NORTHERN TRUST CORP (NTRS) FY 2021 MD&A

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

The following is management’s discussion and analysis of the financial condition and results of operations (MD&A) of Northern Trust Corporation (Corporation) for the year ended December 31, 2021. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled “Forward-Looking Statements.”

BUSINESS OVERVIEW

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

The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (the Bank). The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a global presence with offices in 23 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. Except where the context requires otherwise, the terms “Northern Trust,” “we,” “us,” “our,” “its,” or similar terms refers to the Corporation and its subsidiaries on a consolidated basis.

COVID-19 PANDEMIC AND RECENT EVENTS

During the COVID-19 pandemic, Northern Trust has remained focused on the health and well-being of its workforce, meeting its clients’ needs and supporting its communities. The majority of Northern Trust’s workforce continues to work remotely and the Corporation continues to adjust its response to the pandemic as needed. The timing of any return to office for our workforce will be driven by the operational, business, and client needs of each location, and will be guided by health and safety guidelines and relevant government mandates. In addition, as the prolonged public health crisis has unfolded, Northern Trust has responded by providing additional health and well-being resources to its employees, including expanded virtual access to health care and well-being programs and diversity, equity, and inclusion resources; a well-being learning center with tools for working effectively in a virtual environment; and virtual focus groups allowing employees to provide feedback and build connections with colleagues. Northern Trust also provided additional paid-time-off for a COVID-19 diagnosis and supported all employees electing to receive the COVID-19 vaccine with additional paid-time-off to obtain and recover from the primary series vaccine or booster shot. To facilitate COVID-19 vaccinations in India and the Philippines, Northern Trust hosted on-site vaccine drives (in India) and participated in a program which provided access to vaccines for our employees (in the Philippines). Northern Trust also reimbursed vaccine costs for employees and their immediate family members in India.

During the pandemic, Northern Trust offered credit assistance to impacted clients under a government lending program and provided payment deferrals. In addition, there have been two forms of relief provided to lenders exempting certain loan modifications which would otherwise be classified as troubled debt restructuring from such classification. Northern Trust elected to apply each of these forms of relief, when applicable, in providing borrowers with qualifying loan modifications, including payment deferrals, in response to the COVID-19 pandemic. Both of these assistance measures have declined since the start of the pandemic. For further information, please refer to Note 6, “Loans and Leases,” provided in Item 8. “Financial Statements and Supplementary Data.”

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

FINANCIAL OVERVIEW

TABLE 4: FINANCIAL HIGHLIGHTS

Net Income increased $336.0 million, or 28%, to $1.55 billion in 2021 from $1.21 billion in 2020. Earnings per diluted common share was $7.14 in 2021 compared to $5.46 in 2020. Return on average common equity increased to 13.9% in 2021 from 11.2% in 2020.

Revenue increased $363.7 million to $6.46 billion in 2021 from $6.10 billion in the prior year, primarily driven by increases in Trust, Investment and Other Servicing Fees of 9% and Other Operating Income of 26%, partially offset by a decrease in Net Interest Income of 4%.

Client assets under custody/administration (AUC/A) increased 12% from $14.53 trillion as of December 31, 2020 to $16.25 trillion as of December 31, 2021, primarily reflecting favorable markets and net inflows, partially offset by unfavorable currency translation. Client assets under custody, a component of AUC/A, increased 12% from $11.26 trillion as of December 31, 2020 to $12.61 trillion as of December 31, 2021. Client assets under custody included $8.24 trillion of global custody assets as of December 31, 2021, which increased 11% from $7.42 trillion as of December 31, 2020. Client assets under management increased 14% to $1.61 trillion as of December 31, 2021 from $1.41 trillion at December 31, 2020 due to favorable markets and net inflows.

The Provision for Credit Losses in 2021 was a release of credit reserves of $81.5 million as compared to a provision of $125.0 million in 2020. The release of credit reserves during 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional portfolio. The prior-year provision primarily reflected an increase in the reserve evaluated on a collective basis. The increase in the collective basis reserve was primarily driven by current and projected economic conditions at the time and downgrades in the portfolio, both resulting from the COVID-19 pandemic and related market and economic impacts. Increases in the collective basis reserve were primarily in the commercial and institutional and commercial real estate portfolios. In addition, a $13.7 million increase in the allowance for credit losses, with a corresponding cumulative effect adjustment to decrease retained earnings by $10.1 million, net of income taxes, was recorded on January 1, 2020 upon adoption of the Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments.”

