2019, primarily due to higher income related to a bank-owned life insurance program implemented during 2019, a charge in the prior year related to the decision made to sell substantially all of the lease portfolio, and higher miscellaneous income.

Net Interest Income on a fully taxable equivalent (FTE) basis of $1.48 billion in 2020, decreased $233.1 million, or 14%, from $1.71 billion in 2019, due to a decreased net interest margin, partially offset by higher levels of average earning assets. The net interest margin on an FTE basis decreased to 1.19% in 2020 from 1.60% in 2019, primarily due to lower interest rates.

The Corporation adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) on January 1, 2020, which significantly changed the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. Upon adoption of ASU 2016-13, the Corporation recorded a $13.7 million increase in the Allowance for Credit Losses with a corresponding cumulative effect adjustment to decrease Retained Earnings by $10.1 million, net of income taxes. For more information on the adoption of ASU 2016-13, please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.”

The Provision for Credit Losses in 2020 was $125.0 million as compared to a credit provision of $14.5 million in 2019. The provision for 2020 reflected an increase in the reserve evaluated on a collective basis. The increase in the collective basis reserve was primarily driven by current and projected economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with increases primarily in the commercial and institutional and commercial real estate portfolios. The prior-year credit provision primarily reflected a decrease in the inherent reserve related to the residential real estate portfolio due to a reduction in outstanding loans and improved credit quality and reductions to the specific reserve related to the commercial and institutional and residential real estate portfolios, partially offset by an increase in the inherent reserve related to the private client portfolio due to an increase in outstanding loans and lower credit quality. Loans and Leases of $33.8 billion as of December 31, 2020 increased from $31.4 billion as of December 31, 2019. Net charge-offs for the year ended December 31, 2020 were $3.2 million, compared to net recoveries of $0.7 million for the year ended December 31, 2019. Nonaccrual assets increased to $132.4 million as of December 31, 2020 from $86.8 million as of December 31, 2019.

Noninterest Expense of $4.35 billion in 2020 increased $204.7 million, or 5%, from $4.14 billion in 2019, primarily reflecting increased Compensation, Equipment and Software, Employee Benefits, Occupancy, and Other Operating Expense, partially offset by lower Outside Services. Noninterest Expense in 2020 included severance-related charges of $55.0 million in connection with a reduction in force, a $43.4 million charge related to a corporate action processing error, and Occupancy expense related to an early lease exit arising from a workplace real estate strategy of $11.9 million.

The Provision for Income Taxes in 2020 totaled $418.3 million, representing an effective tax rate of 25.7%. The Provision for Income Taxes in 2019 totaled $451.9 million, representing an effective tax rate of 23.2%. The increase in the effective tax rate was primarily driven by $26.8 million of tax expense related to the reversal of tax benefits previously recognized through earnings and higher taxes payable on the income of the Corporation’s non-U.S. branches.

Northern Trust continued to maintain a strong capital position during 2020, with all capital ratios exceeding those required for classification as “well-capitalized” under federal bank regulatory capital requirements. Total Stockholders’ Equity increased 5% from $11.1 billion in 2019 to $11.7 billion at year-end 2020. During the fourth quarter of 2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Non-Cumulative Perpetual Preferred Stock for proceeds of $391.4 million, net of underwriting discounts, commissions, and other issuance costs. These proceeds were subsequently used to fund the redemption of all outstanding shares of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock on January 2, 2020.

The Corporation suspended its open-market share repurchase program on March 16, 2020. Prior to the suspension, 2,743,876 shares of common stock were repurchased on the open market at a total cost of $246.4 million. Subsequent to the suspension, the only shares repurchased were shares of common stock withheld upon the vesting of share-based compensation to satisfy tax withholding obligations. During the year ended December 31, 2020, the Corporation repurchased 3,276,589 shares of common stock, including 532,713 shares withheld related to share-based compensation, at a total cost of $299.8 million. During the year ended December 31, 2020, the Northern Trust quarterly common stock dividend remained unchanged from the end of the prior year at $0.70 per share. During the first quarter of 2021, the Corporation restarted its share repurchase program in accordance with limitations established by the Federal Reserve.

CONSOLIDATED RESULTS OF OPERATIONS

The following information summarizes our consolidated results of operations for 2020 compared to 2019. For a discussion related to the consolidated results of operations for 2019 compared to 2018, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ended December 31, 2019 (2019 Form 10-K), which was filed with the United States Securities and Exchange Commission on February 25, 2020.

Revenue

Northern Trust generates the majority of its revenue from Noninterest Income that primarily consists of Trust, Investment and Other Servicing Fees. Net Interest Income comprises the remainder of revenue and consists of Interest Income generated by earning assets, net of Interest Expense on deposits and borrowed funds.

Revenue in 2020 of $6.10 billion increased from $6.07 billion in 2019. Noninterest Income represented 76% and 72% of total revenue in 2020 and 2019, respectively, and totaled $4.66 billion in 2020, which increased 6% from $4.40 billion in 2019.

Noninterest Income in 2020 increased primarily reflecting higher Trust, Investment and Other Servicing Fees, Other Operating Income, Foreign Exchange Trading Income, and Security Commissions and Trading Income. Trust, Investment and Other Servicing Fees of $4.00 billion in 2020 increased $142.9 million, or 4%, from $3.85 billion in 2019, primarily due to new business and favorable markets, partially offset by money market mutual fund fee waivers. Foreign Exchange Trading Income in 2020 of $290.4 million increased $39.5 million, or 16%, compared with $250.9 million in 2019, primarily driven by higher client volumes and increased market volatility, partially offset by lower foreign exchange swap activity in Treasury. Security Commissions and Trading Income of $133.2 million in 2020 increased 29% from $103.6 million in 2019, primarily driven by higher core brokerage revenue and revenue from interest rate swaps. Other Operating Income of $194.0 million in 2020 increased 33% from $145.5 million in the prior year, primarily due to higher income related to a bank-owned life insurance program implemented during 2019, a charge in the prior year related to the decision made to sell substantially all of the lease portfolio, and higher miscellaneous income.

Net Interest Income on an FTE basis in 2020 of $1.48 billion decreased $233.1 million, or 14%, from $1.71 billion in 2019, due to a decreased net interest margin, partially offset by higher levels of average earning assets. The net interest margin on an FTE basis decreased to 1.19% in 2020 from 1.60% in 2019, primarily due to lower interest rates.Average earning assets increased $17.0 billion, or 16%, from $107.1 billion in 2019 to $124.1 billion in 2020, primarily reflecting higher levels of short-term interest bearing deposits, Securities, and Loans and Leases.

Additional information regarding Northern Trust’s revenue by type is provided in the following table.

TABLE 4: REVENUE

FOR THE YEAR ENDED DECEMBER 31,

Noninterest Income

Security Commissions and Trading Income 133.2 103.6 98.3

Investment Security Gains (Losses), net (0.4) (1.4) (1.0)

Trust, Investment and Other Servicing Fees

Trust, Investment and Other Servicing Fees were $4.00 billion in 2020 compared with $3.85 billion in 2019, and 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 current low-interest-rate environment. Northern Trust voluntarily waived $29.3 million of money market mutual fund fees for the year ended December 31, 2020, of which $23.6 million was waived in the fourth quarter of 2020, related to the low-interest-rate environment. These fee waivers, which are expected to continue in the low-interest-rate environment in which the yields in certain funds remain insufficient to pay the stated fees associated with such funds, will adversely impact Trust, Investment and Other Servicing Fees within the C&IS and Wealth Management reporting segments. Northern Trust did not waive any money market mutual fund fees due to interest rates in the year ended December 31, 2019.

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The components of Trust, Investment and Other Servicing Fees are provided in the following table.

TABLE 5: TRUST, INVESTMENT AND OTHER SERVICING FEES

FOR THE YEAR ENDED DECEMBER 31, CHANGE

C&IS Trust, Investment and Other Servicing Fees

Wealth Management Trust, Investment and Other Servicing Fees

Corporate & Institutional Services

C&IS Trust, Investment and Other Servicing Fees are primarily attributable to services related to custody, fund administration, investment management, and securities lending. Custody and fund administration fees, the largest component of C&IS fees, are driven primarily by values of client assets under custody/administration, transaction volumes and number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment management fees are based generally on market values of client assets under management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag.

Securities lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. The other services fee category in C&IS includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.

Custody and fund administration fees increased from 2019 to 2020 primarily due to new business and favorable currency translation, partially offset by unfavorable non-U.S. markets. Investment management fees increased from 2019 to 2020 primarily due to new business and favorable markets, partially offset by money market mutual fund fee waivers.

