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Cover and table of contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-36609

NORTHERN TRUST CORPORATION

(Exact name of registrant as specified in its charter)


Delaware			36-2723087
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)


50 South LaSalle Street		60603
Chicago,	Illinois	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (312) 630-6000

____________________________________________

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


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $1.66 2/3 Par Value	NTRS	The NASDAQ Stock Market LLC
Depositary Shares, each representing 1/1,000th interest in a share of Series E Non-Cumulative Perpetual Preferred Stock	NTRSO	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

At June 30, 2023, 207,004,181 shares of common stock, $1.66 2/3 par value, were outstanding.

NORTHERN TRUST CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023

TABLE OF CONTENTS



			Page
Consolidated Financial Highlights (unaudited)			1

Part I – Financial Information
Items 2 and 3: Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk			3
Item 1: Consolidated Financial Statements (unaudited)			35
Consolidated Balance Sheets			35
Consolidated Statements of Income			36
Consolidated Statements of Comprehensive Income			36
Consolidated Statements of Changes in Stockholders’ Equity			37
Consolidated Statements of Cash Flows			38
Notes to Consolidated Financial Statements			39
Item 4: Controls and Procedures			83

Part II – Other Information
Item 1: Legal Proceedings			84
Item 1A: Risk Factors			84
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds			84
Item 3: Defaults Upon Senior Securities			84
Item 4: Mine Safety Disclosures			84
Item 5: Other Information			84
Item 6: Exhibits			85

Signatures			86

CONSOLIDATED FINANCIAL HIGHLIGHTS

(UNAUDITED)


	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
CONDENSED INCOME STATEMENTS ($ In Millions)	2023		2022		% CHANGE(1)		2023		2022		% CHANGE(1)
Noninterest Income	$	1,245.6	$	1,310.0	(5)	%	$	2,459.0	$	2,647.7	(7)	%
Net Interest Income	511.5		458.7		12		1,042.7		839.7		24
Total Revenue	1,757.1		1,768.7		(1)		3,501.7		3,487.4		—
(Release of) Provision for Credit Losses	(15.5)		4.5		N/M		(0.5)		6.5		N/M
Noninterest Expense	1,331.9		1,223.6		9		2,617.5		2,429.5		8
Income before Income Taxes	440.7		540.6		(18)		884.7		1,051.4		(16)
Provision for Income Taxes	108.9		144.4		(25)		218.3		265.9		(18)
Net Income	$	331.8	$	396.2	(16)	%	$	666.4	$	785.5	(15)	%


PER COMMON SHARE
Net Income — Basic	$	1.56	$	1.86	(16)	%	$	3.07	$	3.64	(16)	%
— Diluted	1.56		1.86		(16)		3.07		3.63		(16)
Cash Dividends Declared Per Common Share	0.75		0.70		7		1.50		1.40		7
Book Value — End of Period (EOP)	51.94		48.87		6		51.94		48.87		6
Market Price — EOP	74.14		96.48		(23)		74.14		96.48		(23)


SELECTED BALANCE SHEET DATA ($ In Millions)	JUNE 30, 2023		DECEMBER 31, 2022		% CHANGE(1)
End of Period:
Total Assets	$	156,752.5	$	155,036.7	1	%
Earning Assets	145,042.1		142,484.7		2
Deposits	113,203.6		123,932.1		(9)
Stockholders’ Equity	11,635.7		11,259.5		3


	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2023		2022		% CHANGE(1)		2023		2022		% CHANGE(1)
Average Balances:
Total Assets	$	145,899.6	$	154,084.1	(5)	%	$	146,973.8	$	158,091.3	(7)	%
Earning Assets	134,116.4		139,901.5		(4)		135,031.8		144,807.8		(7)
Deposits	105,598.7		129,393.8		(18)		108,874.0		133,921.8		(19)
Stockholders’ Equity	11,448.7		10,907.0		5		11,365.5		11,207.5		1


CLIENT ASSETS ($ In Billions)	JUNE 30, 2023		DECEMBER 31, 2022		% CHANGE(1)
Assets Under Custody/Administration(2)	$	14,478.9	$	13,604.0	6	%
Assets Under Custody	11,284.8		10,604.6		6
Assets Under Management	1,365.8		1,249.5		9

N/M - Not meaningful

(1) Percentage calculations are based on actual balances rather than the rounded amounts presented in the Consolidated Financial Highlights.

(2) For the purposes of disclosing Assets Under Custody/Administration, to the extent that both custody and administration services are provided, the value of the assets is included only once in this amount.

SELECTED RATIOS AND METRICS


	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2023		2022		2023		2022
Financial Ratios:
Return on Average Common Equity	12.4	%	15.7	%	12.4	%	14.9	%
Return on Average Assets	0.91		1.03		0.91		1.00
Dividend Payout Ratio	48.1		37.6		48.9		38.6
Net Interest Margin(1)	1.57		1.35		1.60		1.19


	JUNE 30, 2023				DECEMBER 31, 2022
	STANDARDIZED APPROACH		ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		WELL-CAPITALIZED RATIOS		MINIMUM CAPITAL RATIOS
Capital Ratios:
Northern Trust Corporation
Common Equity Tier 1 Capital	11.3	%	13.0	%	10.8	%	11.5	%	N/A		4.5	%
Tier 1 Capital	12.3		14.1		11.8		12.5		6.0		6.0
Total Capital	14.4		16.3		13.9		14.5		10.0		8.0
Tier 1 Leverage	7.4		7.4		7.1		7.1		N/A		4.0
Supplementary Leverage	N/A		8.3		N/A		7.9		N/A		3.0

The Northern Trust Company
Common Equity Tier 1 Capital	12.1	%	14.3	%	11.6	%	12.4	%	6.5	%	4.5	%
Tier 1 Capital	12.1		14.3		11.6		12.4		8.0		6.0
Total Capital	13.9		16.2		13.5		14.2		10.0		8.0
Tier 1 Leverage	7.4		7.4		6.9		6.9		5.0		4.0
Supplementary Leverage	N/A		8.2		N/A		7.7		3.0		3.0

(1) Net interest margin is presented on a fully taxable equivalent (FTE) basis, a non-generally accepted accounting principle (GAAP) financial measure that facilitates the analysis of asset yields. The net interest margin on a GAAP basis and a reconciliation of net interest income on a GAAP basis to net interest income on an FTE basis are presented in “Reconciliation to Fully Taxable Equivalent” within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

PART I – FINANCIAL INFORMATION

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk

The following is management’s discussion and analysis of the financial condition and results of operations (MD&A) of Northern Trust Corporation (Corporation) for the second quarter of 2023. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report as well as the Annual Report on Form 10-K for the year ended December 31, 2022. Investors also should read the section entitled “Forward-Looking Statements.”

Certain terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended December 31, 2022.

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS

General

The Corporation is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Asset Servicing and Wealth Management. Asset management and related services are provided to Asset Servicing and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the terms “Northern Trust,” “we,” “us,” “our,” “its,” or similar terms mean the Corporation and its subsidiaries on a consolidated basis.

Overview of Financial Results

Net Income per diluted common share was $1.56 in the current quarter and $1.86 in the second quarter of 2022. Net Income decreased $64.4 million to $331.8 million in the current quarter from $396.2 million in the prior-year quarter. Annualized return on average common equity was 12.4% in the current quarter and 15.7% in the prior-year quarter. The annualized return on average assets was 0.91% in the current quarter as compared to 1.03% in the prior-year quarter. Reflected in Net Income were impacts from the changes in monetary policy implemented by the Federal Reserve Board to address inflation, which positively impacted Net Interest Income relative to the prior-year quarter. The impacts of a tight labor market are reflected in our Compensation expense. Inflationary pressures were also reflected in higher Equipment and Software expense.

Revenue decreased $11.6 million, or 1%, to $1.76 billion in the current quarter from $1.77 billion in the prior-year quarter.

Trust, Investment and Other Servicing Fees decreased $47.1 million, or 4%, from $1.14 billion in the prior-year quarter to $1.10 billion in the current quarter, primarily due to unfavorable lagged markets, asset outflows, and lower transaction volumes.

Other Noninterest Income decreased $17.3 million, or 10%, from $166.6 million in the prior-year quarter to $149.3 million in the current quarter, primarily reflecting lower Foreign Exchange Trading Income, partially offset by higher Other Operating Income.

Net Interest Income increased $52.8 million, or 12%, to $511.5 million in the current quarter as compared to $458.7 million in the prior-year quarter, primarily due to higher average interest rates, partially offset by lower average earning assets.

There was a $15.5 million release of credit reserves in the current quarter, as compared to a $4.5 million Provision for Credit Losses in the prior-year quarter. The current quarter release of credit reserves was primarily due to a decrease in the reserve evaluated on a collective basis, primarily driven by improved credit quality in certain commercial and institutional and certain commercial real estate (CRE) loans, partially offset by expectations for higher economic stress in the CRE market, particularly office CRE. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics.

Noninterest Expense increased $108.3 million, or 9%, from $1.22 billion in the prior-year quarter to $1.33 billion in the current quarter, primarily attributable to higher Compensation, Equipment and Software, and Other Operating Expense.

The Provision for Income Taxes in the current quarter totaled $108.9 million, representing an effective tax rate of 24.7%. The Provision for Income Taxes in the prior-year quarter totaled $144.4 million, representing an effective tax rate of 26.7%. The effective tax rate decreased compared to the prior-year quarter primarily due to a lower net tax impact from international operations.

Trust, Investment and Other Servicing Fees

Trust, Investment and Other Servicing Fees are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears.

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Trust, Investment and Other Servicing Fees (continued)

Northern Trust voluntarily waived $2.3 million of money market fund fees for the three months ended June 30, 2023 and $8.6 million of money market fund fees for the three months ended June 30, 2022.

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

TABLE 1: TRUST, INVESTMENT AND OTHER SERVICING FEES


	THREE MONTHS ENDED JUNE 30,
($ In Millions)	2023		2022		CHANGE
Asset Servicing Trust, Investment and Other Servicing Fees
Custody and Fund Administration	$	427.4	$	433.8	$	(6.4)	(1)	%
Investment Management	134.1		148.4		(14.3)		(10)
Securities Lending	21.5		21.6		(0.1)		—
Other	38.2		38.9		(0.7)		(2)
Total Asset Servicing Trust, Investment and Other Servicing Fees	$	621.2	$	642.7	$	(21.5)	(3)	%
Wealth Management Trust, Investment and Other Servicing Fees
Central	$	166.0	$	177.4	$	(11.4)	(6)	%
East	124.1		128.1		(4.0)		(3)
West	93.7		98.7		(5.0)		(5)
Global Family Office	91.3		96.5		(5.2)		(5)
Total Wealth Management Trust, Investment and Other Servicing Fees	$	475.1	$	500.7	$	(25.6)	(5)	%
Total Consolidated Trust, Investment and Other Servicing Fees	$	1,096.3	$	1,143.4	$	(47.1)	(4)	%

Asset Servicing

Custody and Fund Administration fees, the largest component of Asset Servicing fees, are driven primarily by values of client assets under custody/administration (AUC/A), transaction volumes and the number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client-specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment Management fees are based generally on market values of client assets under management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag. Securities Lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. The Other fee category in Asset Servicing includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.

Custody and Fund Administration fees decreased from the prior-year quarter, primarily due to unfavorable lagged markets.

Investment Management fees decreased from the prior-year quarter, primarily due to asset outflows and unfavorable lagged markets.

Wealth Management

Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and one-quarter lagged asset values. Fee income in the regions (Central, East and West) decreased from the prior-year quarter, primarily due to unfavorable lagged markets and product-related asset outflows. Global Family Office fee income decreased from the prior-year quarter, primarily due to unfavorable lagged markets.

Market Indices

The following tables present selected market indices and the percentage changes year-over-year to provide context regarding equity and fixed income market impacts on the Corporation’s results.

TABLE 2: EQUITY MARKET INDICES


	DAILY AVERAGES				PERIOD-END
	THREE MONTHS ENDED JUNE 30,				AS OF JUNE 30,
	2023	2022	CHANGE		2023	2022	CHANGE
S&P 500	4,205	4,112	2	%	4,450	3,785	18	%
MSCI EAFE (U.S. dollars)	2,121	2,001	6		2,132	1,846	15
MSCI EAFE (local currency)	1,337	1,253	7		1,357	1,188	14

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Trust, Investment and Other Servicing Fees (continued)

TABLE 3: FIXED INCOME MARKET INDICES


	AS OF JUNE 30,
	2023	2022	CHANGE
Barclays Capital U.S. Aggregate Bond Index	2,092	2,111	(1)	%
Barclays Capital Global Aggregate Bond Index	452	458	(1)

Client Assets

As noted above, AUC/A and assets under management are two of the primary drivers of our Trust, Investment and Other Servicing Fees. For the purposes of disclosing AUC/A, to the extent that both custody and administration services are provided, the value of the assets is included only once in this amount. The following table presents AUC/A by reporting segment.