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

Noninterest Expense of $4.54 billion in 2021 increased $187.7 million, or 4%, from $4.35 billion in 2020, primarily reflecting increased Outside Services, Compensation, Equipment and Software and Employee Benefits, partially offset by lower Other Operating Expense and Occupancy. Employee Benefits expense in 2021 included pension settlement charges of $27.9 million.

The Provision for Income Taxes in 2021 totaled $464.8 million, representing an effective tax rate of 23.1%. The Provision for Income Taxes in 2020 totaled $418.3 million, representing an effective tax rate of 25.7%. The decrease in the effective tax rate was primarily driven by the lower net tax impact from international operations and $26.8 million of prior-year tax expense related to the reversal of tax benefits previously recognized through earnings.

Northern Trust continued to maintain a strong capital position during 2021, with all capital ratios exceeding those required for classification as “well-capitalized” under federal bank regulatory capital requirements. For additional information, please refer to the “Capital Management” section.

CONSOLIDATED RESULTS OF OPERATIONS

The following information summarizes our consolidated results of operations for 2021 compared to 2020. For a discussion related to the consolidated results of operations for 2020 compared to 2019, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 Form 10-K), which was filed with the United States Securities and Exchange Commission on February 23, 2021.

Revenue

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

Revenue in 2021 of $6.46 billion increased $363.7 million, or 6%, from $6.10 billion in 2020. Noninterest Income represented 79% and 76% of total revenue in 2021 and 2020, respectively, and totaled $5.08 billion in 2021, which increased $424.2 million, or 9%, from $4.66 billion in 2020.

Noninterest Income in 2021 increased primarily reflecting higher Trust, Investment and Other Servicing Fees and Other Operating Income. Trust, Investment and Other Servicing Fees of $4.36 billion in 2021 increased $366.1 million, or 9%, from $4.00 billion in 2020, primarily due to favorable markets and new business, partially offset by higher money market mutual fund fee waivers. Other Operating Income of $243.9 million in 2021 increased $49.9 million, or 26%, from $194.0 million in the prior year, primarily due to higher banking and credit-related service charges, distributions from investments in community development projects and gains from property sales.

Net Interest Income on a fully taxable equivalent (FTE) basis in 2021 of $1.42 billion decreased $59.3 million, or 4%, from $1.48 billion in 2020, due to a decreased net interest margin, partially offset by higher levels of average earning assets. The net interest margin on an FTE basis decreased to 0.99% in 2021 from 1.19% in 2020, primarily due to lower average interest rates, partially offset by favorable balance sheet volume and mix shift. Average earning assets increased $19.7 billion, or 16%, from $124.1 billion in 2020 to $143.9 billion in 2021, primarily reflecting higher levels of short-term interest bearing deposits, Securities, and Loans and Leases.

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

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

TABLE 5: REVENUE

(1) Net Interest Income stated on a GAAP basis. Net Interest Income on an FTE basis includes FTE adjustments of $35.6 million, $34.4 million, and $32.8 million for 2021, 2020, and 2019, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

Trust, Investment and Other Servicing Fees

Trust, Investment and Other Servicing Fees were $4.36 billion in 2021 compared with $4.00 billion in 2020, and are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears. Low-interest-rate environments have historically had a negative impact on fees earned on certain products.

Beginning in the second quarter of 2020, the Corporation began to waive a portion of certain fees associated with money market mutual funds due to the low-interest-rate environment. Northern Trust voluntarily waived $287.8 million and $29.3 million of money market mutual fund fees for the years ended December 31, 2021 and 2020, respectively. These fee waivers are impacted by the level of yields earned and account balances in certain funds, as the yields in these funds remain insufficient to pay the stated fees associated with such funds. If the level of short-term interest rates were to increase as currently expected, fee waivers would likely decline.

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

TABLE 6: TRUST, INVESTMENT AND OTHER SERVICING FEES

Corporate & Institutional Services

C&IS Trust, Investment and Other Servicing Fees are primarily attributable to services related to custody, fund administration, investment management, and securities lending. Custody and Fund Administration fees, the largest component of C&IS fees, are driven primarily by values of client assets under custody/administration, transaction volumes and the number of accounts. The asset values used to calculate these fees vary depending on the individual fee

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

arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment Management fees are based generally on market values of client assets under management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag.

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

Custody and Fund Administration fees increased from 2020 to 2021 primarily due to favorable markets, new business and favorable currency translation. Investment Management fees decreased from 2020 to 2021 primarily due to higher money market mutual fund fee waivers, partially offset by favorable markets and new business.