The following tables provide a breakdown of the C&IS assets under custody and under management.

TABLE 6: C&IS ASSETS UNDER CUSTODY

DECEMBER 31, CHANGE

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 7: C&IS ASSETS UNDER MANAGEMENT

DECEMBER 31, CHANGE

Cash and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed by Northern Trust and are included in assets under custody and under management. This securities lending collateral totaled $186.9 billion and $163.0 billion at December 31, 2020 and 2019, respectively.

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. Wealth Management fees increased from 2019 to 2020, primarily due to favorable markets and new business, partially offset by money market mutual fund fee waivers. The following tables provide a summary of Wealth Management assets under custody and under management.

TABLE 8: WEALTH MANAGEMENT ASSETS UNDER CUSTODY

DECEMBER 31, CHANGE

TABLE 9: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT

DECEMBER 31, CHANGE

The Wealth Management regions shown are comprised of the following: Central includes Illinois, Michigan, Minnesota, Missouri, Ohio and Wisconsin; East includes Connecticut, Delaware, Florida, Georgia, Massachusetts, New York, Pennsylvania, and Washington, D.C.; West includes Arizona, California, Colorado, Nevada, Texas and Washington. Global Family Office provides specialized asset management, investment consulting, global custody, fiduciary, and private banking services to ultra-wealthy domestic and international clients.

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 10: EQUITY MARKET INDICES

DAILY AVERAGES YEAR-END

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 11: FIXED INCOME MARKET INDICES

AS OF DECEMBER 31,

Barclays Capital U.S. Aggregate Bond Index 2,392 2,225 8 %

Barclays Capital Global Aggregate Bond Index 559 512 9

Client Assets

Northern Trust, in the normal course of business, holds assets under custody/administration and management in a fiduciary or agency capacity for its clients. In accordance with GAAP, these assets are not assets of Northern Trust and are not included in its consolidated balance sheets. AUC/A and assets under management are a driver 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.

At December 31, 2020, AUC/A increased from December 31, 2019, primarily reflecting net inflows, favorable markets, and favorable currency translation. Assets under custody, a component of AUC/A, at December 31, 2020, increased from December 31, 2019, and included $7.42 trillion of global custody assets, compared to $5.89 trillion at December 31, 2019.

The following table presents AUC/A by reporting segment.

TABLE 12: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT

DECEMBER 31, CHANGE

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

TABLE 13: ASSETS UNDER CUSTODY BY REPORTING SEGMENT

DECEMBER 31, CHANGE

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

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

TABLE 14: ALLOCATION OF ASSETS UNDER CUSTODY

DECEMBER 31,

C&IS WM TOTAL C&IS WM TOTAL C&IS WM TOTAL

Securities Lending Collateral 2 — 2 2 — 2 2 — 2

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

TABLE 15: ASSETS UNDER CUSTODY BY INVESTMENT TYPE

DECEMBER 31, CHANGE

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

TABLE 16: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT

DECEMBER 31, CHANGE

Assets under management at the end of 2020 increased from 2019. The increase primarily reflected favorable markets and net inflows.

The following tables present the investment allocation and management style of Northern Trust’s assets under management by reporting segment.

TABLE 17: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE

DECEMBER 31,

C&IS WM TOTAL C&IS WM TOTAL C&IS WM TOTAL

TABLE 18: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE

DECEMBER 31,

C&IS WM TOTAL C&IS WM TOTAL C&IS WM TOTAL

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Noninterest Income

The components of other noninterest income, and a discussion of significant changes during 2020 and 2019, are provided below.

TABLE 19: OTHER NONINTEREST INCOME

FOR THE YEAR ENDED DECEMBER 31, CHANGE

Investment Security Gains (Losses), net (0.4) (1.4) (1.0) N/M N/M

Foreign Exchange Trading Income

Northern Trust provides foreign exchange services in the normal course of business as an integral part of its global custody services. Active management of currency positions, within conservative limits, also contributes to foreign exchange trading income. Foreign Exchange Trading Income in 2020 increased from 2019, primarily driven by higher client volumes and increased market volatility, partially offset by lower foreign exchange swap activity in Treasury.

Treasury Management Fees

Treasury Management Fees, generated from cash and treasury management products and services provided to clients, in 2020 increased from 2019.

Security Commissions and Trading Income

Security Commissions and Trading Income, generated primarily from securities brokerage services provided by Northern Trust Securities, Inc., in 2020 increased from 2019, primarily driven by higher core brokerage revenue and revenue from interest rate swaps.

Other Operating Income

The components of Other Operating Income are provided in the following table.

TABLE 20: OTHER OPERATING INCOME

FOR THE YEAR ENDED DECEMBER 31, CHANGE

Other income in 2020 increased from 2019, primarily due to higher income related to a bank-owned life insurance program implemented during 2019, a charge in the prior year related to the decision made to sell substantially all of the lease portfolio, and higher miscellaneous income.

Investment Security Gains (Losses), Net

Losses in 2019 included $0.3 million of charges related to the other-than-temporary impairment (OTTI) of certain Community Reinvestment Act (CRA) eligible held-to-maturity debt securities. ASU 2016-13, adopted on January 1, 2020, replaced the legacy OTTI model with an estimated credit loss model. Refer to the caption "Investment Security Gains and Losses” in Note 4, “Securities,” and the caption “Allowance for Debt Securities Held to Maturity Securities Portfolio” in Note 7, “Allowance for Credit Losses” included under Item 8, “Financial Statements and Supplementary Data.”

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 and Deposits with Banks, Federal Reserve and Other Central Bank Deposits and Other, Securities, and Loans and Leases — are financed by a large base of interest-bearing funds that include client deposits, short-term borrowings, Senior Notes and Long-Term Debt. Short-term borrowings include Federal Funds Purchased, Securities Sold Under Agreements to Repurchase, and Other Borrowings. Earning assets also are 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 an FTE basis is a non-GAAP financial measure that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on Net Income. A reconciliation of Net Interest Income on a GAAP basis to Net Interest Income on an FTE basis is provided on page 85.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 21: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)(1)

INTEREST-EARNING ASSETS

Securities

Allowance for Credit Losses — (178.0) — — (111.4) — — (126.3) —

AVERAGE SOURCE OF FUNDS

Deposits

Interest Rate Spread — — 1.14 — — 1.40 — — 1.29

Note: 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 $34.4 million in 2020, $32.8 million in 2019 and $41.2 million in 2018. 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 85. 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.

(1) Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source income and assets. Non-U.S. source income and assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision revenues, expenses and assets between U.S. and non-U.S.-domiciled customers. On the basis of averages, the percentage of total assets attributable to foreign activities was 20%, 23% and 25% as of December 31, 2020, 2019 and 2018, respectively. On the basis of averages, the percentage of total liabilities attributable to foreign activities was 56%, 53% and 54% as of December 31, 2020, 2019 and 2018, respectively. For additional information, refer to the Geographic Area Information section of Note 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”

(2) 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.

(3) 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.

(4) 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.

(5) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income.

(6) 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.

(7) Rate calculations are based on actual balances rather than the rounded amounts presented in the Average Consolidated Balance Sheets with Analysis of Net Interest Income.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 22: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE

Increase (Decrease) in Net Interest Income (FTE)

Federal Funds Sold (0.2) (0.2) (0.4) — — —

Securities

Obligations of States and Political Subdivisions 26.9 (3.1) 23.8 5.7 4.8 10.5

Interest-Bearing Deposits

Savings Certificates and Other Time (9.3) 9.6 0.3 — 8.4 8.4

Securities Sold under Agreements to Repurchase (1.7) (3.7) (5.4) (6.5) 5.1 (1.4)

Floating Rate Capital Debt — (4.0) (4.0) — 0.7 0.7

Note: Changes not due solely to average balance changes or rate changes are allocated proportionately to average balanceandrate based on their relative absolute magnitudes.

Net Interest Income in 2020 decreased from 2019. Net Interest Income, stated on an FTE basis decreased from 2019, due to a lower net interest margin, partially offset by higher levels of average earning assets. Average earning assets increased in 2020 from 2019, primarily reflecting higher levels of short-term interest bearing deposits, Securities, and Loans and Leases. Funding of the balance sheet reflected higher levels of client deposits. The increase in average client deposits resulted from the large inflows experienced at the end of the first quarter of 2020, and these balances were largely maintained throughout the year.