TABLE 4: ASSETS UNDER CUSTODY / ADMINISTRATION BY REPORTING SEGMENT


	JUNE 30, 2023		MARCH 31, 2023		JUNE 30, 2022		CHANGE Q2-23/Q1-23		CHANGE Q2-23/Q2-22
($ In Billions)
Asset Servicing	$	13,483.5	$	13,221.5	$	12,812.2	2	%	5	%
Wealth Management	995.4		953.3		921.5		4		8
Total Assets Under Custody / Administration	$	14,478.9	$	14,174.8	$	13,733.7	2	%	5	%

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

TABLE 5: ASSETS UNDER CUSTODY BY REPORTING SEGMENT


	JUNE 30, 2023		MARCH 31, 2023		JUNE 30, 2022		CHANGE Q2-23/Q1-23		CHANGE Q2-23/Q2-22
($ In Billions)
Asset Servicing	$	10,295.7	$	10,065.6	$	9,771.2	2	%	5	%
Wealth Management	989.1		947.6		913.0		4		8
Total Assets Under Custody	$	11,284.8	$	11,013.2	$	10,684.2	2	%	6	%

Consolidated assets under custody increased from the prior quarter and from the prior-year quarter, primarily reflecting favorable markets and favorable currency translation, partially offset by asset outflows.

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

TABLE 6: ALLOCATION OF ASSETS UNDER CUSTODY


	JUNE 30, 2023						MARCH 31, 2023						JUNE 30, 2022
	AS		WM		TOTAL		AS		WM		TOTAL		AS		WM		TOTAL
Equities	46	%	60	%	47	%	45	%	58	%	46	%	44	%	56	%	45	%
Fixed Income Securities	33		13		31		33		14		32		35		15		33
Cash and Other Assets	19		27		21		20		28		20		19		29		20
Securities Lending Collateral	2		—		1		2		—		2		2		—		2

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

TABLE 7: ASSETS UNDER CUSTODY BY INVESTMENT TYPE


($ In Billions)	JUNE 30, 2023		MARCH 31, 2023		JUNE 30, 2022		CHANGE Q2-23/Q1-23		CHANGE Q2-23/Q2-22
Equities	$	5,328.7	$	5,091.1	$	4,785.5	5	%	11	%
Fixed Income Securities	3,524.7		3,501.4		3,513.8		1		—
Cash and Other Assets	2,262.6		2,252.8		2,215.6		—		2
Securities Lending Collateral	168.8		167.9		169.3		1		—
Total Assets Under Custody	$	11,284.8	$	11,013.2	$	10,684.2	2	%	6	%

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

TABLE 8: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT


	JUNE 30, 2023		MARCH 31, 2023		JUNE 30, 2022		CHANGE Q2-23/Q1-23		CHANGE Q2-23/Q2-22
($ In Billions)
Asset Servicing	$	989.8	$	962.1	$	950.0	3	%	4	%
Wealth Management	376.0		368.3		352.8		2		7
Total Assets Under Management	$	1,365.8	$	1,330.4	$	1,302.8	3	%	5	%

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Trust, Investment and Other Servicing Fees (continued)

Consolidated assets under management increased compared to the prior quarter, primarily reflecting the impact of favorable markets and net inflows, partially offset by unfavorable currency translation. Consolidated assets under management increased compared to the prior-year quarter, primarily reflecting the impact of favorable markets, partially offset by product-related outflows.

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

TABLE 9: ALLOCATION OF ASSETS UNDER MANAGEMENT


	JUNE 30, 2023						MARCH 31, 2023						JUNE 30, 2022
	AS		WM		TOTAL		AS		WM		TOTAL		AS		WM		TOTAL
Equities	54	%	55	%	54	%	54	%	53	%	54	%	50	%	52	%	51	%
Fixed Income Securities	11		21		14		11		22		14		12		23		15
Cash and Other Assets	18		24		20		18		25		19		20		25		21
Securities Lending Collateral	17		—		12		17		—		13		18		—		13

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

TABLE 10: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE


($ In Billions)	JUNE 30, 2023		MARCH 31, 2023		JUNE 30, 2022		CHANGE Q2-23/Q1-23		CHANGE Q2-23/Q2-22
Equities	$	740.5	$	712.1	$	664.1	4	%	12	%
Fixed Income Securities	188.7		187.6		194.9		1		(3)
Cash and Other Assets	267.8		262.8		274.5		2		(2)
Securities Lending Collateral	168.8		167.9		169.3		1		—
Total Assets Under Management	$	1,365.8	$	1,330.4	$	1,302.8	3	%	5	%

The following table presents activity in consolidated assets under management by product.

TABLE 11: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT


		THREE MONTHS ENDED
($ In Billions)		JUNE 30, 2023		MARCH 31, 2023		DECEMBER 31, 2022		SEPTEMBER 30, 2022		JUNE 30, 2022
Beginning Balance of AUM		$	1,330.4	$	1,249.5	$	1,209.9	$	1,302.8	$	1,487.8
Inflows by Product
	Equities	44.8		52.1		37.7		39.5		51.4
	Fixed Income	11.2		14.4		11.6		12.3		11.8
	Cash and Other Assets	551.3		276.7		121.9		128.9		186.5
	Securities Lending Collateral	53.4		66.3		48.2		55.3		61.6
Total Inflows		660.7		409.5		219.4		236.0		311.3
Outflows by Product
	Equities	(54.7)		(59.2)		(42.8)		(56.5)		(60.6)
	Fixed Income	(10.2)		(16.6)		(12.7)		(12.4)		(14.8)
	Cash and Other Assets	(529.7)		(264.0)		(128.5)		(152.2)		(220.3)
	Securities Lending Collateral	(52.5)		(46.7)		(62.0)		(62.5)		(69.5)
Total Outflows		(647.1)		(386.5)		(246.0)		(283.6)		(365.2)
Net Inflows (Outflows)		13.6		23.0		(26.6)		(47.6)		(53.9)
Market Performance, Currency & Other
	Market Performance & Other	27.7		52.4		55.9		(35.1)		(118.5)
	Currency	(5.9)		5.5		10.3		(10.2)		(12.6)
Total Market Performance, Currency & Other		21.8		57.9		66.2		(45.3)		(131.1)
Ending Balance of AUM		$	1,365.8	$	1,330.4	$	1,249.5	$	1,209.9	$	1,302.8

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Other Noninterest Income

The components of Other Noninterest Income are provided below.

TABLE 12: OTHER NONINTEREST INCOME


	THREE MONTHS ENDED JUNE 30,
($ In Millions)	2023		2022		CHANGE
Foreign Exchange Trading Income	$	50.1	$	77.6	$	(27.5)	(35)	%
Treasury Management Fees	7.9		10.6		(2.7)		(24)
Security Commissions and Trading Income	36.1		32.8		3.3		10
Other Operating Income	55.2		45.6		9.6		21
Investment Security Gains (Losses), net	—		—		—		N/M
Total Other Noninterest Income	$	149.3	$	166.6	$	(17.3)	(10)	%

N/M - Not meaningful

Foreign Exchange Trading Income decreased compared to the prior-year quarter primarily driven by lower client volumes and an unfavorable impact from foreign exchange swap activity.

Security Commissions and Trading Income increased primarily due to higher bond underwriting referral fees.

Other Operating Income increased compared to the prior-year quarter, primarily driven by higher income associated with a market value increase in supplemental compensation plans, higher non-trading foreign exchange income, and banking and credit-related services fees, partially offset by higher expenses related to existing swap agreements related to Visa Inc. Class B common shares. Please refer to Note 15—Other Operating Income to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for further detail.

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, Securities, Loans, and Other Interest-Earning Assets—are financed by a large base of interest-bearing funds that include client deposits, short-term borrowings, Senior Notes and Long-Term Debt. Short-term borrowings include Federal Funds Purchased, Securities Sold Under Agreements to Repurchase, and Other Borrowings. Earning assets are also funded by noninterest-related funds, which include demand deposits and stockholders’ equity. Net Interest Income is subject to variations in the level and mix of earning assets and interest-bearing funds and their relative sensitivity to interest rates. In addition, the levels of nonaccruing assets and client compensating deposit balances used to pay for services impact Net Interest Income.

Net interest margin is the difference between what we earn on our assets and what we pay for deposits and other sources of funding. The direction and level of interest rates are important factors in our earnings. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets.

Net Interest Income stated on a fully taxable equivalent (FTE) basis is a non-generally accepted accounting principle (GAAP) financial measure that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on Net Income. A reconciliation of Net Interest Income on a GAAP basis to Net Interest Income on an FTE basis is provided in “Reconciliation to Fully Taxable Equivalent” within this MD&A.

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

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

TABLE 13: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME


(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)	SECOND QUARTER
2023					2022
($ In Millions)	INTEREST		AVERAGE BALANCE		AVERAGE RATE(7)		INTEREST		AVERAGE BALANCE		AVERAGE RATE(7)
Interest-Earning Assets
Federal Reserve and Other Central Bank Deposits	$	398.9	$	34,380.4	4.65	%	$	59.2	$	36,691.1	0.65	%
Interest-Bearing Due from and Deposits with Banks(1)	32.1		4,573.4		2.82		6.5		4,227.6		0.62
Federal Funds Sold	0.1		2.9		5.25		—		2.2		0.75
Securities Purchased under Agreements to Resell(2)	284.3		1,238.6		92.09		7.0		1,149.3		2.47
Debt Securities
Available for Sale	254.7		24,511.8		4.17		138.1		35,676.6		1.55
Held to Maturity	112.5		25,053.3		1.80		56.2		20,244.3		1.11
Trading Account	—		0.2		42.53		—		0.4		5.40
Total Debt Securities	367.2		49,565.3		2.97		194.3		55,921.3		1.39
Loans and Leases(3)	640.5		42,365.4		6.06		257.1		40,747.0		2.53
Other Interest-Earning Assets(4)	25.0		1,990.4		5.04		11.8		1,163.0		4.07
Total Interest-Earning Assets	1,748.1		134,116.4		5.23		535.9		139,901.5		1.54
Cash and Due from Banks and Other Central Bank Deposits(5)	—		1,842.5		—		—		2,559.1		—
Other Noninterest-Earning Assets	—		9,940.7		—		—		11,623.5		—
Total Assets	$	—	$	145,899.6	—	%	$	—	$	154,084.1	—	%
Average Source of Funds
Deposits
Savings, Money Market and Other	$	152.8	$	22,961.2	2.67	%	$	18.7	$	30,967.5	0.24	%
Savings Certificates and Other Time	32.0		3,036.1		4.23		1.1		792.3		0.58
Non-U.S. Offices — Interest-Bearing	448.7		62,046.3		2.90		3.4		63,900.7		0.02
Total Interest-Bearing Deposits	633.5		88,043.6		2.89		23.2		95,660.5		0.10
Federal Funds Purchased	87.6		7,070.0		4.97		2.8		922.8		1.22
Securities Sold under Agreements to Repurchase(2)	273.4		467.8		234.39		6.0		596.7		4.01
Other Borrowings(6)	156.5		12,132.6		5.17		8.4		4,186.7		0.80
Senior Notes	42.1		2,761.1		6.14		18.9		2,885.1		2.65
Long-Term Debt	30.4		2,069.7		5.89		6.8		1,096.4		2.47

Total Interest-Related Funds	1,223.5		112,544.8		4.36		66.1		105,348.2		0.25
Interest Rate Spread	—		—		0.87		—		—		1.29
Demand and Other Noninterest-Bearing Deposits	—		17,555.1		—		—		33,733.3		—
Other Noninterest-Bearing Liabilities	—		4,351.0		—		—		4,095.6		—
Stockholders’ Equity	—		11,448.7		—		—		10,907.0		—
Total Liabilities and Stockholders’ Equity	$	—	$	145,899.6	—	%	$	—	$	154,084.1	—	%
Net Interest Income/Margin (FTE Adjusted)	$	524.6	$	—	1.57	%	$	469.8	$	—	1.35	%
Net Interest Income/Margin (Unadjusted)	$	511.5	$	—	1.53	%	$	458.7	$	—	1.31	%

*(1)*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.

*(2)*Includes the impact of balance sheet netting under master netting arrangements of approximately $21.3 billion and $2.8 billion for the three months ended June 30, 2023 and 2022, respectively. Excluding the impact of netting for the three months ended June 30, 2023 and 2022, the average interest rate on Securities Purchased under Agreements to Resell would be approximately 5.06% and 0.72%, respectively. Excluding the impact of netting for the three months ended June 30, 2023 and 2022, the average interest rate on Securities Sold under Agreements to Repurchase would be approximately 5.04% and 0.70%, respectively. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when there is a legally enforceable master netting agreement.

*(3)*Average balances include nonaccrual loans.

*(4)*Other Interest-Earning Assets include certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank and Federal Reserve stock, and money market investments which are classified in Other Assets on the consolidated balance sheets.

*(5)*Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits on the consolidated balance sheets.

*(6)*Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.

*(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.