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

TABLE 7: C&IS ASSETS UNDER CUSTODY

TABLE 8: C&IS ASSETS UNDER MANAGEMENT

Cash and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed by Northern Trust and are included in assets under custody and under management. This securities lending collateral totaled $195.6 billion and $186.9 billion at December 31, 2021 and 2020, respectively.

Wealth Management

Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and one-quarter lagged asset values. Fee income in the regions (Central, East and West) increased from 2020 to 2021, primarily due to favorable markets and new business, partially offset by higher money market mutual fund fee waivers. Global Family Office fee income decreased slightly primarily due to higher money market mutual fund fee waivers, partially offset by favorable markets and new business. The following tables provide a summary of Wealth Management assets under custody and under management.

TABLE 9: WEALTH MANAGEMENT ASSETS UNDER CUSTODY

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

TABLE 10: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT

The Wealth Management regions shown are comprised of the following: Central includes Illinois, Michigan, Minnesota, Missouri, Ohio and Wisconsin; East includes Connecticut, Delaware, Florida, Georgia, Massachusetts, New York, Pennsylvania, and Washington, D.C.; West includes Arizona, California, Colorado, Nevada, Texas and Washington. Global Family Office provides customized services, including but not limited to investment consulting, global custody, fiduciary, and private banking, to meet the complex financial needs of ultra-high-net-worth individuals and family offices across the globe.

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 11: EQUITY MARKET INDICES

TABLE 12: FIXED INCOME MARKET INDICES

Client Assets

Northern Trust, in the normal course of business, holds assets under custody/administration and management in a fiduciary or agency capacity for its clients. In accordance with GAAP, these assets are not assets of Northern Trust and are not included in its consolidated balance sheets. AUC/A and assets under management are a driver of our Trust, Investment and Other Servicing Fees. For the purposes of disclosing AUC/A, to the extent that both custody and administration services are provided, the value of the assets is included only once in this amount.

At December 31, 2021, AUC/A increased from December 31, 2020, primarily reflecting favorable markets and net inflows, partially offset by unfavorable currency translation. Assets under custody, a component of AUC/A, at December 31, 2021, increased from December 31, 2020, and included $8.24 trillion of global custody assets, compared to $7.42 trillion at December 31, 2020.

The following table presents AUC/A by reporting segment.

TABLE 13: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT

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

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

TABLE 14: ASSETS UNDER CUSTODY BY REPORTING SEGMENT

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

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

TABLE 15: ALLOCATION OF ASSETS UNDER CUSTODY

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

TABLE 16: ASSETS UNDER CUSTODY BY INVESTMENT TYPE

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

TABLE 17: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT

Assets under management at the end of 2021 increased from 2020. The increase primarily reflected favorable markets and net inflows.

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

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

TABLE 18: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE

TABLE 19: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE

Other Noninterest Income

The components of other noninterest income, and a discussion of significant changes during 2021 and 2020, are provided below.

TABLE 20: OTHER NONINTEREST INCOME

Foreign Exchange Trading Income

Northern Trust provides foreign exchange services in the normal course of business as an integral part of its global custody services. Active management of currency positions, within conservative limits, also contributes to foreign exchange trading income. Foreign Exchange Trading Income in 2021 increased from 2020, primarily driven by higher client volumes, partially offset by lower foreign exchange swap activity in Treasury.

Treasury Management Fees

Treasury Management Fees, generated from cash and treasury management products and services provided to clients, in 2021 decreased from 2020.

Security Commissions and Trading Income

Security Commissions and Trading Income, generated primarily from securities brokerage services provided by Northern Trust Securities, Inc., in 2021 increased from 2020, primarily driven by higher revenue from core brokerage, partially offset by lower revenue from interest rate swaps.

Other Operating Income

Other Operating Income in 2021 increased from 2020 primarily due to higher banking and credit-related service charges, distributions from investments in community development projects and gains from property sales.

Please refer to Note 20, “Other Operating Income” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to other operating income.

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

Investment Security Losses, Net

ASU 2016-13, adopted on January 1, 2020, replaced the legacy OTTI model with an estimated credit loss model. Refer to the caption "Investment Security Gains and Losses” in Note 4, “Securities,” and the caption “Allowance for Held to Maturity Debt Securities Portfolio” in Note 7, “Allowance for Credit Losses” included under Item 8, “Financial Statements and Supplementary Data.”