The net interest margin in 2020 decreased from 2019. The net interest margin on an FTE basis in 2020 decreased from 2019, primarily due to lower 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 $27.9 billion in 2020, which increased $9.4 billion, or 51%, from $18.5 billion in 2019, which resulted 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 $56.1 billion and increased $5.4 billion, or 11%, from $50.7 billion in the prior-year period and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $769.6 million, $202.9 million and $63.5 million, respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $50.9 billion in 2020 and $43.9 billion in 2019. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $5.2 billion in 2020 and $6.8 billion in 2019. Interest-Bearing Due From and Deposits with Banks averaged $5.4 billion in 2020 and $6.0 billion in 2019.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Loans and Leases averaged $33.5 billion, which increased $2.4 billion, or 8%, from $31.1 billion in 2019, primarily reflecting higher levels of commercial and institutional, private client, commercial real estate, and non-U.S. loans, partially offset by a decrease in residential real estate loans. Commercial and institutional loans averaged $10.3 billion and increased $1.3 billion, or 15%, from $9.0 billion for the prior-year period. Private client loans averaged $11.5 billion and increased $706.9 million, or 7%, from $10.7 billion for the prior-year period. Commercial real estate loans averaged $3.3 billion and increased $335.6 million, or 12%, from $2.9 billion for the prior-year period. Non-U.S. loans averaged $2.0 billion and increased $262.7 million, or 15.3%, from $1.7 billion for the prior-year period. Residential real estate loans averaged $6.1 billion and decreased $180.9 million, or 3%, from $6.3 billion for the prior-year period.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits increased $12.8 billion, or 18%, to $85.1 billion in 2020 from $72.3 billion in 2019. Average Interest-Related Funds increased $12.0 billion, or 14%, to $97.5 billion in 2020 from $85.5 billion in 2019. 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 $5.1 billion, or 23%, to $26.7 billion in 2020 from $21.6 billion in 2019, primarily resulting from higher levels of Demand and Other Noninterest-Bearing Deposits and Other Liabilities, partially offset by Other Assets. Average Demand and Other Noninterest-Bearing Deposits increased $5.9 billion, or 34%, to $23.4 billion in 2020 from $17.5 billion in 2019. The average rate on total source of funds was 0.16% in 2020 and 0.77% in 2019.

Interest expense for Interest-Bearing Deposits in the current year 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 year ended December 31, 2020.

Stockholders’ Equity averaged $11.2 billion in 2020, compared with $10.6 billion in 2019. The increased Stockholders’ Equity of $544.2 million, or 5%, was primarily attributable to 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, the redemption of preferred stock during the first quarter of 2020, and dividend declarations. During the year ended December 31, 2020, the Corporation maintained its quarterly common stock dividend at $0.70 per share and repurchased 3,276,589 shares of common stock, returning $891.8 million in capital to common stockholders, compared to $1.7 billion in 2019.

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 Corporation suspended this program on March 16, 2020. Subsequent to the Corporation suspending its open-market share repurchase program, the only shares repurchased were shares of common stock withheld upon the vesting of share-based compensation to satisfy tax withholding obligations.

Beginning in the second quarter of 2020, the Federal Reserve announced certain measures to ensure that large financial institutions, including Northern Trust, remain resilient despite the economic uncertainty resulting from the ongoing COVID-19 pandemic. Specifically, for the third and fourth quarters of 2020, no share repurchases were permitted by these institutions and dividend payments were limited to the amount paid in the second quarter and could not exceed the payor’s average net income for the four preceding quarters. On December 18, 2020, the Federal Reserve again extended its capital distribution limits into the first quarter of 2021 with certain modifications, which include continuing to limit dividend payments based on recent income and limiting share repurchases based on recent income. During the first quarter of 2021, the Corporation restarted its share repurchase program in accordance with such limitations. 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 regulations permit. Please refer to Note 15, “Stockholders’ Equity,” provided in Item 8, “Financial Statements and Supplementary Data.”

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Provision for Credit Losses

The Corporation adopted ASU No. 2016-13 on January 1, 2020, which significantly changed the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. For more information on the adoption of ASU 2016-13, please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.”

The Provision for Credit Losses was a provision of $125.0 million in 2020, as compared to a credit provision of $14.5 million in 2019. The provision for 2020 primarily reflected an increase in the reserve evaluated on a collective basis. The increase in the collective basis reserve was primarily driven by current and projected economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with increases primarily in the commercial and institutional and commercial real estate portfolios. The prior-year credit provision primarily reflected a decrease in the inherent reserve related to the residential real estate portfolio due to a reduction in outstanding loans and improved credit quality and reductions to the specific reserve related to the commercial and institutional and residential real estate portfolios, partially offset by an increase in the inherent reserve related to the private client portfolio due to an increase in outstanding loans and lower credit quality.

Net charge-offs in 2020 totaled $3.2 million resulting from $9.7 million of charge-offs and $6.5 million of recoveries, compared to net recoveries of $0.7 million in the prior-year resulting from $6.5 million of charge-offs and $7.2 million of recoveries.

Nonaccrual assets at December 31, 2020 increased 53% from the prior year-end. Residential real estate, commercial real estate, commercial and institutional, and private client loans accounted for 47%, 31%, 20%, and 2%, respectively, of nonaccrual loans and leases at December 31, 2020. Residential real estate, commercial and institutional, commercial real estate, private client, and non-U.S. loans accounted for 85%, 9%, 4%, 1%, and 1%, respectively, of total nonaccrual loans and leases at December 31, 2019. For additional discussion of the Allowance for Credit Losses, refer to the “Asset Quality” section.

Noninterest Expense

Noninterest Expense for 2020 increased from 2019, primarily reflecting increased Compensation, Equipment and Software, Employee Benefits, Occupancy, and Other Operating Expense, partially offset by lower Outside Services. Noninterest Expense for 2020 included severance-related charges of $55.0 million in connection with a reduction in force, a $43.4 million charge related to a corporate action processing error, and Occupancy expense related to an early lease exit arising from a workplace real estate strategy of $11.9 million.

The components of Noninterest Expense and a discussion of significant changes during 2020 and 2019 are provided below.

TABLE 23: NONINTEREST EXPENSE

FOR THE YEAR ENDED DECEMBER 31, CHANGE

Compensation

Compensation expense, the largest component of Noninterest Expense, increased in 2020 from 2019, primarily reflecting higher salary expense driven by staff growth and base pay adjustments, $52.5 million of severance-related charges in connection with a reduction in force, and a one-time supplemental payment to certain employees in response to the COVID-19 pandemic, partially offset by lower cash-based incentives and long-term performance-based incentive expense. Staff on a full-time equivalent basis totaled approximately 20,900 at December 31, 2020, up 6% from approximately 19,800 at December 31, 2019.

Employee Benefits

Employee Benefits expense in 2020 increased from 2019, primarily reflecting higher retirement plan expenses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Outside Services

Outside Services expense in 2020 decreased from 2019, primarily due to lower data processing and consulting services, partially offset by higher sub-custodian expenses. Included in Outside Services is $2.5 million of outplacement costs associated with the reduction in force.

Equipment and Software

Equipment and Software expense in 2020 increased from 2019, primarily reflecting higher depreciation and amortization and software support costs.

Occupancy

Occupancy expense in 2020 increased from 2019, primarily reflecting higher rent arising from workplace real estate strategies, including $11.9 million of expense related to an early lease exit, partially offset by an asset retirement obligation reduction resulting from a lease renegotiation.

Other Operating Expense

The components of Other Operating Expense are provided in the following table.

TABLE 24: OTHER OPERATING EXPENSE

FOR THE YEAR ENDED DECEMBER 31, CHANGE

Other Operating Expense in the current year increased compared to the prior year primarily due to a $43.4 million charge related to a corporate action processing error as well as increases in mutual fund co-administration fees, partially offset by lower business promotion expense due to reduced business travel and lower staff-related expense.

Provision for Income Taxes

The 2020 Provision for Income Taxes was $418.3 million, representing an effective rate of 25.7%. This compares with a Provision for Income Taxes of $451.9 million and an effective rate of 23.2% in 2019. The increase in the effective tax rate was primarily driven by $26.8 million of tax expense related to the reversal of tax benefits previously recognized through earnings and higher taxes payable on the income of the Corporation’s non-U.S. branches.

See Note 22, “Income Taxes,” provided in Item 8, “Financial Statements and Supplementary Data,” for more information on income taxes.