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

TABLE 14: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE**(1)**


(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)	THREE MONTHS ENDED JUNE 30, 2023/2022
	CHANGE DUE TO
(In Millions)	AVERAGE BALANCE		AVERAGE RATE		NET (DECREASE) INCREASE
Increase (Decrease) in Net Interest Income (FTE)
Federal Reserve and Other Central Bank Deposits	$	(3.9)	$	343.6	$	339.7
Interest-Bearing Due from and Deposits with Banks	0.5		25.1		25.6
Federal Funds Sold	—		0.1		0.1
Securities Purchased under Agreements to Resell	0.6		276.7		277.3
Debt Securities
Available for Sale	(64.8)		181.4		116.6
Held to Maturity	15.6		40.7		56.3
Trading Account	—		—		—
Total Debt Securities	(49.2)		222.1		172.9
Loans and Leases	10.6		372.8		383.4
Other Interest-Earning Assets	9.9		3.3		13.2
Total Interest Income	$	(31.5)	$	1,243.7	$	1,212.2

Interest-Bearing Deposits
Savings, Money Market and Other	$	(38.9)	$	173.0	$	134.1
Savings Certificates and Other Time	9.5		21.4		30.9
Non-U.S. Offices - Interest-Bearing	(0.1)		445.4		445.3
Total Interest-Bearing Deposits	(29.5)		639.8		610.3
Federal Funds Purchased	58.0		26.8		84.8
Securities Sold under Agreements to Repurchase	(1.6)		269.0		267.4
Other Borrowings	38.3		109.8		148.1
Senior Notes	(0.8)		24.0		23.2
Long-Term Debt	9.3		14.3		23.6

Total Interest Expense	$	73.7	$	1,083.7	$	1,157.4
Increase (Decrease) in Net Interest Income (FTE)	$	(105.2)	$	160.0	$	54.8

*(1)*Changes not due solely to average balance changes or rate changes are allocated proportionately to average balance and rate based on their relative absolute magnitudes.

Notes: Net Interest Income (FTE), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans, securities and other interest-earning assets. 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 $13.1 million and $11.1 million for the three months ended June 30, 2023 and 2022, respectively. A reconciliation of Net Interest Income and net interest margin on a GAAP basis to Net Interest Income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided in “Reconciliation to Fully Taxable Equivalent” within this MD&A. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets.

Interest revenue on cash collateral positions is reported above in Interest-Bearing Due from and Deposits with Banks and in Loans and Leases. Interest Expense on cash collateral positions is reported above in Non-U.S. Offices Interest-Bearing Deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract in Other Assets and Other Liabilities, respectively.

Net Interest Income, stated on a FTE basis, increased from the prior-year quarter, primarily due to higher average interest rates, partially offset by lower average earning assets. Average earning assets decreased from the prior-year quarter, primarily due to lower client deposits, partially offset by increased short-term borrowing activity.

The net interest margin on an FTE basis increased from the prior-year quarter, primarily due to higher average interest rates, partially offset by an unfavorable balance sheet mix shift.

Federal Reserve and Other Central Bank Deposits averaged $34.4 billion and decreased $2.3 billion, or 6%, from $36.7 billion in the prior-year quarter. Interest-Bearing Due from and Deposits with Banks averaged $4.6 billion and increased $0.4 billion, or 8%, from $4.2 billion in the prior-year quarter. Average Securities were $49.6 billion and decreased $6.3 billion, or 11%, from $55.9 billion in the prior-year quarter. Average Other Interest-Earning Assets include certain community development investments, Federal Home Loan Bank stock, collateral deposits with certain securities depositories and clearing houses, money market investments, and Federal Reserve stock of $902.5 million, $398.5 million, $355.2 million, $90.8 million, and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $46.7 billion in the current quarter and $53.2 billion in the prior-year quarter. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $2.9 billion in the current quarter and $2.7 billion in the prior-year quarter.

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

Loans and Leases averaged $42.4 billion and increased $1.7 billion, or 4%, from $40.7 billion in the prior-year quarter, primarily reflecting higher levels of commercial and institutional, commercial real estate, and residential real estate loans, partially offset by lower levels of non-U.S. and private client loans. Commercial and institutional loans averaged $12.9 billion and increased $670.2 million, or 5%, from $12.3 billion for the prior-year quarter. Commercial real estate loans averaged $4.9 billion and increased $620.5 million, or 14%, from $4.3 billion for the prior-year quarter. Residential real estate loans averaged $6.4 billion and increased $36.8 million, or 1%, from $6.3 billion for the prior-year quarter. Non-U.S. loans averaged $3.4 billion and decreased $475.1 million or 12%, from $3.8 billion for the prior-year quarter. Private client loans averaged $13.8 billion and decreased $61.8 million from $13.9 billion for the prior-year quarter.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits decreased $7.7 billion, or 8%, to an average of $88.0 billion in the current quarter from $95.7 billion in the prior-year quarter. Other Average Interest-Related Funds increased $14.8 billion, or 153%, to an average of $24.5 billion in the current quarter from $9.7 billion in the prior-year quarter. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings.

Interest expense for Interest-Bearing Deposits in the current quarter was driven by higher interest rates. Average Non-U.S. Offices Interest-Bearing Deposits comprised 70% and 67% of total average Interest-Bearing Deposits for the three months ended June 30, 2023 and 2022, respectively.

Provision for Credit Losses

There was a $15.5 million release of credit reserves in the current quarter, as compared to a $4.5 million Provision for Credit Losses in the prior-year quarter. The release of credit reserves in the current quarter was primarily due to a decrease in the reserve evaluated on a collective basis, primarily driven by improved credit quality in certain commercial and institutional and certain CRE loans, partially offset by expectations for higher economic stress in the CRE market, particularly office CRE. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics.

The Provision for Credit Losses in the prior-year quarter was primarily due to an increase in the reserve evaluated on a collective basis, partially offset by recoveries in the prior-year quarter. The increase in the collective basis reserve was primarily driven by market conditions and a higher risk of recession at the time as compared to the previous period, partially offset by improvements in credit quality mainly within the CRE and commercial and institutional portfolios.

Net charge-offs in the current quarter were de minimis, reflecting $0.8 million of recoveries and $0.8 million of charge-offs. The prior-year quarter included $5.5 million of net recoveries, reflecting $5.5 million of recoveries and de minimis charge-offs. Nonaccrual assets of $47.4 million decreased $42.4 million, or 47%, from $89.8 million at the end of the prior-year quarter.

For additional discussion of the allowance for credit losses, refer to the “Asset Quality” section in this MD&A.

Noninterest Expense

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

TABLE 15: NONINTEREST EXPENSE


	THREE MONTHS ENDED JUNE 30,
($ In Millions)	2023		2022		CHANGE
Compensation	$	604.5	$	546.5	$	58.0	11	%
Employee Benefits	101.4		119.6		(18.2)		(15)
Outside Services	230.9		213.1		17.8		8
Equipment and Software	229.3		203.5		25.8		13
Occupancy	53.8		51.0		2.8		6
Other Operating Expense	112.0		89.9		22.1		25
Total Noninterest Expense	$	1,331.9	$	1,223.6	$	108.3	9	%

Compensation expense, the largest component of Noninterest Expense, increased compared to the prior-year quarter, primarily due to $36.7 million of severance-related charges and higher salaries, partially offset by lower incentives.

Employee Benefits expense decreased compared to the prior-year quarter primarily due to a U.S. Qualified Plan pension settlement charge of $20.3 million in the prior-year quarter.

Outside Services expense increased compared to the prior-year quarter primarily due to higher technical services.

Equipment and Software expense increased compared to the prior-year quarter, primarily due to higher amortization as well as higher software costs driven by continued technology investments.

SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

Other Operating Expense increased compared to the prior-year quarter primarily due to a $25.6 million charge related to the write-off of an investment in a client capability.

Provision for Income Taxes

Income tax expense for the three months ended June 30, 2023 was $108.9 million, representing an effective tax rate of 24.7%, compared to $144.4 million in the prior-year quarter, representing an effective tax rate of 26.7%.

The effective tax rate decreased compared to the prior-year quarter primarily due to a lower net tax impact from international operations.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS

Overview of Financial Results

Net Income per diluted common share decreased in the current period to $3.07 from $3.63 in the comparable prior-year period. Net Income decreased $119.1 million, or 15%, to $666.4 million in the current period from $785.5 million in the prior-year period. Annualized return on average common equity was 12.4% in the current period and 14.9% in the prior-year period. The annualized return on average assets was 0.91% in the current period compared to 1.00% in the prior-year period.

Revenue for the six months ended June 30, 2023 increased $14.3 million from $3.49 billion in the prior-year period to $3.50 billion in the current period.

Trust, Investment and Other Servicing Fees decreased $151.9 million, or 7%, from $2.31 billion in the prior-year period to $2.16 billion in the current period, primarily driven by unfavorable lagged markets, asset outflows, and unfavorable currency translation, partially offset by lower money market fund fee waivers.

Other Noninterest Income decreased $36.8 million, or 11% from $335.9 million in the prior-year period to $299.1 million in the current period, primarily driven by lower Foreign Exchange Trading Income, partially offset by higher Other Operating Income.

Net Interest Income increased $203.0 million, or 24%, to $1.04 billion in the current period from $839.7 million in the prior-year period, primarily due to higher average interest rates, partially offset by lower average earning assets.

There was a $0.5 million release of credit reserves in the current period, as compared to a $6.5 million Provision for Credit Losses in the prior-year period. The release of credit reserves was primarily due to a decrease in the collective basis reserve, driven by improvements in credit quality within the commercial and institutional portfolio, partially offset by growth in the size and duration of the CRE portfolio and expectations of higher economic stress in the CRE market, particularly office CRE. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics.

Noninterest Expense increased $188.0 million, or 8%, from $2.43 billion in the prior-year period to $2.62 billion in the current period, primarily attributable to higher Compensation and Equipment and Software expense.

The Provision for Income Taxes for the six months ended June 30, 2023 totaled $218.3 million, representing an effective tax rate of 24.7%. The Provision for Income Taxes for the six months ended June 30, 2022 totaled $265.9 million, representing an effective tax rate of 25.3%. The effective tax rate decreased compared to the prior-year period primarily due to a decrease in pretax earnings and a higher level of tax benefits from tax-credit investments and tax-exempt income, partially offset by lower tax benefits from share-based compensation.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Trust, Investment and Other Servicing Fees

Northern Trust voluntarily waived $4.3 million of money market fund fees for the six months ended June 30, 2023 as compared to $59.3 million for the six months ended June 30, 2022.

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

TABLE 16: TRUST, INVESTMENT AND OTHER SERVICING FEES


	SIX MONTHS ENDED JUNE 30,
($ In Millions)	2023		2022		CHANGE
Asset Servicing Trust, Investment and Other Servicing Fees
Custody and Fund Administration	$	841.0	$	886.5	$	(45.5)	(5)	%
Investment Management	260.3		295.3		(35.0)		(12)
Securities Lending	40.6		40.4		0.2		1
Other	82.3		82.9		(0.6)		(1)
Total Asset Servicing Trust, Investment and Other Servicing Fees	$	1,224.2	$	1,305.1	$	(80.9)	(6)	%
Wealth Management Trust, Investment and Other Servicing Fees
Central	$	329.6	$	359.1	$	(29.5)	(8)	%
East	243.9		262.1		(18.2)		(7)
West	184.9		200.1		(15.2)		(8)
Global Family Office	177.3		185.4		(8.1)		(4)
Total Wealth Management Trust, Investment and Other Servicing Fees	$	935.7	$	1,006.7	$	(71.0)	(7)	%
Total Consolidated Trust, Investment and Other Servicing Fees	$	2,159.9	$	2,311.8	$	(151.9)	(7)	%

Asset Servicing

Custody and Fund Administration fees, the largest component of Asset Servicing fees, decreased primarily driven by unfavorable lagged markets. Investment Management fees decreased primarily due to asset outflows and unfavorable lagged markets, partially offset by lower money market fund fee waivers.

Wealth Management

Fee income in the regions (Central, East and West) decreased primarily due to unfavorable lagged markets and product-related asset outflows, partially offset by lower money market fund fee waivers. Global Family Office fee income decreased primarily due to unfavorable lagged markets, partially offset by lower money market fund fee waivers.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Other Noninterest Income

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

TABLE 17: OTHER NONINTEREST INCOME


	SIX MONTHS ENDED JUNE 30,
($ In Millions)	2023		2022		CHANGE
Foreign Exchange Trading Income	$	103.1	$	158.5	$	(55.4)	(35)	%
Treasury Management Fees	16.3		21.7		(5.4)		(25)
Security Commissions and Trading Income	70.8		69.0		1.8		3
Other Operating Income	102.0		86.7		15.3		18
Investment Security Gains (Losses), net	6.9		—		6.9		N/M
Total Other Noninterest Income	$	299.1	$	335.9	$	(36.8)	(11)	%

N/M - Not meaningful

Foreign Exchange Trading Income decreased from the prior-year period, primarily due to lower client volumes and an unfavorable impact from foreign exchange swap activity.

Treasury Management Fees decreased from the prior-year period, primarily due to an increase in the earnings credit rate applied to client balances.

Other Operating Income increased from the prior-year period, primarily driven by higher income associated with a market value increase in supplemental compensation plans, increased income related to a bank-owned life insurance program, higher non-trading foreign exchange income, and increased income from banking and credit-related services fees, partially offset by higher expenses related to existing swap agreements related to Visa Inc. Class B common shares. Please refer to Note 15—Other Operating Income to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for further detail.