Net Interest Income

Net Interest Income is defined as the total of Interest Income and amortized fees on earning assets, less Interest Expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Earning assets — including Federal Funds Sold, Securities Purchased under Agreements to Resell, Interest-Bearing Due From Banks, Federal Reserve and Other Central Bank Deposits and Other, Securities, and Loans and Leases — are financed by a large base of interest-bearing funds that include client deposits, short-term borrowings, Senior Notes and Long-Term Debt. Short-term borrowings include Federal Funds Purchased, Securities Sold Under Agreements to Repurchase, and Other Borrowings. Earning assets also are funded by noninterest-related funds, which include demand deposits and Stockholders’ Equity. Net Interest Income is subject to variations in the level and mix of earning assets and interest-bearing funds and their relative sensitivity to interest rates. In addition, the levels of nonaccruing assets and client compensating deposit balances used to pay for services impact Net Interest Income.

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

Net Interest Income stated on an FTE basis is a non-GAAP financial measure that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on Net Income. A reconciliation of Net Interest Income on a GAAP basis to Net Interest Income on an FTE basis is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

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

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

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

(1) Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source income and assets. Non-U.S. source income and assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision revenues, expenses and assets between U.S. and non-U.S.-domiciled customers. On the basis of averages, the percentage of total assets attributable to foreign activities was 19%, 20% and 23% as of December 31, 2021, 2020 and 2019, respectively. On the basis of averages, the percentage of total liabilities attributable to foreign activities was 58%, 56% and 53% as of December 31, 2021, 2020 and 2019, respectively. For additional information, refer to the Geographic Area Information section of Note 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”

(2) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets on the consolidated balance sheets.

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

(4) Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets.

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

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

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

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

TABLE 22: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE(1)

(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 $35.6 million in 2021, $34.4 million in 2020 and $32.8 million in 2019. 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 “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. 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 in Other Assets and Other Liabilities, respectively.

Net Interest Income in 2021 decreased from 2020. Net Interest Income, stated on an FTE basis, decreased from 2020, due to a lower net interest margin, partially offset by higher levels of average earning assets. Average earning assets increased in 2021 from 2020, primarily reflecting higher levels of short-term interest bearing deposits, Securities, and Loans and Leases. Funding of the balance sheet reflected higher levels of client deposits.

The net interest margin in 2021 decreased from 2020. The net interest margin on an FTE basis in 2021 decreased from 2020, primarily due to lower average interest rates, partially offset by favorable balance sheet volume and mix shift.

Federal Reserve and Other Central Bank Deposits and Other averaged $39.0 billion in 2021, which increased $11.1 billion, or 40%, from $27.9 billion in 2020, which resulted from significant deposit inflows. The higher level of client deposits were primarily placed with the Federal Reserve and other central banks and in the securities portfolio and the loan portfolio. Average Securities were $60.8 billion and increased $4.7 billion, or 8%, from $56.1 billion in the prior-year period and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $925.5 million, $158.0 million and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $57.8 billion in 2021 and $50.9 billion in 2020. Average

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

nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $3.0 billion in 2021 and $5.2 billion in 2020. Interest-Bearing Due From and Deposits with Banks averaged $5.8 billion in 2021 and $5.4 billion in 2020.

Loans and Leases averaged $37.2 billion, which increased $3.7 billion, or 11%, from $33.5 billion in 2020, primarily reflecting higher levels of private client, commercial real estate, non-U.S. loans, commercial and institutional, and residential real estate loans. Private client loans averaged $13.7 billion and increased $2.2 billion, or 20%, from $11.5 billion for the prior-year period. Commercial real estate loans averaged $4.0 billion and increased $723.3 million, or 22%, from $3.3 billion for the prior-year period. Non-U.S. loans averaged $2.5 billion and increased $557.6 million, or 28%, from $2.0 billion for the prior-year period. Commercial and institutional loans averaged $10.4 billion and increased $81.5 million, or 1%, from $10.3 billion for the prior-year period. Residential real estate loans averaged $6.2 billion and increased $74.3 million, or 1%, from $6.1 billion for the prior-year period.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits increased $13.8 billion, or 16%, to $98.9 billion in 2021 from $85.1 billion in 2020. Average Interest-Related Funds increased $11.2 billion, or 11%, to $108.7 billion in 2021 from $97.5 billion in 2020. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-related funds increased $8.5 billion, or 32%, to $35.2 billion in 2021 from $26.7 billion in 2020, primarily resulting from higher levels of Demand and Other Noninterest-Bearing Deposits. Average Demand and Other Noninterest-Bearing Deposits increased $7.7 billion , or 33%, to $31.1 billion in 2021 from $23.4 billion in 2020. The average rate on total source of funds was 0.02% in 2021 and 0.16% in 2020.