REPORTING SEGMENTS AND RELATED INFORMATION

The following information summarizes our consolidated results of operations by reporting segment for 2020 compared to 2019. For a discussion related to the consolidated results of operations by reporting segment for 2019 compared to 2018, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K, which was filed with the SEC on February 25, 2020.

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

Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Equity is allocated to the reporting segments based on a variety of factors including, but not limited to, risk, regulatory considerations, and internal metrics. Allocations of capital and certain corporate expense may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1, “Summary of Significant Accounting Policies,” provided in Item 8, “Financial Statements and Supplementary Data.” Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between

2020 Annual Report | Northern Trust Corporation 45

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

reporting segments. Northern Trust's presentations are not necessarily consistent with similar information for other financial institutions.

Effective January 1, 2019, Northern Trust implemented several enhancements to its FTP methodology, including the allocation of contingent liquidity charges to C&IS and Wealth Management client instruments and products. These methodology enhancements affect the results of each reporting segment. Due to the lack of historical information, segment results for periods ended prior to January 1, 2019 have not been revised to reflect the methodology enhancements.

Also effective January 1, 2019, revenues, expenses and average assets are allocated to C&IS and Wealth Management, with the exception of non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments not directly attributable to a specific reporting segment.

For reporting periods ended prior to January 1, 2019, income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive-level compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and were reported in Treasury and Other.

Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis. The following table presents the earnings and average assets for the Corporation.

TABLE 25: CONSOLIDATED FINANCIAL INFORMATION

FOR THE YEAR ENDED DECEMBER 31, CHANGE

Noninterest Income

Provision for Credit Losses 125.0 (14.5) (14.5) N/M —

(1) Non-GAAP financial measures stated on an FTE basis. The consolidated figures include $34.4 million, $32.8 million, and $41.2 million of FTE adjustments for 2020, 2019, and 2018, respectively. 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 85.

Corporate & Institutional Services

C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region. The following table summarizes the results of operations of C&IS for the years ended December 31, 2020, 2019, and 2018 on a management-reporting basis.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 26: C&IS RESULTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, CHANGE

Noninterest Income

Provision for Credit Losses 38.1 1.9 1.9 N/M —

Percentage of Consolidated Net Income 43 % 48 % 58 %

(1) Non-GAAP financial measures stated on an FTE basis.

C&IS Net Income

Net Income decreased in 2020 compared to 2019, primarily due to lower Net Interest Income and higher Noninterest Expense, partially offset by higher Noninterest Income.

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

Foreign Exchange Trading Income in 2020 increased from 2019, primarily driven by higher client volumes and increased market volatility.

C&IS Other Noninterest Income

Other Noninterest Income for 2020 increased from 2019, primarily due to Security Commissions and Trading Income and Other Operating Income.

C&IS Net Interest Income

Net Interest Income on an FTE basis decreased in 2020 from 2019, due to a lower net interest margin, partially offset by an increase in average earning assets. Net interest margin on an FTE basis decreased to 0.75% from 1.26%. Average earning assets of $94.6 billion, increased $15.5 billion, or 20%, from $79.1 billion in the prior year. The earning assets in C&IS consisted primarily of intercompanyassets and Loans and Leases. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $60.5 billion in 2020, increased from $54.9 billion in 2019.

C&IS Provision for Credit Losses

On January 1, 2020, the Corporation adopted ASU 2016-13. For more information on the adoption, please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.” The C&IS Provision for Credit Losses was a provision of $38.1 million for 2020 and $1.9 million for 2019. The 2020 provision reflected an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts on the commercial and institutional portfolio. The 2019 provision reflected an increase to the inherent reserve for outstanding loans due to lower credit quality, partially offset by a decrease to the specific reserve related to standby letters of credit and outstanding loans.

C&IS Noninterest Expense

Total C&IS Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, increased in 2020 from 2019. The increase primarily reflects higher expense allocations, including a $43.4 million charge related to a corporate action processing error, higher Compensation expense, Employee Benefits, Outside Services, and Equipment and Software expense, partially offset by lower business promotion expense due to reduced business travel and lower staff-related expenses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Wealth Management

Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. The business also includes the Global Family Office, which provides customized services to meet the complex financial needs of individuals and family offices in the United States and throughout the world with assets typically exceeding $200 million. In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking. Wealth Management is one of the largest providers of advisory services in the United States with assets under custody/administration, assets under custody, and assets under management of $879.4 billion, $875.1 billion, and $347.8 billion, respectively, at December 31, 2020. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.

The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2020, 2019, and 2018 on a management-reporting basis.

TABLE 27: WEALTH MANAGEMENT RESULTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, CHANGE

Noninterest Income

Foreign Exchange Trading Income 14.1 18.7 4.2 (25) N/M

Provision for Credit Losses 86.9 (16.4) (16.4) N/M —

Percentage of Consolidated Net Income 60 % 53 % 51 %

(1) Non-GAAP financial measures stated on an FTE basis.

Wealth Management Net Income

Wealth Management Net Income decreased in 2020, primarily reflecting a higher Provision for Credit Losses and higher Noninterest Expense, partially offset by higher Revenue.

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 Other Noninterest Income

Other Noninterest Income for 2020 increased from 2019, primarily due to Security Commissions and Trading Income, Other Operating Income, and Treasury Management Fees.

Wealth Management Net Interest Income

Net Interest Income on an FTE basis for 2020 increased from 2019, primarily attributable to a higher net interest allocation from Treasury and Other and an increase in earning assets, partially offset by a decrease in the net interest margin. Net interest margin on an FTE basis decreased to 2.94% from 3.06%. Average earning assets of $29.5 billion in 2020, increased $1.5 billion, or 5%, from $28.0 billion in 2019. Earning assets and funding sources for the year ended December 31, 2020 were primarily comprised of loans and domestic interest-bearing deposits, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Wealth Management Provision for Credit Losses

On January 1, 2020, the Corporation adopted ASU 2016-13. For more information on the adoption, please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.” The Wealth Management Provision for Credit Losses was $86.9 million in 2020 as compared to a credit provision of $16.4 million in 2019. The 2020 provision reflected an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, primarily impacting the commercial real estate and commercial and institutional portfolios. The 2019 credit provision was primarily driven by a reduction in outstanding loans and improved credit quality in the residential real estate portfolio, which resulted in a reduction of the inherent allowance.

Wealth Management Noninterest Expense

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 in 2020 from 2019. The increase primarily reflects higher expense allocations and Employee Benefits, partially offset by lower business promotion expense due to reduced business travel.

Treasury and Other

Beginning January 1, 2019, Treasury and Other includes income and expenses associated with non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments. For reporting periods ended prior to January 1, 2019, income and expense associated with the wholesale funding activities and investment portfolios of the Corporation and the Bank, as well as certain corporate-based expense, executive-level compensation and nonrecurring items, were not allocated to C&IS and Wealth Management, and are reported in Treasury and Other. Treasury and Other information for 2020 and 2019 is not directly comparable to information for 2018 due to the enhanced segment reporting methodology beginning January 1, 2019. Also beginning January 1, 2019, net interest income and average assets are allocated to the C&IS and Wealth Management reporting segments.

The following table summarizes the results of operations of Treasury and Other for the years ended December 31, 2020, 2019, and 2018 on a management-reporting basis.

TABLE 28: TREASURY AND OTHER RESULTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, CHANGE

Noninterest Income $ (18.3) $ (17.1) $ 60.5 N/M N/M

Net Interest Income(1) — — (144.8) N/M N/M

Income (Loss) before Income Taxes(1) (54.1) (23.5) (219.8) N/M N/M

Provision (Benefit) for Income Taxes(1) (13.5) (5.8) (74.8) N/M N/M

Percentage of Consolidated Net Income (3) % (1) % (9) %

Average Assets $ — $ — $ 13,786.4 N/M N/M

(1) Non-GAAP financial measures stated on an FTE basis.

Treasury and Other Noninterest Income

Noninterest Income in 2020 decreased from 2019 due to higher expenses for existing swap agreements related to Visa Inc. Class B common shares.

Treasury and Other Noninterest Expense

Noninterest Expense in 2020 increased from 2019, primarily due to costs associated with workplace real estate strategies and higher Compensation expense related to a one-time supplemental payment to employees in response to the COVID-19 pandemic.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Asset Management

Asset Management, through the Corporation’s various subsidiaries, supports the C&IS and Wealth Management reporting segments by providing a broad range of asset management and related services and other products to clients around the world. Investment solutions are delivered through separately managed accounts, bank common and collective funds, registered investment companies, exchange traded funds, non-U.S. collective investment funds, and unregistered private investment funds. Asset Management’s capabilities include active and passive equity; active and passive fixed income; cash management; multi-asset and alternative asset classes (such as private equity and hedge funds of funds); and multi-manager advisory services and products. Asset Management’s activities also include overlay services and other risk management services. Asset Management operates internationally through subsidiaries and distribution arrangements and its revenue and expense are allocated fully to C&IS and Wealth Management.