Investment Security Gains (Losses), net included a $6.9 million gain upon sale of certain available for sale debt securities in the current-year period. Please refer to Note 4—Securities to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited) for additional details related to the sale of available for sale debt securities.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income

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

TABLE 18: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME


(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)	SIX MONTHS ENDED JUNE 30,
2023					2022
($ In Millions)	INTEREST		AVERAGE BALANCE		AVERAGE RATE(7)		INTEREST		AVERAGE BALANCE		AVERAGE RATE(7)
Interest-Earning Assets
Federal Reserve and Other Central Bank Deposits	$	775.9	$	35,504.9	4.41	%	$	76.8	$	40,921.8	0.38	%
Interest-Bearing Due from and Deposits with Banks(1)	60.3		4,387.1		2.77		9.1		4,305.4		0.43
Federal Funds Sold	0.3		11.2		4.85		—		1.5		0.67
Securities Purchased under Agreements to Resell(2)	410.2		1,142.9		72.38		7.9		921.7		1.74
Debt Securities
Available for Sale	489.4		24,769.8		3.98		258.6		36,581.4		1.43
Held to Maturity	216.3		25,216.8		1.72		105.5		20,773.3		1.02
Trading Account	—		0.7		12.45		—		0.6		8.59
Total Debt Securities	705.7		49,987.3		2.85		364.1		57,355.3		1.28
Loans and Leases(3)	1,220.0		42,163.5		5.83		448.8		40,149.0		2.25
Other Interest-Earning Assets(4)	44.3		1,834.9		4.87		19.4		1,153.1		3.39
Total Interest-Earning Assets	3,216.7		135,031.8		4.80		926.1		144,807.8		1.29
Cash and Due from Banks and Other Central Bank Deposits(5)	—		1,819.3		—		—		2,304.4		—
Other Noninterest-Earning Assets	—		10,122.7		—		—		10,979.1		—
Total Assets	$	—	$	146,973.8	—	%	$	—	$	158,091.3	—	%
Average Source of Funds
Deposits
Savings, Money Market and Other	$	310.8	$	25,103.0	2.50	%	$	22.0	$	31,644.6	0.14	%
Savings Certificates and Other Time	53.6		2,700.0		4.00		2.2		817.1		0.54
Non-U.S. Offices — Interest-Bearing	833.7		62,227.7		2.70		(16.9)		66,038.3		(0.05)
Total Interest-Bearing Deposits	1,198.1		90,030.7		2.68		7.3		98,500.0		0.01
Federal Funds Purchased	127.7		5,371.4		4.79		2.8		464.0		1.22
Securities Sold under Agreements to Repurchase(2)	389.5		407.8		192.58		6.3		426.1		2.97
Other Borrowings(6)	291.5		11,730.6		5.01		11.5		3,940.2		0.59
Senior Notes	81.3		2,754.6		5.97		28.5		2,664.9		2.17
Long-Term Debt	59.6		2,068.0		5.81		12.2		1,112.3		2.20
Total Interest-Related Funds	2,147.7		112,363.1		3.85		68.6		107,107.5		0.13
Interest Rate Spread	—		—		0.95		—		—		1.16
Demand and Other Noninterest-Bearing Deposits	—		18,843.3		—		—		35,421.8		—
Other Noninterest-Bearing Liabilities	—		4,401.9		—		—		4,354.5		—
Stockholders’ Equity	—		11,365.5		—		—		11,207.5		—
Total Liabilities and Stockholders’ Equity	$	—	$	146,973.8	—	%	$	—	$	158,091.3	—	%
Net Interest Income/Margin (FTE Adjusted)	$	1,069.0	$	—	1.60	%	$	857.5	$	—	1.19	%
Net Interest Income/Margin (Unadjusted)	$	1,042.7	$	—	1.56	%	$	839.7	$	—	1.17	%

*(2)*Includes the impact of balance sheet netting under master netting arrangements of approximately $15.7 billion and $2.0 billion for the six months ended June 30, 2023 and 2022, respectively. Excluding the impact of netting for the six months ended June 30, 2023 and 2022, the average interest rate on Securities Purchased under Agreements to Resell would be approximately 4.92% and 0.55%, respectively. Excluding the impact of netting for the six months ended June 30, 2023 and 2022, the average interest rate on Securities Sold under Agreements to Repurchase would be approximately 4.88% and 0.53%, respectively. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when there is a legally enforceable master netting agreement.

*(3)*Average balances include nonaccrual loans.

*(5)*Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits on the consolidated balance sheets.

*(6)*Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.

*(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.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

TABLE 19: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE**(1)**


(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)	SIX MONTHS ENDED JUNE 30, 2023/2022
	CHANGE DUE TO
(In Millions)	AVERAGE BALANCE		AVERAGE RATE		NET (DECREASE) INCREASE
Increase (Decrease) in Net Interest Income (FTE)
Federal Reserve and Other Central Bank Deposits	$	(55.8)	$	754.9	$	699.1
Interest-Bearing Due from and Deposits with Banks	0.2		51.0		51.2
Federal Funds Sold	—		0.3		0.3
Securities Purchased under Agreements to Resell	2.4		399.9		402.3
Debt Securities
Available For Sale	(80.9)		311.7		230.8
Held To Maturity	26.5		84.3		110.8
Trading Account	—		—		—
Total Debt Securities	(54.4)		396.0		341.6
Loans and Leases	19.3		751.9		771.2
Other Interest-Earning Assets	14.4		10.5		24.9
Total Interest Income	$	(73.9)	$	2,364.5	$	2,290.6

Interest-Bearing Deposits
Savings, Money Market and Other	$	(10.4)	$	299.2	$	288.8
Savings Certificates and Other Time	8.5		42.9		51.4
Non-U.S. Offices - Interest-Bearing	(6.0)		856.6		850.6
Total Interest-Bearing Deposits	(7.9)		1,198.7		1,190.8
Federal Funds Purchased	97.8		27.1		124.9
Securities Sold under Agreements to Repurchase	(0.3)		383.5		383.2
Other Borrowings	58.5		221.5		280.0
Senior Notes	1.0		51.8		52.8
Long-Term Debt	16.3		31.1		47.4

Total Interest Expense	$	165.4	$	1,913.7	$	2,079.1
(Decrease) Increase in Net Interest Income (FTE)	$	(239.3)	$	450.8	$	211.5

(1) Changes not due solely to average balance changes or rate changes are allocated proportionately to average balance and rate based on their relative absolute magnitudes.

Notes: Net Interest Income (FTE Adjusted), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans and securities. The adjustments are based on a federal income tax rate of 21.0%, where the rate is adjusted for applicable state income taxes, net of related federal tax benefit. Total taxable equivalent interest adjustments amounted to $26.3 million and $17.8 million for the six months ended June 30, 2023 and 2022, respectively. A reconciliation of Net Interest Income and net interest margin on a GAAP basis to Net Interest Income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided in “Reconciliation to Fully Taxable Equivalent” within this MD&A. Net interest margin is calculated by dividing annualized net interest income by average interest-earning assets.

Interest revenue on cash collateral positions is reported above within Interest-Bearing Due from and Deposits with Banks and within Loans and Leases. Interest expense on cash collateral positions is reported above within Non-U.S. Offices Interest-Bearing Deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract within Other Assets and Other Liabilities, respectively.

Net Interest Income, stated on an FTE basis, increased from the prior-year period, primarily due to higher average interest rates, partially offset by lower average earning assets. Average earning assets decreased from the prior-year period, primarily due to lower client deposits, partially offset by increased short-term borrowing activity.

The net interest margin on an FTE basis increased from the prior-year period, primarily due to higher average interest rates, partially offset by unfavorable balance sheet mix shift.

Federal Reserve and Other Central Bank Deposits averaged $35.5 billion and decreased $5.4 billion, or 13%, from $40.9 billion in the prior-year period. Average Securities were $50.0 billion and decreased $7.4 billion, or 13%, from $57.4 billion in the prior-year period and include certain community development investments, Federal Home Loan Bank stock, collateral deposits with certain securities depositories and clearing houses, money market investments, and Federal Reserve stock of $901.9 million, $375.9 million, $266.6 million, $76.6 million and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $47.0 billion in the current period and $54.8 billion in the prior-year period. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $3.0 billion in the current period and $2.6 billion in the prior-year period. Interest-Bearing Due from and Deposits with Banks averaged $4.4 billion in the current period and $4.3 billion in the prior-year period.

Loans and leases averaged $42.2 billion and increased $2.1 billion, or 5%, from $40.1 billion in the prior-year period, primarily reflecting higher levels of commercial and institutional, commercial real estate, residential real estate, and non-U.S. loans, partially offset by lower levels of private client loans. Commercial and institutional loans averaged $12.7 billion and increased $705.3 million, or 6%, from $12.0 billion for the prior-year period. Commercial real estate loans averaged $4.9 billion and

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Net Interest Income (continued)

increased $605.3 million, or 14%, from $4.3 billion for the prior-year period. Residential real estate loans averaged $6.4 billion and increased $135.6 million, or 2%, from $6.3 billion for the prior-year period. Non-U.S. loans averaged $3.5 billion and increased $97.6 million or 3% from $3.4 billion for the prior-year period. Private client loans averaged $13.8 billion and decreased $122.0 million, or 1%, from $14.0 billion for the prior-year period.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits decreased $8.5 billion, or 9%, to an average of $90.0 billion in the current period from $98.5 billion in the prior-year period. Other Average Interest-Related Funds increased $13.7 billion, or 159%, to an average of $22.3 billion in the current period from $8.6 billion in the prior-year period. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings.

Interest expense for Interest-Bearing Deposits in the current period was driven by higher interest rates. Average non-U.S. offices interest-bearing deposits comprised 69% and 67% of total average interest-bearing deposits for the six months ended June 30, 2023 and 2022, respectively.

Provision for Credit Losses

There was a $0.5 million release of credit reserves for the six months ended June 30, 2023, as compared to a $6.5 million provision in the prior-year period. The release of credit reserves was primarily due to a decrease in the collective basis reserve, driven by improvements in credit quality within the commercial and institutional portfolio, partially offset by growth in the size and duration of the CRE portfolio and expectations of higher economic stress in the CRE market, particularly office CRE. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics.

The provision in the prior-year period was primarily due to an increase in the reserve evaluated on a collective basis and an increase in the reserve evaluated on an individual basis for two commercial borrowers, partially offset by net recoveries during the prior-year period. The increase in the collective basis reserve was primarily driven by market conditions at the time and a higher risk of recession as compared to the previous period, partially offset by improvements in credit quality mainly within the commercial real estate and commercial and institutional portfolios.

Net charge-offs in the current-year period totaled $2.9 million resulting from $4.8 million of charge-offs and $1.9 million of recoveries, compared to net recoveries of $8.7 million in the prior-year period resulting from $0.1 million of charge-offs and $8.8 million of recoveries.

For additional discussion of the allowance for credit losses, refer to the “Asset Quality” section in this MD&A.

Noninterest Expense

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

TABLE 20: NONINTEREST EXPENSE


	SIX MONTHS ENDED JUNE 30,
($ In Millions)	2023		2022		CHANGE
Compensation	$	1,199.7	$	1,110.4	$	89.3	8	%
Employee Benefits	202.4		223.9		(21.5)		(10)
Outside Services	441.7		426.5		15.2		4
Equipment and Software	461.0		397.0		64.0		16
Occupancy	115.1		102.1		13.0		13
Other Operating Expense	197.6		169.6		28.0		17
Total Noninterest Expense	$	2,617.5	$	2,429.5	$	188.0	8	%

Compensation expense, the largest component of Noninterest Expense increased compared to the prior-year period, primarily due to higher salary expense and $36.7 million of severance-related charges, partially offset by lower incentives.

Employee Benefits expense decreased compared to the prior-year period, primarily due to a U.S. Qualified Plan pension settlement charge of $20.3 million in the prior-year period.

Outside Services expense increased compared to the prior-year period, primarily reflecting higher technical services, partially offset by lower subcustodian expense and third-party advisory fees.

Equipment and Software expense increased compared to the prior-year period, primarily due to higher amortization as well as higher software costs driven by continued technology investments.

SIX-MONTH CONSOLIDATED RESULTS OF OPERATIONS (continued)

Noninterest Expense (continued)

Occupancy expense increased compared to the prior-year period, primarily due to a $9.8 million charge during the first quarter related to early lease exits.

Other Operating Expense increased compared to the prior-year period, primarily due to a $25.6 million charge related to the write-off of an investment in a client capability.

Provision for Income Taxes

Income tax expense for the six months ended June 30, 2023 was $218.3 million, representing an effective tax rate of 24.7%, compared to $265.9 million for the six months ended June 30, 2022, representing an effective tax rate of 25.3%.

The effective tax rate decreased compared to the prior-year period primarily due to a decrease in pretax earnings and a higher level of tax benefits from tax-credit investments and tax-exempt income, partially offset by lower tax benefits from share-based compensation.

REPORTING SEGMENTS

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

Reporting segment financial information, presented on an internal management reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Additionally, segment information is presented on an FTE basis as management believes an FTE presentation provides a clearer indication of net interest income. The adjustment to an FTE basis has no impact on Net Income.

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

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

REPORTING SEGMENTS (continued)

The following table presents the earnings contributions and average assets of Northern Trust’s reporting segments for the three- and six-month periods ended June 30, 2023 and 2022.