Interest expense for Interest-Bearing Deposits in the current year was driven by low and negative interest rates for Non-U.S. Offices Interest-Bearing Deposits and low interest rates on domestic Interest-Bearing Deposits. Average Non-U.S. Offices Interest-Bearing Deposits comprised 70% of total average Interest-Bearing Deposits for the year ended December 31, 2021.

Stockholders’ Equity

Stockholders’ Equity averaged $11.7 billion in 2021, compared with $11.2 billion in 2020. The increase in average Stockholders’ Equity of $504.4 million, or 5%, was primarily attributable to Retained Earnings, partially offset by lower Accumulated Other Comprehensive Income since the prior year, repurchases of common stock pursuant to the Corporation’s share repurchase program and decreased Additional Paid-in Capital. During the year ended December 31, 2021, the Corporation maintained its quarterly common stock dividend at $0.70 per share and repurchased 2,527,544 shares of common stock, returning $861.5 million in capital to common stockholders, compared to $891.8 million in 2020.

The share repurchases were predominantly made pursuant to the repurchase program authorized by the Board of Directors in July 2018. In October 2021, this program was terminated and replaced with a new repurchase program, under which the Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. Shares are repurchased by the Corporation to, among other things, manage the Corporation’s capital levels. Repurchased shares are used for general purposes, including the issuance of shares under stock option and other equity incentive plans. The repurchase authorization approved by the Board of Directors has no expiration date, thus the Corporation retains the ability to resume repurchases thereunder when circumstances warrant and applicable regulations permit. Please refer to Note 15, “Stockholders’ Equity,” provided in Item 8, “Financial Statements and Supplementary Data.”

Provision for Credit Losses

There was an $81.5 million release of credit reserves in 2021, as compared to a provision of $125.0 million in 2020. The release of credit reserves during 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional portfolio. The prior-year provision primarily reflected an increase in the reserve evaluated on a collective basis. The increase in the collective basis reserve was primarily driven by current and projected economic conditions at the time and downgrades in the portfolio, both resulting from the COVID-19 pandemic and related market and economic impacts. Increases in the collective basis reserve were primarily in the commercial and institutional and commercial real estate portfolios. In addition, a $13.7 million increase in the allowance for credit losses, with a corresponding cumulative effect adjustment to decrease retained earnings by $10.1 million, net of income taxes, was recorded on January 1, 2020 upon adoption of the Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments.”

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

Net recoveries in 2021 totaled $6.3 million resulting from $0.7 million of charge-offs and $7.0 million of recoveries, compared to net charge-offs of $3.2 million in the prior-year resulting from $9.7 million of charge-offs and $6.5 million of recoveries.

Nonaccrual assets at December 31, 2021 decreased 5% from the prior year-end. Commercial real estate, residential real estate, and commercial and institutional accounted for 54%, 30%, and 16%, respectively, of total nonaccrual loans and leases at December 31, 2021. Residential real estate, commercial real estate, commercial and institutional, and private client loans accounted for 47%, 31%, 20%, and 2%, respectively, of total nonaccrual loans and leases at December 31, 2020. For additional discussion of the Allowance for Credit Losses, refer to the “Asset Quality” section.

Noninterest Expense

Noninterest Expense for 2021 increased from 2020, primarily reflecting increased Outside Services, Compensation, Equipment and Software and Employee Benefits, partially offset by lower Other Operating Expense and Occupancy. Employee Benefits expense in 2021 included pension settlement charges of $27.9 million.

The components of Noninterest Expense and a discussion of significant changes during 2021 and 2020 are provided below.

TABLE 23: NONINTEREST EXPENSE

Compensation

Compensation expense, the largest component of Noninterest Expense, increased in 2021 from 2020, primarily reflecting higher incentives and salary expense. The prior year reflects $52.5 million of severance-related charges. Staff on a full-time equivalent basis totaled approximately 21,100 at December 31, 2021, up 1% from approximately 20,900 at December 31, 2020.

Employee Benefits

Employee Benefits expense in 2021 increased from 2020, primarily reflecting higher retirement plan expenses, medical costs and payroll taxes. There were $27.9 million of pension settlement charges in 2021.

Outside Services

Outside Services expense in 2021 increased from 2020, primarily due to higher technical services costs, third-party advisory fees and sub-custodian expenses.