At December 31, 2020, Northern Trust managed $1.41 trillion in assets for personal and institutional clients, including $1.06 trillion for C&IS clients and $347.8 billion for Wealth Management clients. The following table presents consolidated assets under management as of December 31, 2020, 2019 and 2018 by investment type.

TABLE 29: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE

DECEMBER 31, CHANGE

Assets under management increased at year-end 2020 from year-end 2019. The increase primarily reflected favorable markets and net inflows. The following table presents activity in consolidated assets under management by product during the years ended December 31, 2020, 2019 and 2018.

TABLE 30: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT

Inflows by Product

Outflows by Product

Market Performance, Currency & Other

Total Market Performance, Currency & Other 117.4 151.6 (57.5)

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CONSOLIDATED BALANCE SHEET REVIEW

The following tables summarize selected consolidated balance sheet information.

TABLE 31: SELECT CONSOLIDATED BALANCE SHEET INFORMATION

Assets

Interest-Bearing Due from and Deposits with Banks(2) 6.6 7.0 (0.4) (5)

Securities Purchased under Agreements to Resell 1.6 0.7 0.9 126

Liabilities and Stockholders' Equity

Demand and Other Noninterest-Bearing Deposits 43.1 26.3 16.8 64

Federal Funds Purchased 0.3 0.6 (0.3) (53)

Securities Sold under Agreements to Repurchase — 0.5 (0.5) (92)

(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 32: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION

TWELVE MONTHS ENDED DECEMBER 31,

Assets

Interest-Bearing Due from and Deposits with Banks(2) 5.4 6.0 (0.6) (10)

Securities Purchased under Agreements to Resell 1.2 0.8 0.4 50

Liabilities and Stockholders' Equity

Demand and Other Noninterest-Bearing Deposits 23.4 17.5 5.9 34

Federal Funds Purchased 1.0 1.3 (0.3) (23)

Securities Sold under Agreements to Repurchase 0.2 0.3 (0.1) (36)

(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.

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 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 earnings and Accumulated Other Comprehensive Income since the prior year, partially offset by the repurchase of common stock

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

pursuant to the Corporation’s share repurchase program, the net redemption of preferred stock during the first quarter of 2020, and dividend declarations. During the first quarter of 2020, proceeds from the Series E Non-Cumulative Perpetual Preferred Stock issuance in the fourth quarter of 2019 were used to fund the redemption of all outstanding shares of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock at a redemption price of $400 million, which was $11.5 million in excess of the net carrying value of the shares. The $11.5 million excess is included in preferred stock dividends in the determination of net income available to common shareholders.

The Corporation suspended its open-market share repurchase program on March 16, 2020. During the year ended December 31, 2020, the Corporation repurchased 3,276,589 shares of common stock, including 532,713 shares withheld related to share-based compensation, at a total cost of $299.8 million ($91.49 average price per share).

Beginning in the second quarter of 2020, the Federal Reserve announced certain measures to ensure that large financial institutions, including Northern Trust, remain resilient despite the economic uncertainty resulting from the ongoing COVID-19 pandemic. Specifically, for the third and fourth quarters of 2020, no share repurchases were permitted by these institutions and dividend payments were limited to the amount paid in the second quarter and could not exceed the payor’s average net income for the four preceding quarters. On December 18, 2020, the Federal Reserve again extended its capital distribution limits into the first quarter of 2021 with certain modifications, which include continuing to limit dividend payments based on recent income and limiting share repurchases based on recent income. During the first quarter of 2021, the Corporation restarted its share repurchase program in accordance with such limitations.

Asset Quality

Securities Portfolio

The following table presents the remaining maturity and average yield of Northern Trust's held to maturity and available for sale debt securities by security type as of December 31, 2020.

TABLE 33: REMAINING MATURITY AND AVERAGE YIELD OF DEBT SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE

($ in Millions) BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD

Debt Securities Held to Maturity

U.S. Government $ 90.0 0.06% $ 90.0 0.06% $ — —% $ — — % $ — —% 2 mo.

Debt Securities Available for Sale

Note: Yield is calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

($ In Millions) AAA AA A NOT RATED TOTAL

Obligations of States and Political Subdivisions 918.1 2,165.5 — — 3,083.6

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

TABLE 35: AMORTIZED COST OF DEBT SECURITIES HELD TO MATURITY BY CREDIT RATING

($ 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

Certificates of Deposit — — — — 807.2 807.2

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 $872.6 million at December 31, 2020, compared to net unrealized gains of $118.9 million as of December 31, 2019. 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 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 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 December 31, 2020, 16% of the corporate debt securities available for sale portfolio was backed by guarantees provided by U.S. and non-U.S. government entities.

For additional information relating to the securities portfolio, refer to Note 4, “Securities,” provided in Item 8, “Financial Statements and Supplementary Data.”

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It 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 the repurchase.

For additional information relating to the securities sold under agreements to repurchase, refer to Note 5, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” provided in Item 8, “Financial Statements and Supplementary Data.”

Loans and Leases

During 2020, the Corporation implemented a change in the classification of certain loans and leases to enhance the consistency of its reporting across various regulatory regimes. As a result, the loan and lease balances as of December 31, 2019 below have been adjusted to conform to the revised presentation. The 2020 adjustments generally reflect reclassification of loans from the commercial real estate class to commercial and institutional, residential real estate, and private client classes. There was no impact on total Loans and Leases previously reported.

For additional information relating to the loan and leases portfolio, refer to Note 6, “Loans and Leases,” and Note 8 “Concentrations of Credit Risk” provided in Item 8, “Financial Statements and Supplementary Data.”

The following table presents the remaining maturity of loans and leases by segment and class as of December 31, 2020.

TABLE 36: REMAINING MATURITY OF LOANS AND LEASES

U.S.:

Commercial

Lease Financing, net 11.4 — — 11.4 —

Personal

Non-U.S.:

Note: Non-U.S. loans primarily include short duration exposures related to custodied client investments.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 37: INTEREST RATE SENSITIVITY OF LOANS AND LEASES

Fixed Rate:

Commercial

Personal

Variable Rate:

Commercial

Lease Financing, net 11.4 — — 11.4 —

Personal

Nonaccrual Assets and 90 Days Past Due Loans

During 2020, the Corporation implemented changes in the classification of certain loans and leases to enhance the consistency of its reporting across various regulatory regimes. As a result, the loan and lease balances as of December 31, 2019 below have been adjusted to conform to the revised presentation. The 2020 adjustments generally reflect reclassification of loans from the commercial real estate class to commercial and institutional, residential real estate, and private client classes.

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. Loans that are delinquent 90 days or more and still accruing interest can fluctuate widely at any reporting period based on the timing of cash collections, renegotiations and renewals. For additional information relating to nonaccrual loans, refer to Note 6, “Loans and Leases,” provided in Item 8, “Financial Statements and Supplementary Data.”

2020 Annual Report | Northern Trust Corporation 55

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents nonaccrual assets and loans that were delinquent 90 days or more and still accruing interest at December 31, 2020 and 2019.

TABLE 38: NONACCRUAL ASSETS

DECEMBER 31,

Nonaccrual Loans and Leases

Commercial

Commercial and Institutional $ 26.4 $ 7.6

Commercial Real Estate 40.2 3.6

Personal

Residential Real Estate $ 62.2 $ 71.4

Private Client 2.9 0.5

Non-U.S. — 0.5

Total Nonaccrual Loans and Leases 131.7 83.6

Other Real Estate Owned 0.7 3.2

Total Nonaccrual Assets $ 132.4 $ 86.8

90 Day Past Due Loans Still Accruing $ 8.9 $ 7.4

Nonaccrual Loans and Leases to Total Loans and Leases 0.39 % 0.27 %

Nonaccrual assets as of December 31, 2020 increased from December 31, 2019, primarily relating to net increases in the commercial real estate portfolio due to three new nonaccrual loans and the commercial and institutional portfolio primarily due to a new nonaccrual loan, partially offset by a net decrease in the residential real estate portfolio due to net payoffs and charge-offs. 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.