TABLE 21: RESULTS OF REPORTING SEGMENTS


($ In Millions)	ASSET SERVICING						WEALTH MANAGEMENT						OTHER						RECONCILING ITEMS				TOTAL CONSOLIDATED
THREE MONTHS ENDED JUNE 30,	2023			2022			2023			2022			2023			2022			2023		2022		2023			2022
Noninterest Income
Trust, Investment and Other Servicing Fees	$	621.2		$	642.8		$	475.1		$	500.6		$	—		$	—		$	—	$	—	$	1,096.3		$	1,143.4
Foreign Exchange Trading Income (Loss)	52.0			74.8			(1.9)			2.8			—			—			—		—		50.1			77.6
Other Noninterest Income	69.7			61.8			40.4			32.8			(10.9)			(5.6)			—		—		99.2			89.0
Total Noninterest Income	742.9			779.4			513.6			536.2			(10.9)			(5.6)			—		—		1,245.6			1,310.0
Net Interest Income	309.3			255.1			215.3			214.7			—			—			(13.1)		(11.1)		511.5			458.7
Revenue	1,052.2			1,034.5			728.9			750.9			(10.9)			(5.6)			(13.1)		(11.1)		1,757.1			1,768.7
(Release of) Provision for Credit Losses	(3.5)			0.5			(12.0)			4.0			—			—			—		—		(15.5)			4.5
Noninterest Expense	849.4			751.1			476.3			439.1			6.2			33.4			—		—		1,331.9			1,223.6
Income before Income Taxes	206.3			282.9			264.6			307.8			(17.1)			(39.0)			(13.1)		(11.1)		440.7			540.6
Provision for Income Taxes	52.6			74.5			73.7			90.7			(4.3)			(9.7)			(13.1)		(11.1)		108.9			144.4
Net Income	$	153.7		$	208.4		$	190.9		$	217.1		$	(12.8)		$	(29.3)		$	—	$	—	$	331.8		$	396.2
Percentage of Consolidated Net Income	46		%	53		%	58		%	54		%	(4)		%	(7)		%	N/A		N/A		100		%	100		%
Average Assets	$	111,029.9		$	117,047.6		$	34,869.7		$	37,036.5		$	—		$	—		N/A		N/A		$	145,899.6		$	154,084.1



($ In Millions)	ASSET SERVICING						WEALTH MANAGEMENT						OTHER						RECONCILING ITEMS				TOTAL CONSOLIDATED
SIX MONTHS ENDED JUNE 30,	2023			2022			2023			2022			2023			2022			2023		2022		2023			2022
Noninterest Income
Trust, Investment and Other Servicing Fees	$	1,224.2		$	1,305.2		$	935.7		$	1,006.6		$	—		$	—		$	—	$	—	$	2,159.9		$	2,311.8
Foreign Exchange Trading Income (Loss)	106.9			152.2			(3.8)			6.3			—			—			—		—		103.1			158.5
Other Noninterest Income	132.9			122.9			74.7			64.6			(11.6)			(10.1)			—		—		196.0			177.4
Total Noninterest Income	1,464.0			1,580.3			1,006.6			1,077.5			(11.6)			(10.1)			—		—		2,459.0			2,647.7
Net Interest Income	621.4			445.2			447.6			412.3			—			—			(26.3)		(17.8)		1,042.7			839.7
Revenue	2,085.4			2,025.5			1,454.2			1,489.8			(11.6)			(10.1)			(26.3)		(17.8)		3,501.7			3,487.4
(Release of) Provision for Credit Losses	(6.4)			8.9			5.9			(2.4)			—			—			—		—		(0.5)			6.5
Noninterest Expense	1,650.4			1,509.0			945.5			884.2			21.6			36.3			—		—		2,617.5			2,429.5
Income before Income Taxes	441.4			507.6			502.8			608.0			(33.2)			(46.4)			(26.3)		(17.8)		884.7			1,051.4
Provision for Income Taxes	113.1			126.3			139.8			169.0			(8.3)			(11.6)			(26.3)		(17.8)		218.3			265.9
Net Income	$	328.3		$	381.3		$	363.0		$	439.0		$	(24.9)		$	(34.8)		$	—	$	—	$	666.4		$	785.5
Percentage of Consolidated Net Income	49		%	49		%	55		%	55		%	(4)		%	(4)		%	N/A		N/A		100		%	100		%
Average Assets	$	111,143.6		$	121,114.2		$	35,830.2		$	36,977.1		$	—		$	—		N/A		N/A		$	146,973.8		$	158,091.3

Note: Segment results are stated on an FTE basis. The FTE adjustments are eliminated in the reconciling items column with the Corporation’s total consolidated financial results stated on a GAAP basis. The adjustment to an FTE basis has no impact on Net Income.

Asset Servicing

Asset Servicing Net Income

For the quarter ended June 30, 2023, Net Income decreased $54.7 million, or 26%, from the prior-year quarter, primarily reflecting higher Noninterest Expense, partially offset by higher Net Interest Income.

For the six months ended June 30, 2023, Net Income, decreased $53.0 million, or 14%, from the prior-year period, primarily reflecting higher Noninterest Expense and lower Trust, Investment and Other Servicing Fees, partially offset by higher Net Interest Income.

REPORTING SEGMENTS (continued)

Asset Servicing (continued)

Asset Servicing Trust, Investment and Other Servicing Fees

For an explanation of Asset Servicing Trust, Investment, and Other Servicing Fees, please see the “Trust, Investment and Other Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.

Asset Servicing Foreign Exchange Trading Income

For the three and six months ended June 30, 2023, Foreign Exchange Trading Income decreased $22.8 million, or 30%, from the prior-year quarter and decreased $45.3 million, or 30%, from the prior-year period, primarily driven by lower client volumes and an unfavorable impact from foreign exchange swap activity.

Asset Servicing Other Noninterest Income

For the quarter ended June 30, 2023, Other Noninterest Income increased $7.9 million, or 13%, from the prior-year quarter, primarily due to higher Other Operating Income.

For the six months ended June 30, 2023, Other Noninterest Income increased $10.0 million, or 8%, from the prior-year period, primarily due to higher allocations, including in Other Operating Income.

Asset Servicing Net Interest Income

For the quarter ended June 30, 2023, Net Interest Income stated on an FTE basis increased $54.2 million, or 21%, from the prior-year quarter. For the six months ended June 30, 2023, Net Interest Income stated on an FTE basis increased $176.2 million, or 40%, from the prior-year period. The increase for the three and six months ended June 30, 2023 primarily reflected higher average interest rates.

Average earning assets decreased $4.0 billion, or 4%, to $101.8 billion in the current quarter from $105.8 billion in the prior-year quarter and decreased $8.3 billion, or 8%, to $101.9 billion for the six months ended June 30, 2023 from $110.2 billion in the prior-year period. Average earning assets decreased in Asset Servicing for the three and six months ended June 30, 2023 primarily due to lower client deposits, partially offset by increased short-term borrowing activity.

Asset Servicing Provision for Credit Losses

For the three and six months ended June 30, 2023, there was a $3.5 million and a $6.4 million release of credit reserves, respectively, compared to a $0.5 million and a $8.9 million Provision for Credit Losses for the three and six months ended June 30, 2022, respectively.

The release of credit reserves for the three and six months ended June 30, 2023 was primarily due to a decrease in the reserve evaluated on a collective basis, primarily driven by improved credit quality of certain commercial and institutional loans. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar characteristics.

Asset Servicing Noninterest Expense

For the three and six months ended June 30, 2023, 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 $98.3 million, or 13%, from the prior-year quarter and increased $141.4 million, or 9%, from the prior-year period, primarily due to higher expense allocations, Compensation, Other Operating Expense, and Outside Services.

Wealth Management

Wealth Management Net Income

For the quarter ended June 30, 2023, Net Income decreased $26.2 million, or 12%, from the prior-year quarter primarily due to higher Noninterest Expense and lower Trust, Investment and Other Servicing Fees, partially offset by a lower Provision for Income Taxes and a release of credit reserves compared to a Provision for Credit Losses in the prior-year quarter.

For the six months ended June 30, 2023, Net Income decreased $76.0 million, or 17%, from the prior-year period, primarily reflecting lower Trust, Investment and Other Servicing Fees and higher Noninterest Expense, partially offset by higher Net Interest Income and a lower Provision for Income Taxes.

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

For the quarter ended June 30, 2023, Other Noninterest Income increased $7.6 million, or 23%, from the prior-year quarter primarily due to higher Other Operating Income.

For the six months ended June 30, 2023, Other Noninterest Income increased $10.1 million, or 16%, from the prior-year period, primarily due to higher income allocations and Other Operating Income.

REPORTING SEGMENTS (continued)

Wealth Management (continued)

Wealth Management Net Interest Income

For the quarter ended June 30, 2023, Net Interest Income stated on an FTE basis increased $0.6 million from the prior-year quarter. For the six months ended June 30, 2023, Net Interest Income stated on an FTE basis increased $35.3 million, or 9%, from the prior-year period. The increase for the three and six months ended June 30, 2023, primarily reflected higher average interest rates.

Average earning assets decreased $1.8 billion, or 5%, to $32.3 billion in the current quarter from $34.1 billion in the prior-year quarter and decreased $1.4 billion, or 4%, to $33.2 billion for the six months ended June 30, 2023 from $34.6 billion in the prior-year period. Average earning assets decreased in Wealth Management for the three and six months ended June 30, 2023 primarily due to lower client deposits, partially offset by higher average lending activity.

Wealth Management Provision for Credit Losses

For the three and six months ended June 30, 2023, there was a $12.0 million release of credit reserves and a $5.9 million Provision for Credit Losses, respectively, compared to a $4.0 million Provision for Credit Losses and a $2.4 million release of credit reserves for the three and six months ended June 30, 2022, respectively.

The release of credit reserves for the three months ended June 30, 2023 reflected a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was primarily due to improved credit quality in certain commercial and institutional and certain CRE loans, partially offset by expectations of higher economic stress in the CRE market, particularly office CRE.

The Provision for Credit Losses for the six months ended June 30, 2023 was primarily due to an increase in the reserve evaluated on a collective basis, primarily due to growth in the size and duration of the CRE portfolio and expectations of higher economic stress in the CRE market, particularly office CRE, partially offset by improved credit quality for certain commercial and institutional and certain CRE loans.

Wealth Management Noninterest Expense

For the quarter ended June 30, 2023, Noninterest Expense, which includes the direct expenses of the reporting segment, indirect expense allocations for product and operating support and indirect expense allocations for certain corporate support services, increased $37.2 million, or 8%, from the prior-year quarter, primarily reflecting higher expense allocations and Other Operating Expense. For the six months ended June 30, 2023, Noninterest Expense increased $61.3 million, or 7%, from the prior-year period, primarily reflecting higher expense allocations, Compensation, and Other Operating Expense.

Other

Other—Noninterest Income

For the quarter ended June 30, 2023, Other Noninterest Income decreased $5.3 million, or 95%, primarily due to higher expenses for existing swap agreements related to Visa Inc. Class B common shares.

Other—Noninterest Expense

For the quarter ended June 30, 2023, Other Noninterest Expense decreased $27.2 million, or 81%, primarily due to a $20.3 million pension settlement charge in the prior-year quarter.

For the six months ended June 30, 2023, Other Noninterest Expense decreased $14.7 million, or 40%, from the prior-year period, primarily due to a $20.3 million pension settlement charge in the prior-year period and other miscellaneous expense in the prior-year period, partially offset by higher non-allocated occupancy expense primarily arising from early lease exits.

CONSOLIDATED BALANCE SHEETS

The following tables summarize selected consolidated balance sheet information.

TABLE 22: SELECT CONSOLIDATED BALANCE SHEET INFORMATION


($ In Billions)	JUNE 30, 2023		DECEMBER 31, 2022		CHANGE
Assets
Federal Reserve and Other Central Bank Deposits	$	42.7	$	40.0	$	2.7	7	%
Interest-Bearing Due from and Deposits with Banks(1)	4.6		4.9		(0.3)		(6)
Securities Purchased under Agreements to Resell	1.2		1.1		0.1		15
Total Debt Securities	50.3		51.8		(1.5)		(3)
Loans	43.5		42.9		0.6		2
Other Interest-Earning Assets(2)	2.7		1.8		0.9		52
Total Earning Assets	145.0		142.5		2.5		2
Total Assets	156.8		155.0		1.8		1
Liabilities and Stockholders' Equity
Total Interest-Bearing Deposits	91.9		98.6		(6.7)		(7)
Demand and Other Noninterest-Bearing Deposits	21.3		25.3		(4.0)		(16)
Federal Funds Purchased	9.3		1.9		7.4		N/M
Securities Sold under Agreements to Repurchase	1.0		0.6		0.4		74
Other Borrowings(3)	12.4		7.6		4.8		63
Total Stockholders’ Equity	11.6		11.3		0.3		3

(1) 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.

(2) Other Interest-Earning Assets includes certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank and Federal Reserve stock, and money market investments which are classified in Other Assets on the consolidated balance sheets.

(3) Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.