Equipment and Software

Equipment and Software expense in 2021 increased from 2020, primarily reflecting higher software support and rental costs and higher amortization.

Occupancy

Occupancy expense in 2021 decreased from 2020, primarily due to early lease exits arising from workplace real estate strategies in the prior year, which included $11.9 million of expense related to an early lease exit.

Other Operating Expense

Other Operating Expense in 2021 decreased from 2020 primarily due to lower charges associated with account servicing activities and a decline in other miscellaneous expenses. The account servicing activities in the prior year included a $43.4 million charge related to a corporate action processing error. Please refer to Note 21, “Other Operating Expense” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to other operating expenses.

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

Provision for Income Taxes

The 2021 Provision for Income Taxes was $464.8 million, representing an effective rate of 23.1%. This compares with a Provision for Income Taxes of $418.3 million and an effective rate of 25.7% in 2020. The decrease in the effective tax rate was primarily driven by the lower net tax impact from international operations and $26.8 million of prior-year tax expense related to the reversal of tax benefits previously recognized through earnings.

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

REPORTING SEGMENTS AND RELATED INFORMATION

The following information summarizes our consolidated results of operations by reporting segment for 2021 compared to 2020. For a discussion related to the consolidated results of operations by reporting segment for 2020 compared to 2019, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K, which was filed with the SEC on February 23, 2021.

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

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

Equity is allocated to the reporting segments based on a variety of factors including, but not limited to, risk, regulatory considerations, and internal metrics. Allocations of capital and certain corporate expense may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1, “Summary of Significant Accounting Policies.” Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between reporting segments. Northern Trust’s presentations are not necessarily consistent with similar information for other financial institutions.

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

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

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

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

The following table presents the earnings and average assets for the Corporation.

TABLE 24: CONSOLIDATED FINANCIAL INFORMATION

(1) Non-GAAP financial measures stated on an FTE basis. The consolidated figures include $35.6 million, $34.4 million, and $32.8 million of FTE adjustments for 2021, 2020, and 2019, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

Corporate & Institutional Services

C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking; and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region. The following table summarizes the results of operations of C&IS for the years ended December 31, 2021, 2020, and 2019 on a management-reporting basis.

TABLE 25: C&IS RESULTS OF OPERATIONS

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

C&IS Net Income

Net Income increased in 2021 compared to 2020, primarily reflecting higher Trust, Investment and Other Servicing Fees, a release of credit reserves in the current year as compared to a provision in the prior year and higher Other Noninterest

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

Income, partially offset by higher Noninterest Expense, lower Net Interest Income and an increase in the Provision for Income Taxes.

C&IS Trust, Investment and Other Servicing Fees

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

C&IS Foreign Exchange Trading Income

Foreign Exchange Trading Income in 2021 increased from 2020, primarily driven by higher client volumes, partially offset by lower foreign exchange swap activity in Treasury.

C&IS Other Noninterest Income

Other Noninterest Income for 2021 increased from 2020, primarily due to Other Operating Income and Security Commissions and Trading Income.

C&IS Net Interest Income

Net Interest Income on an FTE basis decreased in 2021 from 2020, due to a lower net interest margin, partially offset by an increase in average earning assets. Net interest margin on an FTE basis decreased to 0.60% from 0.75%. Average earning assets of $111.0 billion, increased $16.4 billion, or 17%, from $94.6 billion in the prior year. The earning assets in C&IS consisted primarily of intercompany assets and Loans and Leases. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $69.7 billion in 2021 as compared to $60.5 billion in 2020.

C&IS Provision for Credit Losses

There was a release of credit reserves of $33.8 million for 2021 compared to a provision of $38.1 million for 2020. The release of credit reserves during 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by improvements in projected economic conditions and portfolio credit quality. The 2020 provision reflected an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions at the time and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts on the commercial and institutional portfolio.

C&IS Noninterest Expense

Total C&IS Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, increased in 2021 from 2020. The increase primarily reflects higher expense allocations, Outside Services expense and Compensation expense including incentives.

Wealth Management

Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking. Wealth Management also includes Global Family Office, which provides customized services, including but not limited to: investment consulting; global custody; fiduciary; and private banking to meet the complex financial needs of ultra-high-net-worth individuals and family offices across the globe. Wealth Management is one of the largest providers of advisory services in the United States with assets under custody/administration, assets under custody, and assets under management of $1.07 trillion, $1.06 trillion, and $416.1 billion, respectively, at December 31, 2021. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.