Allowance for Credit Losses

During 2020, the Corporation implemented changes in the classification of certain loans and leases to specific segments to enhance the consistency of its reporting across various regulatory regimes. The allowance for credit losses as of and prior to December 31, 2019 remains unadjusted for these adjustments, as the impact of the reclassification on the allowance was immaterial.

The Corporation adopted ASU No. 2016-13 on January 1, 2020, which significantly changed the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. For more information on the adoption of ASU 2016-13, please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.”

The allowance for credit losses — which represents management’s best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower relationships — is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation. Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts. The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic Research group, and each of Northern Trust’s business units. 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 as of December 31, 2020. For additional information relating to the allowance for credit losses and the changes in the allowance for credit losses during the years ended December 31, 2020 and 2019 due to charge-offs,

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

recoveries and provisions for credit losses, refer to Note 7, “Allowance for Credit Losses,” provided in Item 8, “Financial Statements and Supplementary Data.”

The following table shows the net recoveries (charge-offs) to average loans and leases by segment and class at December 31, 2020, 2019, and 2018.

TABLE 39: NET RECOVERIES (CHARGE-OFFS) TO AVERAGE LOANS AND LEASES

Net Recoveries (Charge-Offs) to Average Loans and Leases

Commercial

Commercial and Institutional 0.02 % (0.03) % 0.02 %

Personal

Private Client — — (0.01)

Total Net Recoveries (Charge-Offs) to Average Loans and Leases (0.01) % — % — %

Net Recoveries (Charge-Offs)

Commercial

Commercial and Institutional $ 1.8 $ (2.6) $ 1.4

Commercial Real Estate (5.7) 0.5 (0.6)

Total Commercial (3.9) (2.1) 0.8

Personal

Residential Real Estate 1.2 2.5 (0.6)

Total Net Recoveries (Charge-Offs) $ (3.2) $ 0.7 $ (1.1)

Average Loans and Leases

Commercial

Personal

Net recoveries (charge-offs) for the following segments were zero and therefore excluded from the above table as the ratio of net recoveries (charge-offs) to average loans and leases is also zero: Lease Financing, net, Other, and Non-U.S. The average loans and leases balances were also not provided in the table for Lease Financing, net, Other, and Non-U.S.

Total average loans and leases for all loan portfolio categories were $33.5 billion, $31.1 billion, and $32.0 billion for the years ended December 31, 2020, 2019, and 2018, respectively.

The SEC requires the disclosure of the Allowance for Credit Losses that is applicable to international operations. The disclosure has been prepared in compliance with this disclosure requirement and is used in determining non-U.S. operating performance. The amounts disclosed should not be construed as being the only amounts that are available for non-U.S. loan charge-offs, since the entire Allowance for Credit Losses assigned to Loans and Leases is available to absorb losses on both U.S. and non-U.S. loans. In addition, these amounts are not intended to be indicative of future charge-off trends. Please refer to the following table for the non-U.S. allowance balances.

2020 Annual Report | Northern Trust Corporation 57

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table shows the allowance evaluated on an individual and collective basis for the loans and leases portfolio by segment and class at December 31, 2020 and 2019.

TABLE 40: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

DECEMBER 31,

Evaluated on an Individual Basis $ 10.7 — % $ 6.9 — %

Evaluated on a Collective Basis

Commercial

Lease Financing, net 0.4 — 0.1 —

Personal

Other — — 1.4 —

Total Allowance Evaluated on a Collective Basis $ 241.1 100 % $ 117.5 100 %

Allowance Assigned to:

Undrawn Commitments and Standby Letters of Credit 61.1 19.9

Total Allowance for Credit Losses $ 251.8 $ 124.4

Allowance Assigned to Loans and Leases to Total Loans and Leases 0.56 % 0.33 %

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.

The allowance evaluated on an individual basis for Loans and Leases increased $3.8 million from $6.9 million at December 31, 2019 to $10.7 million at December 31, 2020, primarily attributable to outstanding loans in the commercial and institutional portfolio, partially offset by a decrease in outstanding loans in the residential real estate portfolio.

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 evaluated on a collective basis for Loans and Leases increased $123.6 million to $241.1 million at December 31, 2020, compared with $117.5 million at December 31, 2019 under the previous “incurred loss” model, primarily driven by current and projected economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts. The largest increases were in the commercial and institutional and commercial real estate portfolios.

Overall Allowance: The evaluation of the reserve evaluated on an individual and collective basis resulted in a total allowance for credit losses of $259.9 million at December 31, 2020, compared with $124.4 million at the end of 2019 under the previous “incurred loss” model. The allowance of $190.7 million assigned to Loans and Leases, as a percentage of total Loans and Leases, was 0.56% at December 31, 2020, which increased from a $104.5 million allowance assigned to Loans and Leases, representing 0.33% of total Loans and Leases at December 31, 2019. Allowances assigned to undrawn loan commitments and standby letters of credit totaled $61.1 million and $19.9 million at December 31, 2020 and 2019, respectively, and are included in Other Liabilities on the consolidated balance sheets.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital Expenditures

Capital expenditures in 2020 included continued investments to enhance Northern Trust’s software and hardware capabilities, the opening of new offices, and the renovation of several existing offices. Capital expenditures for 2020 totaled $560.4 million, of which $424.6 million was for software, $66.6 million was for building and leasehold improvements, $65.4 million was for computer hardware, and $3.8 million was for furnishings. These capital expenditures principally support, enhance, and protect Northern Trust’s investment management, asset servicing and asset management systems and capabilities, and deliver innovative solutions to better serve our clients. Additional capital expenditures committed for technology systems will result in future expense for the depreciation of hardware and amortization of software. Software amortization and depreciation on computer hardware and machinery are charged to Equipment and Software expense. Depreciation on building and leasehold improvements and on furnishings is charged to Occupancy expense and equipment expense, respectively. Capital expenditures for 2019 totaled $599.8 million, of which $441.8 million was for software, $77.7 million was for building and leasehold improvements, $73.7 million was for computer hardware, and $6.6 million was for furnishings.

Deposits

The following table provides the scheduled maturity of total time deposits in denominations of $250,000 or greater at December 31, 2020. For additional information, refer to Note 12, “Deposits,” provided in Item 8, “Financial Statements and Supplementary Data.”

TABLE 41: REMAINING MATURITY OF TIME DEPOSITS $250,000 OR MORE

U.S. OFFICE NON-U.S. OFFICES

(In Millions) CERTIFICATES OF DEPOSIT OTHER TIME TOTAL

Over 3 Months through 6 Months 83.6 — 83.6

Deposits not insured by the FDIC as of December 31, 2020 and 2019 totaled $135.5 billion and $100.9 billion, respectively. These deposit amounts are derived by adding estimated domestic office uninsured deposits as allowed by Federal Financial Institutions Examination Council instructions to all foreign office deposits. Estimated uninsured domestic office deposits are determined by calculating and totaling the deposits in excess of the deposit insurance limit on an individual account basis.

Short-Term Borrowings

For additional information relating to short-term borrowings, refer to Note 5, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” provided in Item 8, “Financial Statements and Supplementary Data.”

Geographic Area Information

Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source assets. Non-U.S. source assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision assets between U.S. and non-U.S.-domiciled customers. Therefore, certain subjective estimates and assumptions have been made to allocate assets between U.S. and non-U.S. operations.

2020 Annual Report | Northern Trust Corporation 59

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables present selected average assets and liabilities attributable to non-U.S. operations (based on the obligor’s domicile) and the percent of those balances to total consolidated average assets. For additional information refer to Note 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”

TABLE 42: SELECTED AVERAGE ASSETS AND LIABILITIES ATTRIBUTABLE TO NON-U.S. OPERATIONS

Non-U.S. Outstandings

As used in this discussion, non-U.S. outstandings are cross-border outstandings as defined by the SEC. They consist of loans, securities, interest-bearing deposits with financial institutions, accrued interest and other monetary assets. Not included are letters of credit, loan commitments, and non-U.S. office local currency claims on residents. Non-U.S. outstandings related to a country are net of guarantees given by third parties resident outside the country and the value of tangible, liquid collateral realizable outside the country. However, transactions with branches of non-U.S. banks are included in these outstandings and are classified according to the country location of the non-U.S. bank’s head office.

Short-term interbank time deposits with non-U.S. banks represent the largest category of non-U.S. outstandings. Northern Trust actively participates in the interbank market with U.S. and non-U.S. banks.