N/M - Not meaningful

TABLE 23: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION


	THREE MONTHS ENDED JUNE 30,								SIX MONTHS ENDED JUNE 30,
($ In Billions)	2023		2022		CHANGE				2023		2022		CHANGE
Assets
Federal Reserve and Other Central Bank Deposits	$	34.4	$	36.7	$	(2.3)	(6)	%	$	35.5	$	40.9	$	(5.4)	(13)	%
Interest-Bearing Due from and Deposits with Banks(1)	4.6		4.2		0.4		8		4.4		4.3		0.1		2
Securities Purchased under Agreements to Resell	1.2		1.1		0.1		8		1.1		0.9		0.2		24
Total Debt Securities	49.6		55.9		(6.3)		(11)		50.0		57.4		(7.4)		(13)
Loans and Leases	42.4		40.8		1.6		4		42.2		40.2		2.0		5
Other Interest-Earning Assets(2)	1.9		1.2		0.7		71		1.8		1.1		0.7		59
Total Earning Assets	134.1		139.9		(5.8)		(4)		135.0		144.8		(9.8)		(7)
Total Assets	145.9		154.1		(8.2)		(5)		147.0		158.1		(11.1)		(7)
Liabilities and Stockholders' Equity
Total Interest-Bearing Deposits	88.0		95.7		(7.7)		(8)		90.0		98.5		(8.5)		(9)
Demand and Other Noninterest-Bearing Deposits	17.6		33.7		(16.1)		(48)		18.8		35.4		(16.6)		(47)
Federal Funds Purchased	7.1		0.9		6.2		N/M		5.4		0.5		4.9		N/M
Securities Sold under Agreements to Repurchase	0.5		0.6		(0.1)		(22)		0.4		0.4		—		(4)
Other Borrowings(3)	12.1		4.2		7.9		190		11.7		3.9		7.8		198
Total Stockholders’ Equity	11.4		10.9		0.5		5		11.4		11.2		0.2		1

(3) Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.

N/M - Not meaningful

Average balances are considered to be a better measure of balance sheet trends, as period-end balances can be impacted by the timing of deposit and withdrawal activity involving large client balances. Average earning assets decreased from the prior-year quarter and prior-year period, primarily due to lower client deposits, partially offset by higher short-term borrowing activity.

Select Earning Assets. Average securities decreased from the prior-year quarter and prior-year period, reflecting the impact of repositioning and reinvesting in short-term securities that will mature usually in one year or less. For additional discussion

CONSOLIDATED BALANCE SHEETS (continued)

relating to the securities portfolio, refer to the “Asset Quality” section in this MD&A and to Note 4—Securities to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

Client Deposits. Average Interest-Bearing Deposits and Demand and Other Noninterest-Bearing Deposits decreased from the prior-year quarter and prior-year period as clients migrated into higher yielding products.

Short-Term Borrowings. Short-term borrowings includes Federal Funds Purchased, Securities Sold under Agreements to Repurchase, and Other Borrowings. The increase in average Other Borrowings from the prior-year quarter and prior-year period was primarily due to borrowings executed to manage regulatory liquidity ratios and as part of an overall net interest income strategy, based on the spread earned on these borrowings.

Stockholders’ Equity. The increase in average Stockholders’ Equity for the current quarter was primarily due to higher Retained Earnings. The increase in average Stockholders’ Equity for the current-year period was primarily attributable to higher Retained Earnings, partially offset by changes in Accumulated Other Comprehensive Loss relative to the prior-year period.

During the three and six months ended June 30, 2023, the Corporation declared cash dividends totaling $157.8 million and $316.4 million to common stockholders, and cash dividends totaling $4.7 million and $20.9 million to preferred stockholders, respectively. During the three and six months ended June 30, 2022, the Corporation declared cash dividends totaling $148.0 million and $295.8 million to common stockholders, and cash dividends totaling $4.7 million and $20.9 million to preferred stockholders, respectively.

For the three and six months ended June 30, 2023, the Corporation repurchased 1,361,828 and 2,412,055 shares of common stock, respectively, at a total cost of $99.3 million ($72.91 average price per share) and $200.2 million ($82.98 average price per share), respectively, including 14,596 and 341,407 shares, respectively, withheld to satisfy tax withholding obligations related to share-based compensation.

For the three and six months ended June 30, 2022, the Corporation repurchased 2,844 and 298,254 shares of common stock, respectively, at a total cost of $0.3 million ($110.36 average price per share) and $34.1 million ($114.54 average price per share), respectively, all of which were shares withheld to satisfy tax withholding obligations related to share-based compensation.

ASSET QUALITY

Securities Portfolio

Northern Trust maintains a high quality debt securities portfolio. Debt securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security. The following tables provide the fair value of available for sale (AFS) debt securities and amortized cost of held to maturity (HTM) debt securities by credit rating.

TABLE 24: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES BY CREDIT RATING


	JUNE 30, 2023
($ In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	2,843.9		$	—		$	—		$	—		$	—		$	2,843.9
Obligations of States and Political Subdivisions	88.4			200.8			—			—			—			289.2
Government Sponsored Agency	11,349.0			—			—			—			—			11,349.0
Non-U.S. Government	251.5			—			—			—			—			251.5
Corporate Debt	89.9			114.3			239.1			—			17.6			460.9
Covered Bonds	319.8			—			21.2			—			—			341.0
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	2,203.0			447.2			267.8			—			—			2,918.0
Other Asset-Backed	4,909.6			—			—			—			—			4,909.6
Commercial Mortgage-Backed	901.3			—			—			—			—			901.3
Total	$	22,956.4		$	762.3		$	528.1		$	—		$	17.6		$	24,264.4
Percent of Total	95		%	3		%	2		%	—		%	—		%	100		%

ASSET QUALITY (continued)

Securities Portfolio (continued)


	DECEMBER 31, 2022
($ In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	2,747.4		$	—		$	—		$	—		$	—		$	2,747.4
Obligations of States and Political Subdivisions	136.4			651.2			—			—			—			787.6
Government Sponsored Agency	11,545.2			—			—			—			—			11,545.2
Non-U.S. Government	360.0			—			—			—			—			360.0
Corporate Debt	302.5			462.6			938.7			19.6			24.2			1,747.6
Covered Bonds	367.0			—			21.7			—			—			388.7
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	1,816.3			451.5			211.6			—			—			2,479.4
Other Asset-Backed	5,256.2			—			—			—			—			5,256.2
Commercial Mortgage-Backed	1,387.8			—			—			—			—			1,387.8
Total	$	23,918.8		$	1,565.3		$	1,172.0		$	19.6		$	24.2		$	26,699.9
Percent of Total	90		%	6		%	4		%	—		%	—		%	100		%

As of both June 30, 2023 and December 31, 2022, the less than 1% of AFS debt securities not rated by Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings (S&P Global) or Fitch Ratings, Inc. (Fitch Ratings) consisted of corporate debt securities.

TABLE 25: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING


	JUNE 30, 2023
($ In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL

Obligations of States and Political Subdivisions	$	932.1		$	1,640.9		$	—		$	—		$	—		$	2,573.0
Government Sponsored Agency	9,354.2			—			—			—			—			9,354.2
Non-U.S. Government	1,249.5			886.3			1,522.4			329.1			—			3,987.3
Corporate Debt	2.2			308.7			359.0			—			—			669.9
Covered Bonds	2,278.7			—			—			—			—			2,278.7
Certificates of Deposit	555.0			—			—			—			33.2			588.2
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	4,322.0			1,292.9			29.8			1.1			—			5,645.8
Other Asset-Backed	288.0			—			—			—			—			288.0
Commercial Mortgage-Backed	37.6			—			—			—			—			37.6
Other	64.1			—			—			—			519.5			583.6
Total	$	19,083.4		$	4,128.8		$	1,911.2		$	330.2		$	552.7		$	26,006.3
Percent of Total	74		%	16		%	7		%	1		%	2		%	100		%


	DECEMBER 31, 2022
(In Millions)	AAA			AA			A			BBB			NOT RATED			TOTAL
U.S. Government	$	50.0		$	—		$	—		$	—		$	—		$	50.0
Obligations of States and Political Subdivisions	926.8			1,638.5			—			—			—			2,565.3
Government Sponsored Agency	9,407.7			—			—			—			—			9,407.7
Non-U.S. Government	762.2			926.5			1,223.0			322.3			—			3,234.0
Corporate Debt	2.1			305.7			405.5			—			—			713.3
Covered Bonds	2,530.3			—			—			—			—			2,530.3
Certificates of Deposit	—			—			—			—			35.9			35.9
Sub-Sovereign, Supranational and Non-U.S. Agency Bonds	4,171.3			1,502.0			28.9			1.1			—			5,703.3
Other Asset-Backed	263.7			—			—			—			—			263.7
Other	65.8			—			—			—			466.8			532.6
Total	$	18,179.9		$	4,372.7		$	1,657.4		$	323.4		$	502.7		$	25,036.1
Percent of Total	73		%	17		%	7		%	1		%	2		%	100		%

As of both June 30, 2023 and December 31, 2022, the 2% of HTM debt securities not rated by Moody’s, S&P Global or Fitch Ratings consisted of certificates of deposit with a remaining life of less than six months, as well as investments purchased by Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income communities within Northern Trust’s market area.

Net unrealized losses within the investment securities portfolio totaled $3.2 billion at both June 30, 2023 and December 31, 2022. Net unrealized losses as of both June 30, 2023 and December 31, 2022 were comprised of $9.1 million and $3.2 billion of

ASSET QUALITY (continued)

Securities Portfolio (continued)

gross unrealized gains and losses, respectively. $931.3 million of the $3.2 billion gross unrealized losses relate to AFS debt securities as of June 30, 2023, and $1.1 billion of the $3.2 billion gross unrealized losses relate to AFS debt securities as of December 31, 2022.

As of June 30, 2023, the $24.3 billion AFS debt securities portfolio had unrealized losses of $311.3 million, $226.2 million, and $142.6 million related to government-sponsored agency securities, other asset-backed and sub-sovereign, supranational and non-U.S. agency bonds respectively, which are primarily attributable to changes in overall market interest rates. As of December 31, 2022, the $26.7 billion AFS debt securities portfolio had unrealized losses of $351.6 million, $288.1 million, and $157.6 million related to government sponsored agency, other asset-backed, and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which were primarily attributable to changes in overall market interest rates and credit spreads since their purchase.

As of December 31, 2022, the Corporation intended to sell certain AFS debt securities that were in an unrealized loss position. The securities were written down to their fair value of $2.1 billion with a $213.0 million loss recognized in Investment Security Gains (Losses), net on the consolidated statements of income for the period ended December 31, 2022. In January 2023, the securities were subsequently sold resulting in an incremental $6.9 million gain upon sale as compared to the fair value recorded on the consolidated balance sheets at December 31, 2022.

As of June 30, 2023, the $26.0 billion HTM debt securities portfolio had unrealized losses of $1.1 billion and $491.8 million related to government-sponsored agency securities and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in overall market interest rates. As of December 31, 2022, the $25.0 billion HTM debt securities portfolio had an unrealized loss of $1.1 billion and $436.1 million related to government-sponsored agency and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which were primarily attributable to changes in overall market interest rates and credit spreads since their purchase.

HTM debt securities consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity.

For additional information relating to the securities portfolio, refer to Note 4—Securities to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are held by the counterparty until their repurchase.

For additional information relating to the securities sold under agreements to repurchase, refer to Note 22—Securities Sold Under Agreements to Repurchase to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

Nonaccrual Loans and Other Real Estate Owned

Nonaccrual assets consist of nonaccrual loans and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans.

The following table provides the amounts of nonaccrual loans, by loan segment and class, and of OREO that were outstanding at the dates shown, as well as the balance of loans that were delinquent 90 days or more and still accruing interest. Loans that are delinquent 90 days or more and still accruing interest can fluctuate widely based on the timing of cash collections, renegotiation and renewals.

ASSET QUALITY (continued)

Nonaccrual Loans and Other Real Estate Owned (continued)

TABLE 26: NONACCRUAL ASSETS


	JUNE 30, 2023					DECEMBER 31, 2022
($ In Millions)	AMOUNT			% OF NONACCRUAL LOANS TO TOTAL NONACCRUAL LOANS		AMOUNT			% OF NONACCRUAL LOANS TO TOTAL NONACCRUAL LOANS
Nonaccrual Loans
Commercial
Commercial and Institutional	$	16.4		35	%	$	17.4		38	%
Commercial Real Estate	3.8			8		10.2			22

Total Commercial	$	20.2		43	%	$	27.6		60	%
Personal
Private Client	$	2.0		4	%	$	—		—	%
Residential Real Estate	24.9			53		18.3			40
Total Personal	$	26.9		57	%	$	18.3		40	%
Total Nonaccrual Loans	47.1					45.9
Other Real Estate Owned	0.3					—
Total Nonaccrual Assets	$	47.4				$	45.9
90 Day Past Due Loans Still Accruing	$	15.2				$	54.2
Nonaccrual Loans to Total Loans	0.11		%			0.11		%
Allowance for Credit Losses Assigned to Loans to Nonaccrual Loans	3.2		x			3.1		x

Nonaccrual assets of $47.4 million as of June 30, 2023 increased slightly from December 31, 2022, primarily due to the addition of six new nonaccrual loans, partially offset by a commercial real estate upgrade and a commercial real estate charge-off. The six new nonaccrual loans were composed of three residential real estate, one commercial and institutional, one private client and one commercial real estate loan. In addition to the negative impact on Net Interest Income and the risk of credit losses, nonaccrual assets also increase operating costs due to the expense associated with collection efforts. Changes in the level of nonaccrual assets may be indicative of changes in the credit quality of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment of the allowance evaluated on an individual basis and the quantitative and qualitative factors used in the determination of the allowance evaluated on a collective basis within the allowance for credit losses.