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

The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2021, 2020, and 2019 on a management-reporting basis.

TABLE 26: WEALTH MANAGEMENT RESULTS OF OPERATIONS

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

Wealth Management Net Income

Wealth Management Net Income increased in 2021, primarily reflecting higher Trust, Investment and Other Servicing Fees, a release of credit reserves in the current year as compared to a provision in the prior year and higher Other Noninterest Income, partially offset by higher Noninterest Expense, lower Net Interest Income and an increase in the 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

Other Noninterest Income for 2021 increased from 2020, primarily due to higher Other Operating Income driven by gains on property sales.

Wealth Management Net Interest Income

Net Interest Income on an FTE basis for 2021 decreased from 2020, primarily attributable to a decrease in the net interest margin, partially offset by an increase in earning assets. Net interest margin on an FTE basis decreased to 2.47% from 2.94%. Average earning assets of $32.8 billion in 2021, increased $3.3 billion, or 11%, from $29.5 billion in 2020. Earning assets and funding sources for the year ended December 31, 2021 were primarily comprised of loans and domestic interest-bearing deposits, respectively.

Wealth Management Provision for Credit Losses

There was a release of credit reserves of $47.7 million for 2021 compared to a provision of $86.9 million in 2020. The release of credit reserves during 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional and private client portfolios. The 2020 provision reflected an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions at the time and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, primarily impacting the commercial real estate and commercial and institutional portfolios.

Wealth Management Noninterest Expense

Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, increased in 2021 from 2020.

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

The increase primarily reflects higher expense allocations, Compensation expense including incentives and Employee Benefits.

Other

Income and expenses associated with non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments are included within Other. The following table summarizes the results of operations of the Other segment for the years ended December 31, 2021, 2020, and 2019 on a management-reporting basis.

TABLE 27: OTHER RESULTS OF OPERATIONS

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

Other—Noninterest Income

Noninterest Income in 2021 decreased from 2020 due to higher expenses for existing swap agreements related to Visa Inc. Class B common shares.

Other—Noninterest Expense

Noninterest Expense in 2021 decreased from 2020, primarily due to lower costs arising from prior-year workplace real estate strategies and a one-time supplemental payment to employees in response to COVID-19 pandemic in the prior year, offset by pension settlement charges in 2021.

Asset Management

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

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

At December 31, 2021, Northern Trust managed $1.61 trillion in assets for personal and institutional clients, including $1.19 trillion for C&IS clients and $416.1 billion for Wealth Management clients. The following table presents consolidated assets under management as of December 31, 2021, 2020 and 2019 by investment type.

TABLE 28: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE

Assets under management increased at year-end 2021 from year-end 2020. The increase primarily reflected favorable markets and net inflows. The following table presents activity in consolidated assets under management by product during the years ended December 31, 2021, 2020 and 2019.

TABLE 29: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT

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

CONSOLIDATED BALANCE SHEET REVIEW

The following tables summarize selected consolidated balance sheet information.

TABLE 30: SELECT CONSOLIDATED BALANCE SHEET INFORMATION

(1)    Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses for the purpose of presenting earning assets; such deposits are presented in Other Assets on the consolidated balance sheets.

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

(3)    Total Securities includes certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets.

TABLE 31: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION

(1)    Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses for the purpose of presenting earning assets; such deposits are presented in Other Assets on the consolidated balance sheets.

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

(3)    Total Securities includes certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets.

Average balances are considered to be a better measure of balance sheet trends, as period-end balances can be impacted by the timing of deposit and withdrawal activity involving large client balances. The current growth in both the period-end and average consolidated balance sheets was primarily driven by higher customer deposit balances.

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

Short-Term Borrowings. Short-term borrowings includes Federal Funds Purchased, Securities Sold under Agreements to Repurchase, and Other Borrowings. Securities Sold under Agreements to Repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. Securities Sold under Agreements to Repurchase are held by the counterparty until the repurchase.

During the third quarter of 2021, Northern Trust became a Government Securities Division (GSD) netting and sponsoring member in the Fixed Income Clearing Corporation (FICC) sponsored member program. FICC, a wholly-owned subsidiary of The Depository Trust & Clearing Corporation, is a central counterparty and provides netting and settlement for the U.S. Government securities marketplace. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when FICC is the counterparty. See Note 5, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” Note 26, “Commitments and Contingent Liabilities” and Note 28, “Offsetting of Assets and Liabilities” to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data” for additional information on Northern Trust’s repurchase and reverse repurchase agreements.