Northern Trust places deposits with non-U.S. counterparties that have strong internal (Northern Trust) risk ratings and external credit ratings. These non-U.S. banks are approved and monitored by Northern Trust’s Capital Markets Credit Committee, which has credit authority for exposure to all non-U.S. banks and approves credit limits. This process includes financial analysis of the non-U.S. banks, use of an internal risk rating system and consideration of external market indicators. Each counterparty is reviewed at least annually and potentially more frequently based on credit fundamentals or general market conditions. Separate from the entity-specific review process, the average life to maturity of deposits with non-U.S. banks is deliberately maintained on a short-term basis in order to respond quickly to changing credit conditions. Northern Trust also utilizes certain risk mitigation tools and agreements that may reduce exposures through use of collateral and/or balance sheet netting. Additionally, the Capital Markets Credit Committee oversees country-risk analyses and imposes limits on country exposure. For additional information refer to Note 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”

STATEMENTS OF CASH FLOWS

The following discusses the statement of cash flow activities for the years ended December 31, 2020, 2019, and 2018.

TABLE 43: CASH FLOW ACTIVITY SUMMARY

FOR THE YEAR ENDED DECEMBER 31,

Net cash provided by (used in):

Effect of Foreign Currency Exchange Rates on Cash 84.6 74.7 (212.9)

Change in Cash and Due from Banks $ (69.7) $ (122.4) $ 63.5

Operating Activities

Net cash provided by operating activities of $1.9 billion for the year ended December 31, 2020 was primarily attributable to period earnings and the impact of higher non-cash charges such as depreciation and amortization and provision for credit losses.

For the year ended December 31, 2019, net cash provided by operating activities of $2.6 billion was primarily reflecting period earnings and lower net collateral deposited with derivative counterparties.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Investing Activities

Net cash used in investing activities of $29.9 billion for the year ended December 31, 2020 was primarily attributable to higher levels of deposits with the Federal Reserve and other central banks, net purchases of debt securities held to maturity, higher levels of loans and leases, and net purchases of debt securities available for sale.

For the year ended December 31, 2019, net cash used in investing activities of $3.4 billion was primarily reflecting higher levels of deposits with the Federal Reserve and other central banks, net purchases of debt securities available for sale, and the purchase of bank-owned life insurance policies, partially offset by the net proceeds from the maturity and redemption of debt securities held to maturity and lower levels of loans and leases.

Financing Activities

Net cash provided by financing activities of $27.9 billion for the year ended December 31, 2020 was primarily attributable to higher levels of total deposits and proceeds from the issuance by the Corporation of 1.95% senior notes, partially offset by lower short-term other borrowings, dividends paid on common stock, repayment of the 3.45% senior notes previously issued by the Corporation that matured in November 2020, lower securities sold under agreements to repurchase, and the redemption of the Series C Non-Cumulative Perpetual Preferred Stock. The increase in total deposits was primarily attributable to higher levels of non-U.S. office noninterest-bearing deposits, non-U.S. interest-bearing deposits, savings, money market and other interest-bearing deposits, and demand and other noninterest-bearing deposits.

For the year ended December 31, 2019, net cash provided by financing activities of $0.6 billion was primarily reflecting higher levels of total deposits, proceeds from the issuance by the Corporation of 3.15% senior notes, and proceeds from the Series E Non-Cumulative Perpetual Preferred Stock issuance, partially offset by lower federal funds purchased, lower short-term other borrowings, and the repurchase of common stock pursuant to the Corporation’s share repurchase program. The increase in total deposits was primarily attributable to higher levels of savings, money market and other interest-bearing deposits and non-U.S. office noninterest-bearing deposits, partially offset by lower levels of non-U.S. office interest-bearing deposits.

CAPITAL MANAGEMENT

One of Northern Trust’s primary objectives is to maintain a strong capital position to merit the confidence of clients, counterparties, creditors, regulators and stockholders. A strong capital position helps Northern Trust execute its strategies and withstand unforeseen adverse developments.

Senior management, with oversight from the Capital Governance Committee and the full Board of Directors, is responsible for capital management and planning. Northern Trust manages its capital on both a total Corporation basis and a legal entity basis. The Capital Committee is responsible for measuring and managing capital metrics against levels set forth within the Capital Policy approved by the Capital Governance Committee of the Board of Directors. In establishing the metrics related to capital, a variety of factors are taken into consideration, including the unique risk profiles of Northern Trust’s businesses, regulatory requirements, capital levels relative to peers, and the impact on credit ratings.

Capital levels strengthened in 2020 as average stockholders’ equity increased $544.2 million, or 5%, reaching $11.2 billion. Total stockholders’ equity was $11.7 billion at December 31, 2020, as compared to $11.1 billion at December 31, 2019. During 2019, the Corporation issued and sold 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Non-Cumulative Perpetual Preferred Stock for proceeds of $391.4 million, net of underwriting discounts, commissions, and other issuance costs. These proceeds were subsequently used to fund the redemption of all outstanding shares of the Corporation’s Series C Non-Cumulative Perpetual Preferred Stock on January 2, 2020 at a redemption price of $400.0 million, which was $11.5 million in excess of the net carrying value of the shares. The $11.5 million excess is included in preferred stock dividends in the determination of net income available to common shareholders. Preferred dividends totaling $44.7 million were declared in 2020. During 2020, the Corporation maintained its quarterly common stock dividend of $0.70 per common share. Common dividends totaling $592.0 million were declared in 2020. During the year ended December 31, 2020, the Corporation repurchased 3.3 million shares of common stock, including 0.5 million shares withheld related to share-based compensation, at an average price per share of $91.49.

2020 Annual Report | Northern Trust Corporation 61

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced approaches. For each ratio, the lower of the result calculated under the standardized approach and the advanced approach serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of the Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios, under the applicable U.S. regulatory rules as of December 31, 2020 and 2019.

TABLE 44: CAPITAL ADEQUACY

STANDARDIZED APPROACH ADVANCED APPROACH STANDARDIZED APPROACH ADVANCED APPROACH

Common Equity Tier 1 Capital

Additional Tier 1 Capital

Tier 2 Capital

Qualifying Allowance for Credit Losses 259.9 — 124.4 —

Common Stockholders’ Equity to:

Risk-Based Capital Ratios

Supplementary Leverage(3) N/A 8.6 N/A 7.6

(1) Risk-weighted assets exclude, as applicable under each regulatory approach, amounts primarily related to goodwill, certain other intangible assets, and net unrealized gains or losses on securities and reflect adjustments for excess allowances for credit losses that have been excluded from Tier 1 and Tier 2 capital, if any.

(2) Adjusted average fourth quarter assets exclude amounts primarily related to goodwill, other intangible assets, and net unrealized gains or losses on securities.

(3) 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 April 1, 2020, the Federal Reserve issued an interim final rule that requires bank holding companies, including Northern Trust Corporation, to deduct, on a temporary basis, 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 will remain in effect through the first quarter of 2021. On May 15, 2020, the U.S. federal banking agencies released an interim final rule that permits insured depository institutions of bank holding companies also to temporarily 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 December 31, 2020 for the Northern Trust Corporation and The Northern Trust Company reflect the impact of these final rules.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of December 31, 2020 and 2019, the Corporation’s capital ratios exceeded 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 a common equity tier 1 capital ratio minimum requirement of 7.0%.

Further information regarding the Corporation’s and the Bank’s capital ratios and the minimum requirements for classification as “well-capitalized” is provided in the “Supervision and Regulation” section of Item 1, “Business,” and Note 33, “Regulatory Capital Requirements,” provided in Item 8, “Financial Statements and Supplementary Data.”

As of December 31, 2020, the Basel III regulatory capital items subject to phase-in and phase-out are not material to regulatory capital ratios.

OFF-BALANCE SHEET ARRANGEMENTS

Commitments, Letters of Credit, and Securities Lent with Indemnification

Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the potential credit exposure should the instrument be drawn fully upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities.

At December 31, 2020, legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $252.3 million and $4.5 million, respectively. At December 31, 2019, legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $301.6 million and $9.2 million, respectively.

Additional information about Northern Trust’s off-balance sheet financial instruments is included in Note 26, “Commitments and Contingent Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data.”

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.

Additional information about Northern Trust’s VIEs is included in Note 29, “Variable Interest Entities,” provided in Item 8, “Financial Statements and Supplementary Data.”

CRITICAL ACCOUNTING ESTIMATES

Our significant accounting policies are described in Note 1, “Summary of Significant Accounting Policies,” provided in Item 8, “Financial Statements and Supplementary Data.” The use of estimates and assumptions is required in the preparation of financial statements in conformity with GAAP and actual results could differ from those estimates. The SEC has issued guidance relating to the disclosure of critical accounting estimates. Critical accounting estimates are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on Northern Trust’s future financial condition and results of operations.