Northern Trust’s credit policies do not allow for the origination of loan types generally considered to be high risk in nature, such as option adjustable rate mortgage loans, subprime loans, loans with initial “teaser” rates and loans with excessively high loan-to-value ratios. Residential real estate loans consist of first lien mortgages and equity credit lines, which generally require a loan-to-collateral value of no more than 65% to 80% at inception. Appraisals of supporting collateral for residential real estate loans are obtained at loan origination and upon refinancing or default or when otherwise considered warranted. Residential real estate collateral appraisals are performed and reviewed by independent third parties.

The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to experienced investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to owners through guarantees also is commonly required. For additional information relating to the loans portfolio, refer to Note 5—Loans to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

Allowance for Credit Losses

The allowance for credit losses—which represents management’s best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance-sheet credit exposure, and specific borrower relationships—is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation.

Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts. The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic Research Department, and each of Northern Trust’s reporting segments.

ASSET QUALITY (continued)

Allowance for Credit Losses (continued)

As of June 30, 2023, the Allowance for Credit Losses related to loans, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $152.5 million, $26.0 million, $16.7 million, and $1.0 million, respectively. As of December 31, 2022, the Allowance for Credit Losses related to loans, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $144.3 million, $38.5 million, $16.0 million, and $0.8 million, respectively. There was a $1.3 million allowance for credit losses related to AFS debt securities as of both June 30, 2023 and December 31, 2022. For additional information relating to the allowance for credit losses and the changes in the allowance for credit losses during the three and six months ended June 30, 2023 and June 30, 2022 due to charge-offs, recoveries and provisions for credit losses, refer to Note 6—Allowance for Credit Losses to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

The table provides the allowance evaluated on an individual and collective basis for the loan portfolio by segment and class.

TABLE 27: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES FOR LOANS


	JUNE 30, 2023					DECEMBER 31, 2022
($ In Millions)	ALLOWANCE AMOUNT			PERCENT OF LOANS TO TOTAL LOANS		ALLOWANCE AMOUNT			PERCENT OF LOANS TO TOTAL LOANS
Evaluated on an Individual Basis	$	11.0		—	%	$	10.4		—	%
Evaluated on a Collective Basis
Commercial
Commercial and Institutional	47.1			28		57.0			29
Commercial Real Estate	88.6			11		76.5			11
Non-U.S.	2.6			7		8.3			7
Other	—			5		0.3			3
Total Commercial	138.3			51		142.1			50
Personal
Private Client	10.4			32		11.2			33
Residential Real Estate	17.9			15		18.0			15
Non-U.S.	0.9			1		1.1			1
Other	—			1		—			1
Total Personal	29.2			49		30.3			50
Total Allowance Evaluated on a Collective Basis	$	167.5				$	172.4
Total Allowance for Credit Losses	$	178.5				$	182.8
Allowance Assigned to
Loans	$	152.5				$	144.3
Undrawn Commitments and Standby Letters of Credit	26.0					38.5
Total Allowance for Credit Losses	$	178.5				$	182.8
Allowance Assigned to Loans to Total Loans	0.35		%			0.34		%

Commercial Real Estate Loans

The table below provides additional detail regarding commercial real estate loan types.

TABLE 28: COMMERCIAL REAL ESTATE LOANS



(In Millions)	JUNE 30, 2023		DECEMBER 31, 2022
Commercial Mortgages
Apartment/ Multi-family	$	1,531.1	$	1,392.7
Office	1,023.6		1,054.0
Industrial/ Warehouse	609.6		596.2
Retail	607.0		572.2
Other	610.2		548.0
Total Commercial Mortgages	4,381.5		4,163.1
Construction, Acquisition and Development Loans	658.6		609.9
Total Commercial Real Estate Loans	$	5,040.1	$	4,773.0

For an overall discussion on the loan portfolio and on the allowance, refer to Note 5—Loans and Note 6—Allowance for Credit Losses to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

STATEMENTS OF CASH FLOWS

The following discusses the statement of cash flow activities for the six months ended June 30, 2023 and 2022.

TABLE 29: CASH FLOW ACTIVITY SUMMARY


	SIX MONTHS ENDED JUNE 30,
(In Millions)	2023		2022
Net cash provided by (used in):
Operating activities	$	(264.3)	$	(863.9)
Investing activities	(431.4)		25,225.8
Financing activities	1,071.7		(22,060.4)
Effect of Foreign Currency Exchange Rates on Cash	(132.5)		(238.5)
Change in Cash and Due from Banks	$	243.5	$	2,063.0

Operating Activities

Net cash used in operating activities of $264.3 million for the six months ended June 30, 2023, was primarily attributable to higher net collateral deposited with derivative counterparties, partially offset by period earnings and the impact of higher non-cash charges such as amortization and depreciation.

Net cash used in operating activities of $863.9 million for the six months ended June 30, 2022, was primarily attributable to higher net collateral deposited with derivative counterparties, partially offset by period earnings, the impact of higher non-cash charges such as amortization and depreciation, change in receivables and net changes in other operating activities.

Investing Activities

Net cash used in investing activities of $431.4 million for the six months ended June 30, 2023, was primarily attributable to increased levels of Federal Reserve and other central bank deposits and other net investing activities, partially offset by net proceeds associated with AFS debt securities.

Net cash provided by investing activities of $25.2 billion for the six months ended June 30, 2022, was primarily attributable to decreased levels of Federal Reserve and other central bank deposits.

Financing Activities

Net cash provided by financing activities of $1.1 billion for the six months ended June 30, 2023, was primarily attributable to increased levels of federal funds purchased and short-term other borrowings, partially offset by the decreased levels of total deposits. The decrease in total deposits was primarily attributable to lower levels of savings, money market and other interest-bearing deposits, and demand and other noninterest-bearing deposits.

Net cash used in financing activities of $22.1 billion for the six months ended June 30, 2022, was primarily attributable to the decreased levels of total deposits. The decrease in total deposits was primarily attributable to lower levels of non-U.S. office noninterest-bearing and interest-bearing deposits as well as savings, money market and other interest-bearing deposits.

CAPITAL RATIOS

The capital ratios of Northern Trust Corporation and its principal subsidiary, The Northern Trust Company, remained strong at June 30, 2023, exceeding the requirements for classification as “well-capitalized” under applicable U.S. regulatory requirements.

Northern Trust is a Category II institution as defined by the Federal Reserve Board which requires us to adhere to stringent capital standards. In adhering to these standards, Northern Trust engages in a range of reporting and activities with regulators to affirm our financial strength and stability, including but not limited to, capital adequacy reporting that deducts any unrealized losses related to AFS securities from reported capital, and stringent, annual company-run and supervisory stress testing in the form of Comprehensive Capital Analysis and Review (CCAR) exercises, which confirms our ability to remain solvent under severely adverse market conditions.

The results of the 2023 Dodd-Frank Act Stress Test (DFAST), published by the Federal Reserve Board on June 28, 2023, resulted in Northern Trust’s stress capital buffer and effective Common Equity Tier 1 capital ratio minimum requirement remaining constant at 2.5% and 7.0%, respectively, for the annual capital plan cycle beginning on October 1, 2023 through September 30, 2024.

The table below provides capital ratios, as well as the required minimum capital ratios, for Northern Trust Corporation and The Northern Trust Company determined by Basel III phased-in requirements.

TABLE 30: REGULATORY CAPITAL RATIOS


Capital Ratios — Northern Trust Corporation	JUNE 30, 2023				MARCH 31, 2023				JUNE 30, 2022
STANDARDIZED APPROACH	ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		WELL-CAPITALIZED RATIOS		MINIMUM CAPITAL RATIOS
Common Equity Tier 1 Capital	11.3	%	13.0	%	11.3	%	11.7	%	10.5	%	11.6	%	N/A	4.5	%
Tier 1 Capital	12.3		14.1		12.3		12.7		11.5		12.7		6.0	6.0
Total Capital	14.4		16.3		14.4		14.7		12.6		13.7		10.0	8.0
Tier 1 Leverage	7.4		7.4		7.3		7.3		6.7		6.7		N/A	4.0
Supplementary Leverage	N/A		8.3		N/A		8.3		N/A		7.6		N/A	3.0


Capital Ratios — The Northern Trust Company	JUNE 30, 2023				MARCH 31, 2023				JUNE 30, 2022
STANDARDIZED APPROACH	ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		STANDARDIZED APPROACH		ADVANCED APPROACH		WELL-CAPITALIZED RATIOS		MINIMUM CAPITAL RATIOS
Common Equity Tier 1 Capital	12.1	%	14.3	%	12.3	%	12.9	%	11.0	%	12.3	%	6.5	%	4.5	%
Tier 1 Capital	12.1		14.3		12.3		12.9		11.0		12.3		8.0		6.0
Total Capital	13.9		16.2		14.2		14.6		11.9		13.1		10.0		8.0
Tier 1 Leverage	7.4		7.4		7.3		7.3		6.3		6.3		5.0		4.0
Supplementary Leverage	N/A		8.2		N/A		8.3		N/A		7.2		3.0		3.0

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

In March 2023, the Financial Accounting Standards Board (FASB) issued ASU No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method—a consensus of the Emerging Issues Task Force” (ASU 2023-02). The amendments in ASU 2023-02 permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). In addition, ASU 2023-02 requires specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method in accordance with Subtopic 323-740. ASU 2023-02 is effective for interim and annual periods beginning after December 15, 2023, although early adoption is permitted. Northern Trust is currently assessing the impacts of adoption of ASU 2023-02 on the consolidated financial condition and results of operations.

RISK MANAGEMENT

Liquidity Risk

Liquidity risk is the risk of not being able to raise sufficient funds or maintain collateral to meet balance sheet and contingent liability cash flow obligations when due, because of firm-specific or market-wide stress events. Northern Trust is a Category II institution as defined by the Federal Reserve Board which requires us to adhere to the same stringent liquidity standards as Category I institutions. In adhering to these standards, Northern Trust engages in a range of reporting and activities with regulators to affirm our financial strength and stability, including but not limited to, daily Liquidity Coverage Ratio and Net Stable Funding Ratio calculations to regulators.

We maintain a highly liquid balance sheet consisting principally of cash held at the Federal Reserve and other central banks, money market assets, and short-term investment securities, which were 64% and 63% of total assets as of June 30, 2023 and December 31, 2022, respectively. 84% and 81% of Northern Trust’s securities portfolio is composed of U.S. Treasury, government sponsored agency and triple-A rated securities as of June 30, 2023 and December 31, 2022, respectively.

Market Risk

There are two types of market risk, interest rate risk associated with the banking book and trading risk. Interest rate risk associated with the banking book is the potential for movements in interest rates to cause changes in Net Interest Income and the market value of equity, including Accumulated Other Comprehensive Income (Loss) from the AFS debt securities portfolio. Trading risk is the potential for movements in market variables such as foreign exchange and interest rates to cause changes in the value of trading positions.

Northern Trust uses two primary measurement techniques to manage interest rate risk: Net Interest Income (NII) sensitivity and Market Value of Equity (MVE) sensitivity. NII sensitivity provides management with a short-term view of the impact of interest rate changes on NII. MVE sensitivity provides management with a long-term view of interest rate changes on MVE based on the period-end balance sheet. Higher interest rates may impact the fair value of AFS debt securities which in turn affects Accumulated Other Comprehensive Income (Loss), which can impact regulatory capital ratios.

As part of its risk management activities, Northern Trust also measures daily the risk of loss associated with all non-U.S. currency positions using a Value-at-Risk (VaR) model and applying the historical simulation methodology. The following information about Northern Trust’s management of market risk should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022.

NII Sensitivity — The modeling of NII sensitivity incorporates on-balance-sheet positions, as well as derivative financial instruments (principally interest rate swaps) that are used to manage interest rate risk. Northern Trust uses market implied forward interest rates as the base case and measures the sensitivity (i.e., change) of a static balance sheet to changes in interest rates. Stress testing of interest rates is performed to include such scenarios as immediate parallel shocks to rates, nonparallel (i.e., twist) changes to yield curves that result in their becoming steeper or flatter, and changes to the relationship among the yield curves (i.e., basis risk).

The NII sensitivity analysis incorporates certain critical assumptions such as interest rates and client behaviors under changing rate environments. These assumptions are based on a combination of historical analysis and future expected pricing behavior. The simulation cannot precisely estimate NII sensitivity given uncertainty in the assumptions. The following key assumptions are incorporated into the simulation:

▪the balance sheet size and mix remains constant over the simulation horizon with maturing assets and liabilities replaced with instruments with similar terms as those that are maturing, with the exception of certain nonmaturity deposits that are considered short-term in nature and therefore receive a more conservative interest-bearing treatment;

▪prepayments on mortgage loans and securities collateralized by mortgages are projected under each rate scenario using a third-party mortgage analytics system that incorporates market prepayment assumptions;

RISK MANAGEMENT (continued)

Market Risk (continued)

▪cash flows for structured securities are estimated using a third-party vendor in conjunction with the prepayments provided by the third-party mortgage analytics vendor;

▪nonmaturity deposit pricing is projected based on Northern Trust’s actual historical patterns and management judgment, depending upon the availability of historical data and current pricing strategies/or judgment; and

▪new business rates are based on current spreads to market indices.