Stockholders’ Equity. The increase in average Stockholders’ Equity was primarily attributable to Retained Earnings, partially offset by lower Accumulated Other Comprehensive Income since the prior year, repurchases of common stock pursuant to the Corporation’s share repurchase program and decreased Additional Paid-in Capital.

During the year ended December 31, 2021, the Corporation declared cash dividends totaling $593.9 million to common stockholders and repurchased 2,527,544 shares of common stock, including 394,326 shares withheld related to share-based compensation, at a total cost of $267.6 million ($105.90 average price per share).

During the year ended December 31, 2021, the Corporation declared cash dividends totaling $41.8 million to preferred stockholders.

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

Asset Quality

Securities Portfolio

The following table presents the remaining maturity and average yield of Northern Trust's held to maturity (HTM) debt securities and available for sale (AFS) debt securities by security type as of December 31, 2021.

TABLE 32: REMAINING MATURITY AND AVERAGE YIELD OF HELD TO MATURITY AND AVAILABLE FOR SALE DEBT SECURITIES

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

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

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

TABLE 33: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES BY CREDIT RATING

As of December 31, 2021, the 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 and covered bonds.

As of December 31, 2020, the 1% of AFS debt securities not rated by Moody’s, S&P Global or Fitch Ratings consisted of corporate debt, covered bonds, and other asset-backed securities.

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

TABLE 34: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING

As of December 31, 2021 and December 31, 2020, the 5% and 7%, respectively, 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 $187.1 million at December 31, 2021, compared to net unrealized gains of $872.6 million as of December 31, 2020. Net unrealized losses as of December 31, 2021 were comprised of $345.1 million and $532.2 million of gross unrealized gains and losses, respectively. Net unrealized gains as of December 31, 2020 were comprised of $981.9 million and $109.3 million of gross unrealized gains and losses, respectively.

As of December 31, 2021, the $38.0 billion AFS debt securities portfolio had unrealized losses of $110.2 million related to government-sponsored agency, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of December 31, 2020, the $42.0 billion AFS debt securities portfolio had unrealized losses of $26.9 million related to government-sponsored agency, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of December 31, 2021 and December 31, 2020, 14% and 16%, respectively, of the AFS corporate debt securities portfolio was backed by guarantees provided by U.S. and non-U.S. government entities.

As of December 31, 2021, the $23.6 billion HTM debt securities portfolio had an unrealized loss of $106.1 million, $80.0 million and $71.6 million related to government sponsored agency, sub-sovereign, supranational and non-U.S. agency bonds, and other residential mortgage-backed securities, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase. As of December 31, 2020, the $17.8 billion HTM debt securities portfolio had an unrealized loss of $76.5 million related to other residential mortgage-backed securities, which is primarily attributable to changes in overall market interest rates and credit spreads since their purchase.

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

HTM debt securities consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the year ended December 31, 2021, $6.9 billion of government sponsored agency securities were transferred from AFS to HTM for capital management purposes, all of which were transferred in the second quarter of 2021. Upon transfer of a debt security from the AFS to HTM classification, the amortized cost is reset to fair value. Any net unrealized gain or loss at the date of transfer will remain in AOCI and be amortized into net interest income over the remaining life of the securities using the effective interest method. The amortization of amounts retained in AOCI will offset the effect on interest income of the amortization of the premium or discount resulting from transferring the securities at fair value. During the year ended December 31, 2020, $301.5 million of securities reflected in U.S. government were transferred from AFS to HTM, all of which were transferred in the second quarter of 2020.

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

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

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

Loans and Leases

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

The following table presents the remaining maturity of loans and leases by segment and class as of December 31, 2021.

TABLE 35: REMAINING MATURITY OF LOANS AND LEASES

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

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

TABLE 36: INTEREST RATE SENSITIVITY OF LOANS AND LEASES

Nonaccrual Assets and 90 Days Past Due Loans

Nonaccrual assets consist of nonaccrual loans and leases and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans. Loans that are delinquent 90 days or more and still accruing interest can fluctuate widely at any reporting period based on the timing of cash collections, renegotiation and renewals. For additional information relating to nonaccrual loans, refer to Note 6, “Loans and Leases,” provided in Item 8, “Financial Statements and Supplementary Data.”

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

The following table presents nonaccrual assets and loans that were delinquent 90 days or more and still accruing interest at December 31, 2021 and 2020.

TABLE 37: NONACCRUAL ASSETS