For Northern Trust, accounting estimates that are viewed as critical are those relating to the allowance for credit losses and pension plan accounting. Management has discussed the development and selection of each critical accounting estimate with the Audit Committee of the Board of Directors (Audit Committee).

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Allowance for Credit Losses

The Corporation adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) on January 1, 2020, which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. Upon adoption of ASU 2016-13, the Corporation recorded a $13.7 million increase in the allowance for credit losses with a corresponding cumulative effect adjustment to decrease retained earnings $10.1 million, net of income taxes. For more information on the adoption of ASU 2016-13, please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.”

The allowance for credit losses — which represents management’s 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. Due to the inherent imprecision in accounting estimates, other estimates or assumptions could reasonably have been used in 2020 and changes in estimates are reasonably likely to occur from period to period.

The allowance for credit losses consists of the following components:

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 internal 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 segments based on loan and obligor-specific factors, including loan type, borrower type, collateral type, loan size, and borrower credit quality. For each segment, the probability of default and loss given default are derived for each quarter of the remaining life of each instrument. For the first two years (the reasonable and supportable period), these factors are derived by applying quarterly macroeconomic projections using models developed from historical data on macroeconomic factors and loans with similar factors. For periods beyond the reasonable and supportable period, Northern Trust reverts to its long-run historical loss experiences on a straight-line basis over four quarters. The exposure at default for every quarter is based on contractual balances as of each quarter-end, with adjustments made for potential draw-downs of revolving lines.

For each of the different parameters, specific credit models for the individual loan segments were developed. For each segment, the probability of defaultand 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.

ASU 2016-13 requires the use of projected macroeconomic factors. Northern Trust’s current projection period is eight quarters, with a four-quarter straight-line reversion period to historical average loss rates. The Corporation uses multiple forecasts which are approved by Northern Trust’s Macroeconomic Scenario Development Committee (MSDC). The baseline forecast aligns with the Corporation’s latest thinking on macroeconomic projections for the next eight quarters. The forecasts are weighted at each evaluation period and are management’s best estimate of future economic projections at that time.

The allowance estimate is sensitive to changes in portfolio composition and quality, and macroeconomic forecasts. Increases in the amount of borrowing and material downgrades to the quality of the lending portfolio will increase the reserve, all else equal. Similarly, deteriorating projections for macroeconomic conditions will increase the reserve. Macroeconomic factors that are particularly correlated to Northern Trust’s loan and lease portfolio are equity market values, market volatility, corporate profits, house and commercial real estate price indices, unemployment, and disposable income. The investment security and other financial assets exposure portfolios are less sensitive to macroeconomic factors in terms of overall reserve impact due to factors such as high credit quality, short duration, and low historical losses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 MSDC, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s qualitative adjustment framework.

Evaluated on an Individual Basis: The allowance is determined through an individual evaluation of financial assets 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.

The quarterly analysis of the individual and collective allowance components and the control process maintained by Credit Risk Management and the lending staff are the principal methods relied upon by management for the timely identification of, and adjustment for, changes in estimated credit loss levels. In addition to Northern Trust’s own experience, management also considers regulatory guidance. Control processes and analyses employed to determine an appropriate level of allowance for credit losses are reviewed on at least an annual basis and modified as considered appropriate.

Management believes that the allowance for credit losses adequately addresses these uncertainties and has been established at an appropriate level. 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.

Pension Plan Accounting

Northern Trust maintains a noncontributory defined benefit pension plan covering substantially all U.S. employees (U.S. Qualified Plan) and a U.S. noncontributory supplemental pension plan (U.S. Non-qualified Plan). Certain European-based employees also retain benefits in local defined benefit pension plans, of which the majority are closed to new employees and to future benefit accruals. Measuring cost and reporting liabilities resulting from defined benefit pension plans requires the use of several assumptions regarding future interest rates, asset returns, compensation increases, mortality rates, and other actuarially-based projections relating to the plans. Due to the long-term nature of this obligation and the estimates that are required to be made, the assumptions used in determining the periodic pension expense and the projected pension obligation are closely monitored and reviewed annually for adjustments that may be required. Pension accounting guidance requires that differences between estimates and actual experience be recognized as other comprehensive income in the period in which they occur. The differences are amortized into net periodic pension expense from accumulated other comprehensive income over the average remaining service period of eligible participants. As a result, differences between the estimates made in the calculation of periodic pension expense and the projected pension obligation and actual experience affect stockholders’ equity in the period in which they occur but continue to be recognized as expense systematically and gradually over subsequent periods.

Northern Trust recognizes the significant impact that these pension-related assumptions have on the determination of the pension obligations and related expense and has established procedures for monitoring and setting these assumptions each year. These procedures include an annual review of actual demographic and investment experience with the pension plans’ actuaries. In addition to actual experience, adjustments to these assumptions consider observable yields on fixed income securities, known compensation trends and policies, as well as economic conditions and investment strategies that may impact the estimated long-term rate of return on plan assets.

In determining the pension expense for the U.S. pension plans in 2020, Northern Trust utilized a discount rate of 3.37% for both the U.S. Qualified Plan and the U.S. Non-qualified Plan. The rate of increase in the compensation level is based on a graded schedule from 9.00% to 2.50% that averaged 4.97%. The expected long-term rate of return on U.S. Qualified Plan assets was 5.25%.

In evaluating possible revisions to pension-related assumptions for the U.S. pension plans as of Northern Trust’s December 31, 2020 measurement date, the following were considered:

•Discount Rate: Northern Trust estimates the discount rate for its U.S. pension plans by applying the plan specific projected cash flows for future benefit payments for each plan to the Aon AA Above Median yield curve as of the measurement date. This yield curve is composed of individual zero-coupon interest rates for 198 different time periods over a 99-year time horizon. Zero-coupon rates utilized by the yield curve are mathematically derived from observable market yields for AA-rated corporate bonds. This yield curve model referenced by Northern Trust in establishing the discount rate resulted in a rate of 2.75% and 2.45% at December 31, 2020 for the U.S. Qualified and U.S. Non-qualified Plans, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

•Compensation Level: Based on a review of actual and anticipated salary experience, the compensation scale assumption is based on a graded schedule from 9.00% to 2.50% that averages 4.97%.

•Rate of Return on Plan Assets: The expected return on plan assets is based on an estimate of the long-term (30 years) rate of return on plan assets, which is determined using a building block approach that considers the current asset mix and estimates of return by asset class based on historical experience, giving proper consideration to diversification and rebalancing. Current market factors such as inflation and interest rates are also evaluated before long-term capital market assumptions are determined. Peer data and historical returns are reviewed to check for reasonability and appropriateness. As a result of these analyses, Northern Trust’s rate of return assumption for the U.S. Qualified Plan remains at 5.25% for 2021.

•Mortality Table: As of December 31, 2020, Northern Trust has adopted the aggregate Pri-2012 mortality table with a 2012 base year, which was released by the Society of Actuaries in October 2019. Northern Trust’s pension obligations reflect proposed future improvement under scale MP-2020, which was released by the Society of Actuaries in October 2020. This assumption was updated at December 31, 2020 from improvement scale MP-2019. The updated improvement scale applies to annuity payments only and results in slightly lower projected mortality improvement rates than estimated by the MP-2019 improvement scale. Mortality assumptions on lump sum payments remain static and continue to be in line with the IRS prescribed table for minimum lump sums in 2021.

Net pension expense in 2021 is expected to increase slightly by approximately $1.2 million, primarily driven by the decrease in discount rates in 2020.

In order to illustrate the sensitivity of these assumptions on the expected U.S pension plans’ periodic pension expense in 2021 and the projected benefit obligation as of December 31, 2020, the following table is presented to show the effect of increasing or decreasing each of these assumptions by 25 basis points.

TABLE 45: SENSITIVITY OF U.S. PENSION PLANS ASSUMPTIONS

($ In Millions) 25 BASISPOINT INCREASE 25 BASISPOINT DECREASE

Increase (Decrease) in 2021 Pension Expense

Discount Rate Change $ (4.4) $ 4.6

Compensation Level Change 2.5 (2.5)

Rate of Return on Plan Assets Change (3.8) 3.8

Increase (Decrease) in 2020 Projected Benefit Obligation

Discount Rate Change (58.0) 61.4

Compensation Level Change 10.8 (10.4)