The following table shows the estimated NII impact over the next twelve months of 100 and 200 basis point ramps upward and 100 basis point ramp downward movements in interest rates relative to forward rates as of June 30, 2023 and June 30, 2022. A 200 basis point ramp downward movement in interest rate relative to forward rate is also provided as of June 30, 2023. Each rate movement is assumed to occur gradually over a one-year period. Given the low level of interest rates at the time and assumed interest rate floors as rates approach zero, the 200 basis point ramp downward movement in interest rate relative to forward rate as of June 30, 2022 would not provide meaningful results and is therefore not provided.

TABLE 31: NET INTEREST INCOME SENSITIVITY


INCREASE (DECREASE) ESTIMATED IMPACT ON NEXT TWELVE MONTHS OF NET INTEREST INCOME
($ In Millions)	JUNE 30, 2023		JUNE 30, 2022
Increase in Interest Rates Above Market Implied Forward Rates
100 Basis Points	$	(40)	$	60
200 Basis Points	(84)		110
Decrease in Interest Rates Below Market Implied Forward Rates
100 Basis Points	$	37	$	(7)
200 Basis Points	58		N/M

The NII sensitivity analysis does not incorporate certain management actions that may be used to mitigate adverse effects of actual interest rate movement. For that reason and others, the estimated impacts do not reflect the likely actual results but serve as estimates of interest rate risk. NII sensitivity is not comparable to actual results disclosed elsewhere or directly predictive of future values of other measures provided.

MVE Sensitivity — MVE is defined as the present value of assets minus the present value of liabilities, net of the value of financial derivatives that are used to manage the interest rate risk of balance sheet items. The MVE looks at the whole balance sheet, which includes AFS debt securities, HTM debt securities, money market accounts, deposits, loans and wholesale borrowings. The potential effect of interest rate changes on MVE is derived from the impact of such changes on projected future cash flows and the present value of these cash flows and is then compared to the established limit. Northern Trust uses current market rates (and the future rates implied by these market rates) as the base case and measures MVE sensitivity under various rate scenarios. Stress testing of interest rates is performed to include such scenarios as immediate parallel shocks to rates, nonparallel (i.e., twist) changes to yield curves that result in their becoming steeper or flatter, and changes to the relationship among the yield curves (i.e., basis risk).

The MVE sensitivity analysis incorporates certain critical assumptions such as interest rates and client behaviors under changing rate environments. These assumptions are based on a combination of historical analysis and future expected pricing behavior. The simulation cannot precisely estimate MVE sensitivity given uncertainty in the assumptions. Many of the assumptions that apply to NII sensitivity also apply to MVE sensitivity simulations, with the following separate key assumptions incorporated into the MVE simulation:

▪the present value of nonmaturity deposits are estimated using dynamic decay methodologies or estimated remaining lives, which are based on a combination of Northern Trust’s actual historical runoff patterns and management judgment—some balances are assumed to be core and have longer lives while other balances are assumed to be temporary and have comparatively shorter lives;

▪the present values of most noninterest-related balances (such as receivables, equipment, and payables) are the same as their book values; and

▪Monte Carlo simulation is used to generate forward interest rate paths.

RISK MANAGEMENT (continued)

Market Risk (continued)

The following table shows the estimated impact on MVE of 100 and 200 basis point shocks up and a 100 and 200 basis point shock down from current market implied forward rates at June 30, 2023 and December 31, 2022. Each rate movement is assumed to occur gradually over a one-year period.

TABLE 32: MARKET VALUE OF EQUITY SENSITIVITY


INCREASE (DECREASE) ESTIMATED IMPACT ON MARKET VALUE OF EQUITY
($ In Millions)	JUNE 30, 2023		DECEMBER 31, 2022
Increase in Interest Rates Above Market Implied Forward Rates
100 Basis Points	$	(622)	$	(472)
200 Basis Points	(1,294)		(965)
Decrease in Interest Rates Below Market Implied Forward Rates
100 Basis Points	$	686	$	596
200 Basis Points	1,219		842

The MVE simulations do not incorporate certain management actions that may be used to mitigate adverse effects of actual interest rate movements. For that reason and others, the estimated impacts do not reflect the likely actual results but serve as estimates of interest rate risk. MVE sensitivity is not comparable to actual results disclosed elsewhere or directly predictive of future values of other measures provided.

Foreign Currency Value-At-Risk (VaR) — Northern Trust measures daily the risk of loss associated with non-U.S. currency positions using a VaR model and applying the historical simulation methodology. This statistical model provides estimates, based on high confidence levels, of the potential loss in value that might be incurred if an adverse shift in non-U.S. currency exchange rates and interest rates were to occur over a small number of days. The model incorporates foreign currency and interest rate volatilities and correlations in price movements among the currencies. VaR is computed for each trading desk and for the global portfolio.

Northern Trust monitors several variations of the global foreign exchange (GFX) VaR measures to meet specific regulatory and internal management needs. Variations include different methodologies (historical simulation, Monte Carlo simulation and Taylor approximation), horizons of one day and ten days, confidence levels of 95% and 99%, subcomponent VaRs using only foreign exchange (FX) drivers and only interest rate (IR) drivers, and look-back periods of one year, two years, and four years. Those alternative measures provide management an array of corroborating metrics and alternative perspectives on Northern Trust’s market risks.

During the three months ended June 30, 2023, Northern Trust did not incur an actual GFX trading loss in excess of the daily GFX VaR estimate.

The following table presents the levels of total regulatory VaR and its subcomponents for GFX in the periods indicated below, based on the historical simulation methodology, a 99% confidence level, a one-day horizon and equally-weighted volatility. The total VaR for GFX is typically less than the sum of its two subcomponents due to diversification benefits derived from the two subcomponents.

TABLE 33: GLOBAL FOREIGN CURRENCY VALUE-AT-RISK


($ In Millions)	TOTAL VaR (FX AND IR DRIVERS)						FX VaR (FX DRIVERS ONLY)						IR VaR (IR DRIVERS ONLY)
THREE MONTHS ENDED	JUNE 30, 2023		MARCH 31, 2023		JUNE 30, 2022		JUNE 30, 2023		MARCH 31, 2023		JUNE 30, 2022		JUNE 30, 2023		MARCH 31, 2023		JUNE 30, 2022
High	$	0.7	$	0.3	$	0.2	$	0.7	$	0.2	$	0.2	$	0.3	$	0.3	$	0.2
Low	0.1		0.1		0.1		—		—		—		—		0.1		—
Average	0.2		0.2		0.1		0.2		0.1		0.1		0.1		0.2		0.1
Quarter-End	0.3		0.2		0.1		0.4		0.2		0.1		0.2		0.1		0.1

RECONCILIATION TO FULLY TAXABLE EQUIVALENT

The following table presents a reconciliation of Interest Income, Net Interest Income, net interest margin, and total revenue prepared in accordance with GAAP to such measures on an FTE basis, which are non-GAAP financial measures. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets. Management believes this presentation provides a clearer indication of these financial measures for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on Net Income.

TABLE 34: RECONCILIATION TO FULLY TAXABLE EQUIVALENT


	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
($ In Millions)	2023			2022			2023			2022
Net Interest Income
Interest Income - GAAP	$	1,735.0		$	524.8		$	3,190.4		$	908.3
Add: FTE Adjustment	13.1			11.1			26.3			17.8
Interest Income (FTE) - Non-GAAP	$	1,748.1		$	535.9		$	3,216.7		$	926.1

Net Interest Income - GAAP	$	511.5		$	458.7		$	1,042.7		$	839.7
Add: FTE Adjustment	13.1			11.1			26.3			17.8
Net Interest Income (FTE) - Non-GAAP	$	524.6		$	469.8		$	1,069.0		$	857.5

Net Interest Margin - GAAP	1.53		%	1.31		%	1.56		%	1.17		%
Net Interest Margin (FTE) - Non-GAAP	1.57		%	1.35		%	1.60		%	1.19		%

Total Revenue
Total Revenue - GAAP	$	1,757.1		$	1,768.7		$	3,501.7		$	3,487.4
Add: FTE Adjustment	13.1			11.1			26.3			17.8
Total Revenue (FTE) - Non-GAAP	$	1,770.2		$	1,779.8		$	3,528.0		$	3,505.2

FORWARD-LOOKING STATEMENTS

This report may include statements which constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified typically by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “likely,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements include statements, other than those related to historical facts, that relate to Northern Trust’s financial results and outlook; capital adequacy; dividend policy and share repurchase program; accounting estimates and assumptions; credit quality including allowance levels; future pension plan contributions; effective tax rate; anticipated expense levels; contingent liabilities; acquisitions; strategies; market and industry trends; and expectations regarding the impact of accounting pronouncements and legislation. These statements are based on Northern Trust’s current beliefs and expectations of future events or future results, and involve risks and uncertainties that are difficult to predict and subject to change. These statements are also based on assumptions about many important factors, including:

financial market disruptions or economic recession in the United States or other countries across the globe resulting from any of a number of factors;
volatility or changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets held in particular investment funds or client portfolios, including those funds, portfolios, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity;
the impact of equity markets on fee revenue;
changes in interest rates or in the monetary or other policies of various regulatory authorities or central banks;
Northern Trust’s success in controlling the costs and expenses of its business operations and the impacts of any broader inflationary environment thereon;
Federal Deposit Insurance Corporation (FDIC) assessments to recover losses to the Deposit Insurance Fund in connection with bank closures;
a decline in the value of securities held in Northern Trust’s investment portfolio, the liquidity and pricing of which may be negatively impacted by periods of economic turmoil and financial market disruptions;
Northern Trust’s ability to address operating risks, including those related to cybersecurity, data security, human errors or omissions, pricing or valuation of securities, fraud, operational resilience (including systems performance), failure to maintain sustainable business practices, and breakdowns in processes or internal controls;
Northern Trust's success in responding to and investing in changes and advancements in technology;
geopolitical risks, risks related to global climate change and the risks of extraordinary events such as pandemics, natural disasters, terrorist events and war (including the continuing military conflict involving Ukraine and the Russian Federation), and the responses of the United States and other countries to those events;
the effectiveness of Northern Trust’s management of its human capital, including its success in recruiting and retaining necessary and diverse personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;
changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions, including Northern Trust;
the downgrade of U.S. government-issued and other securities;
changes in foreign exchange trading client volumes and volatility in foreign currency exchange rates, changes in the valuation of the U.S. dollar relative to other currencies in which Northern Trust records revenue or accrues expenses, and Northern Trust’s success in assessing and mitigating the risks arising from all such changes and volatility;
a significant downgrade of any of Northern Trust’s debt ratings;
the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business;
uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate allowances therefor;
the transition away from the London Interbank Offered Rate (LIBOR) or changes in the calculation of alternative interest rate benchmarks;
the pace and extent of continued globalization of investment activity and growth in worldwide financial assets;
increased costs of compliance and other risks associated with changes in regulation, the current regulatory environment, and areas of increased regulatory emphasis and oversight in the United States and other countries, such as anti-money laundering, anti-bribery, and data privacy;
failure to satisfy regulatory standards or to obtain regulatory approvals when required, including for the use and distribution of capital;
changes in tax laws, accounting requirements or interpretations and other legislation in the United States or other countries that could affect Northern Trust or its clients;
changes in the nature and activities of Northern Trust’s competition;
Northern Trust’s success in maintaining existing business and continuing to generate new business in existing and targeted markets and its ability to deploy deposits in a profitable manner consistent with its liquidity requirements;

FORWARD-LOOKING STATEMENTS (continued)

Northern Trust’s ability to address the complex needs of a global client base and manage compliance with legal, tax, regulatory and other requirements;
Northern Trust’s ability to maintain a product mix that achieves acceptable margins;
Northern Trust’s ability to continue to generate investment results that satisfy clients and to develop an array of investment products;
uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and expected contributions, returns and payouts;
Northern Trust’s success in continuing to enhance its risk management practices and controls and managing risks inherent in its businesses, including credit risk, operational risk, market and liquidity risk, fiduciary risk, compliance risk and strategic risk;
risks and uncertainties inherent in the litigation and regulatory process, including the possibility that losses may be in excess of Northern Trust’s recorded liability and estimated range of possible loss for litigation exposures;
risks associated with being a holding company, including Northern Trust’s dependence on dividends from its principal subsidiary;
the risk of damage to Northern Trust’s reputation which may undermine the confidence of clients, counterparties, rating agencies, and stockholders; and
other factors identified elsewhere in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, including those factors described in Item 1A, “Risk Factors,” and other filings with the SEC, all of which are available on Northern Trust’s website.

Actual results may differ materially from those expressed or implied by forward-looking statements. The information contained herein is current only as of the date of that information. All forward-looking statements included in this document are based upon information presently available, and Northern Trust assumes no obligation to update its forward-looking statements.

Next: Item 1. Consolidated Financial Statements (unaudited)